3904 / How is the designated beneficiary determined for purposes of the minimum distribution requirements?

Editor’s Note: The SECURE Act, enacted December 20, 2019, changed the required beginning date for required minimum distributions (RMDs) from age 70½ to age 72 (the change applies with respect to distributions to participants who reach age 70½ in 2020-2022).¹ Beginning in 2023, SECURE 2.0 increased the required beginning date to age 73.

The SECURE Act also made other major changes, including substantially eliminating so-called “stretch” beneficiary distributions from defined contribution plans (including IRAs). It generally replaces the lifetime distribution rule with a 10-year distribution period unless the beneficiary is an “eligible designated beneficiary.” The change in the stretch distribution rules applies only to plan participants in defined contribution plans and IRAs who die after December 31, 2019.² 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 made in early 2020 that were otherwise waived under the CARES Act. See Q 3901 for more details on these
changes.

A designated beneficiary means any individual designated as a beneficiary by the employee.⁴ An individual may be designated as a beneficiary under a plan either by the terms of the plan or, if the plan so provides, by an affirmative election by the employee (or the employee’s surviving spouse) specifying the beneficiary.⁵

The fact that an employee’s interest under a plan passes to a certain individual under applicable state law, however, does not make that individual a designated beneficiary unless the individual is designated as a beneficiary under the plan.⁶ For details on the ability of a non-spouse designated beneficiary to rollover funds from a qualified plan account to an inherited IRA, see Q 4014.

A beneficiary designated under a plan is an individual (or certain trusts) who is entitled to a portion of an employee’s benefit, contingent on the employee’s death or another specified event. A designated beneficiary need not be specified by name in the plan or by the employee to the plan to be a designated beneficiary so long as the individual who is to be the beneficiary is identifiable under the plan as of the date the beneficiary is determined.

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Planning Point: To be a QDRO, the beneficiary should be named or otherwise be clearly identified (see Q 3908).

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The choice of beneficiary is subject to the IRC’s provisions for joint and survivor annuities, QDROs, and consent requirements ( Q 3882, Q 3890, and Q 3915).⁷ For an explanation of the effect of a QDRO on the minimum distribution requirements, see Q 3908.

To be a designated beneficiary for purposes of minimum distributions, an individual first must be a beneficiary on the date of the employee’s death. The determination of the existence and identity of a designated beneficiary for purposes of minimum distributions is made on September 30 of the calendar year following the year of the employee’s death.⁸ Post- SECURE Act, it is the date of the employee’s death.

Exceptions may apply if the account is payable as an annuity, or if a surviving spouse beneficiary dies after the employee but before distributions have begun. This is so a distribution may be calculated and made by the deadline of December 31 following the year of the employee’s
death.

Consequently, pre-SECURE Act, an individual who was a beneficiary as of the date of the employee’s death, but is not a beneficiary as of September 30 of the following year (e.g., because the individual disclaims entitlement to the benefit or because the individual receives the entire benefit to which he or she is entitled before that date) was not considered for purposes of determining the distribution period for required minimum distributions after the employee’s death.⁹

A disclaiming beneficiary’s receipt (prior to disclaiming the benefit) of a required distribution in the year after death will not result in the beneficiary being treated as a designated beneficiary for subsequent years.¹⁰

An entity other than an individual or a trust meeting certain requirements (see Q 3907) cannot be a designated beneficiary for required minimum distribution purposes. Thus, for example, an employee’s estate cannot be a designated beneficiary.¹¹

See Q 3905 for a discussion of the impact of multiple, contingent and successor beneficiaries.