3901 / How are the minimum distribution requirements met if an employee died before the required beginning date?

Editor’s Note: The SECURE Act, enacted on December 20, 2019, made significant changes in required minimum distribution (RMD) rules for all qualified plans. It added a new subsection (H) to IRC Section 401(a)(9) to change the mandatory start date for RMDs from age 70½ to age 72 for distributions made after December 31, 2019 and SECURE 2.0 increased the age to 73 for tax years beginning in 2023. It also eliminates so-called “stretch” distributions upon the participant’s death. Under prior law, those distributions could be based upon the life expectancy of the designated beneficiary. Under the SECURE Act, a 10-year fixed distribution period generally applies unless the beneficiary is an “eligible designated beneficiary.”¹ The change in the stretch distribution rules applies only to plan participants who die after December 31, 2019² (see Q 3892 to Q 3908).

In response to the COVID-19 pandemic, the CARES Act³ waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMDs taken in early 2020 that otherwise were not required under the CARES Act waiver.

See below for more details on these changes.

Pre-SECURE ACT Distribution Rules for Employees of All Qualified Plans

Under the pre-SECURE Act rules, if an employee dies before his or her required beginning date, distributions must be made under one of two methods:

(1)  Under the life expectancy rule, if any portion of the interest is payable to, or for the benefit of, a designated beneficiary, that portion must be distributed over the life (or life expectancy) of the beneficiary, beginning within one year of the employee’s death or later date prescribed by regulations.⁴ As described below, regulations do provide a later date.

To the extent that the interest is payable to a non-spouse beneficiary, distributions must begin by the end of the calendar year immediately following the calendar year in which the employee died.⁵ The nonspouse beneficiary’s life expectancy for this purpose is measured as of his or her birthday in the year following the year of the employee’s death. In subsequent years, this amount is reduced by one for each calendar year that has elapsed since the year immediately following the year of the employee’s death.⁶

(2)   Under the five year rule, if there is no designated beneficiary, or if the foregoing rule is not satisfied, the entire interest must be distributed within five years after the death of the employee (regardless of who or what entity receives the distribution).⁷ To satisfy this rule, the entire interest must be distributed by the end of the calendar year that contains the fifth anniversary of the date of the employee’s death.⁸

Surviving spouse beneficiary. If the sole designated beneficiary is the employee’s surviving spouse, distributions must begin by the later of the end of the calendar year immediately following the calendar year in which the employee died or the end of the calendar year in which the employee would have reached age 70½.⁹

In the event that a surviving spouse beneficiary dies after the employee, but before distributions to the spouse have begun, the five year rule and the life expectancy rule for surviving spouses will be applied as though the surviving spouse were the employee.¹⁰ The payout period during the surviving spouse’s life is measured by the surviving spouse’s life expectancy as of his or her birthday in each distribution calendar year for which a minimum distribution is required after the year of the employee’s death.¹¹ The provision that treats a surviving spouse as though the surviving spouse were the employee (i.e., the surviving spouse rules of IRC Section 401(a)(9)(B)(iv)) will not allow a new spouse of the deceased employee’s spouse to continue delaying distributions.¹²

Life expectancy tables. There are tables with single and joint and survivor life expectancies for calculating required minimum distributions, as well as a “Uniform Lifetime Table,” for determining the appropriate distribution periods.¹³ The Single Life Table must be used to calculate the required minimum distributions after the death of the employee.

Plan provisions. Unless a plan adopts a provision specifying otherwise, if distributions to an employee have not begun prior to his or her death, they must commence automatically—either under the life expectancy rule described above or, if there is no designated beneficiary, under the five year rule.¹⁴ A plan may adopt a provision specifying that the five year rule will apply after the death of an employee, or a provision allowing employees (or beneficiaries) to elect whether the five year rule or the life expectancy rule will be applied.¹⁵

Post-SECURE ACT Distribution Rules for Employees after December 31, 2019

For all qualified plans (defined benefit and defined contribution), the “required beginning date” for RMDs must be no later than April 1 of the calendar year immediately following the year in which the participant attains age 73 (72 in 2020-2022 and 70 ½ in earlier years), or, if the participant is not a 5 percent owner of the employer, April 1 of the calendar year following the year in which the participant’s employment terminates (retires), if later.

For IRAs, the “required beginning date” is April 1 of the calendar year immediately following the calendar year in which the IRA account owner attains age 73.

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Planning Point: Roth accounts in qualified plans continue to be subject to RMD requirements, while Roth IRAs continue to be exempt from RMD requirements during an IRA account owner’s lifetime.

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Actuarial Adjustment: The SECURE Act did not amend Section 409(a)(9)(C)(iii) to change the age 70½ to age 72, although it did amend subsections (C)(i) and (C)(ii) to modify the age. Subsection (C)(iii) deals with required actuarial adjustments of benefits under defined benefit plans to participants that retire after the “require beginning date” (still age 70½ and not age 72 or 73), and begins to receive his or her pension benefit. This subsection requires the plan to provide an actuarially increased benefit that has the same value as a benefit beginning at age 70½ (not age 72). Regulations that the required actuarial increase applies to an employee other than a 5- percent owner who retires in a calendar year after the calendar year in which the employee attains age 70½.¹⁶

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Planning Point: The IRS recently released new actuarial tables to better reflect longer life expectancies and allow qualified plan distributions to be taken more slowly than under prior law. For instance, the divisor for a 72-year-old is 25.6 and the revised divisor is 27.3 for an RMD.¹⁷ The combined effect of the SECURE Act changes and the revised actuarial tables is a delay in the start of an RMD to age 72 or 73 and a reduced RMD when finally taken.

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Distributions Beginning When Death Occurs after a Participant’s “Required Beginning Date.” See Q 3902 and Q for the new rules that imposes the 10-year rule on distributions to a designated beneficiary when death occurs after a participant’s required beginning date.