When the IRS released the final regulations updating the required minimum distribution and other life expectancy tables, the agency noted that it would be releasing additional guidance to deal with the impact on substantially equal payments. In Notice 2022-06[1] the IRS has now released that guidance.

Effective Date

One of the more interesting items in the notice is found at the very end where the effective dates for this notice are listed.

The guidance provides first a choice of options for a series of payments commencing in 2022:

The guidance in this notice replaces the guidance in Rev. Rul. 2002-62 and Notice 2004-15 for any series of payments commencing on or after January 1, 2023, and it may be used for a series of payments commencing in 2022.[2]

As well, the ruling provides that, for taxpayers using the required minimum distribution method to compute their substantially equal payment amounts, using the updated tables will not be treated as an impermissible modification of the payment stream.

In the case of a series of payments commencing in a year prior to 2023 using the required minimum distribution method, if the payments in the series are calculated by substituting the Single Life Table, the Joint and Last Survivor Table, or the Uniform Lifetime Table described in section 3.02(a) of this notice for the corresponding table that was used under Rev. Rul. 2002-62, then the substitution will not be treated as a modification within the meaning of section 72(t)(4) or section 72(q)(3).[3]

Rules Apply to IRAs as Well as Employer Retirement Accounts

Although the notice consistently refers to the employee when talking about the primary beneficiary of the retirement account, the IRS notes that:

In the case of distributions from an IRA, the IRA owner is treated as an employee for purposes of applying this notice.[4]

Methods of Taking Substantially Equal Periodic Payments

As with prior rulings, this ruling provides that taxpayers are considered to have taken substantially equal periodic payments if they take payments using one of the following three methods as described in this ruling:

The required minimum distribution method
The fixed amortization method
The fixed annuitization method.[5]

Required Minimum Distribution Method

Under the required minimum distribution method the annual payment is determined by dividing

The account balance for that distribution year by
The number of years from the chosen life expectancy table (described later) for that distribution year.[6]

The guidance provides:

Under this method, the account balance, the number of years from the chosen life expectancy table, and the resulting annual payments are redetermined for each distribution year. This redetermination of the annual payment is not considered a modification of the series of substantially equal periodic payments, provided that the required minimum distribution method continues to be used and the same life expectancy tables continue to be used, except to the extent required in section 3.02(b) of this notice.[7]

Section 3.02(b) of the notice deals with the use of the Joint and Last Survivor table for determining the appropriate life expectancy.

Fixed Amortization Method

Under the fixed amortization method the annual payment is determined as the amount that will result in the level amortization of the account balance:

Over a specified number of years using one of the life expectancy methods provided for in this Notice and
Using an interest rate that is permitted under this notice.[8]

The Notice points out the following:

Under this method, once the account balance, the number of years from the chosen life expectancy table, and the resulting annual payment are determined for the first distribution year, the annual payment is the same amount in each succeeding distribution year.[9]

Fixed Annuitization Method

Under the fixed annuitization method the annual payment for each year is determined by dividing the account balance by an annuity factor that is the present value of an annuity of $1 per year beginning at the employee’s age and continuing for the life of the employee (or the joint lives of the employee and designated beneficiary).[10]

The annuity factor is derived using:

The mortality tables found in Reg. §1.409(a)(9)-9(e) and
An interest rate that is permitted under this notice.[11]

Again, the notice points out the following effect of using this method:

Under this method, once the account balance, the annuity factor, and the resulting annual payment are determined for the first distribution year, the annual payment is the same amount in each succeeding distribution year.[12]

Life Expectancy Tables

The life expectancy tables that can be used to determine distribution periods under the required minimum distribution method and fixed amortization method are:

The Uniform Lifetime Table found in Appendix A of this notice;
The Single Life Table in § 1.401(a)(9)-9(b); or
The Joint and Last Survivor Table in § 1.401(a)(9)-9(d) (which can be used even if the designated beneficiary is not the spouse).[13]

The notice provides the following method for determining the employee/IRA account holder’s age and, if applicable, the designated beneficiary’s age:

The number of years that is used for the required minimum distribution method for a distribution year is the entry from the table for the employee’s age on the employee’s birthday in that distribution year. If the Joint and Last Survivor Table is used, the age of the designated beneficiary on the designated beneficiary's birthday in the distribution year is also used.[14]

The following rules apply when the required minimum distribution method is used:

In the case of the required minimum distribution method, except as provided section 3.02(b)[15] or section 4[16] of this notice, the same life expectancy table that is used for the first distribution year must be used in each following distribution year. Thus, if the employee uses the Single Life Table to apply the required minimum distribution method in the first distribution year, the Single Life Table must be used in subsequent distribution years.[17]

The following rule applies to those using the fixed amortization method:

The number of years that is used to apply the fixed amortization method is the entry from the table for the employee’s age on the employee’s birthday in the first distribution year (and, if applicable, the designated beneficiary’s age on the designated beneficiary’s birthday in that year).[18]

Designated Beneficiary When Using the Joint and Survivor Annuity Table

The notice first provides rules for identifying the proper beneficiary when the Joint and Survivor Annuity method is used.

If the Joint and Last Survivor Table in § 1.401(a)(9)-9(d) is used to apply the required minimum distribution method or the fixed amortization method (or if the fixed annuitization method is applied using an annuity factor determined for the joint lives of the employee and designated beneficiary), then the beneficiary whose life expectancy or expected mortality is used must be the actual designated beneficiary of the employee with respect to the account for the year of the determination.[19]

The designated beneficiary rules refer to the rules that apply for required minimum distributions from retirement plans. The notice references those provisions for determining the proper beneficiary when more than one beneficiary is designated.

If the employee has more than one beneficiary, the identity and age of the designated beneficiary used for purposes of each of the methods described in section 3.01 of this notice are determined under the rules for determining the designated beneficiary for purposes of section 401(a)(9).[20]

The notice also provides that the beneficiary is determined as of January 1 of the distribution year in question:

The designated beneficiary is determined for a distribution year as of January 1 of the distribution year, without regard to changes in the designated beneficiary later in that distribution year or designated beneficiary determinations in prior distribution years.[21]

The notice provides the following example to illustrate this rule.

Example

For example, if an IRA owner starts distributions from an IRA in 2023 at age 50, and applies either the required minimum distribution method or fixed amortization method using the Joint and Last Survivor Table for the IRA owner and the designated beneficiary, and the beneficiaries on January 1, 2023 are 25 and 55 years old, the number of years used to calculate the payment for 2023 would be 40.2 (the entry from the Joint and Last Survivor Table for ages 50 and 55), even if later in 2023 the 55-year-old is eliminated as a designated beneficiary.

However, under the required minimum distribution method, if the 55-year-old beneficiary is eliminated or dies in 2023, that individual would not be taken into account in future distribution years (and if there is no designated beneficiary in a future year, the Single Life Table in § 1.401(a)(9)-9(b) is used for that distribution year).[22]

Interest Rates

The interest rate used for the fixed amortization method or the fixed annuitization method can be no more than the greater of:

5% or
120% of the federal mid-term rate (determined in accordance with section 1274(d) for either of the two months immediately preceding the month in which the distribution begins).[23]

Analysis

The 5% rate option is added by this Notice. Previously Revenue Ruling 2002-62, which governed this calculation, only allowed a maximum rate of 120% of the federal mid-term rate.

Links to the Revenue Rulings that include the mid-term rates are found at: https://apps.irs.gov/app/picklist/list/federalRates.html.

Account Balance

The notice provides the following rules for determining the account balance:

For purposes of applying the required minimum distribution method, the account balance for a distribution year is determined under § 1.401(a)(9)-5. For the fixed amortization and fixed annuitization methods, the account balance must be determined in a reasonable manner based on the facts and circumstances. The account balance will be treated as determined in a reasonable manner if it is the account balance on any date within the period that begins on December 31 of the year prior to the date of the first distribution and ends on the date of the first distribution.[24]

The notice provides that a taxpayer will be treated as making a modification to a series of periodic payments if there is a modification to the account balance after the valuation date chosen above. The modification will occur if, after that date, there is

Any addition to the account balance other than by reason of investment experience,
Any transfer of a portion of the account balance to another retirement plan, or
A rollover of the amount received by the employee.[25]

If such a modification is made it will trigger the recapture tax under IRC §72(t)(4)(A), which will result in all previously avoided early distribution penalties being due.

Exception from Modification When Account Exhausted Solely By Following Allowable Distribution Method

If things go wrong for the taxpayer, it may turn out that taking the required distributions under the method selected may exhaust the entire account prematurely. The Notice provides the following relief from the recapture tax in this case:

If, as a result of following a method of determining substantially equal periodic payments that qualifies for the exception of section 72(t)(2)(A)(iv), an individual's assets in an individual account plan or an IRA are exhausted, any resulting reduction in the amount of the final payment (and the subsequent cessation of payments) is not a modification within the meaning of section 72(t)(4). Accordingly, the recapture tax described in section 72(t)(4)(A) will not apply in this case.[26]

Permitted One Time Switch to Required Minimum Distribution Method

The Notice allows a taxpayer to make a one-time switch to the required minimum distribution method if that method was not selected initially:

An individual who begins distributions using either the fixed amortization method or the fixed annuitization method is permitted in any subsequent distribution year to switch to the required minimum distribution method to determine the payment for the distribution year of the switch and all subsequent distribution years, and this change in method will not be treated as a modification within the meaning of section 72(t)(4). Once a change is made under this paragraph, any subsequent change from the required minimum distribution method will be a modification for purposes of section 72(t)(4).[27]

Application to Distributions from Non-Qualified Annuities

The Notice also provides that these rules can be used for non-qualified annuity substantially equal distribution payments as well:

Taxpayers may use one of the methods set forth in section 3.01 of this notice (applying the rules in section 3.02 of this notice) to determine whether a distribution from a non-qualified annuity contract is part of a series of substantially equal periodic payments under section 72(q)(2)(D). Taxpayers may use the principles of section 3.03 of this notice to determine whether a change in substantially equal periodic payments will be treated as a modification under section 72(q)(3).[28]

[1] Notice 2022-6, January 18, 2022, https://www.irs.gov/pub/irs-drop/n-22-06.pdf (retrieved January 18, 2022)

[2] Notice 2022-6, January 18, 2022, Section 4

[3] Notice 2022-6, January 18, 2022, Section 4

[4] Notice 2022-6, January 18, 2022, Section 3.02(f)

[5] Notice 2022-6, January 18, 2022, Section 3.01

[6] Notice 2022-6, January 18, 2022, Section 3.01(a)

[7] Notice 2022-6, January 18, 2022, Section 3.01(a)

[8] Notice 2022-6, January 18, 2022, Section 3.01(b)

[9] Notice 2022-6, January 18, 2022, Section 3.01(b)

[10] Notice 2022-6, January 18, 2022, Section 3.01(c)

[11] Notice 2022-6, January 18, 2022, Section 3.01(c)

[12] Notice 2022-6, January 18, 2022, Section 3.01(c)

[13] Notice 2022-6, January 18, 2022, Section 3.02(a)

[14] Notice 2022-6, January 18, 2022, Section 3.02(a)

[15] Related to the designated beneficiary under the Joint and Last Survivor table

[16] The effective date and transition rules discussed earlier

[17] Notice 2022-6, January 18, 2022, Section 3.02(a)

[18] Notice 2022-6, January 18, 2022, Section 3.02(a)

[19] Notice 2022-6, January 18, 2022, Section 3.02(b)

[20] Notice 2022-6, January 18, 2022, Section 3.02(b)

[21] Notice 2022-6, January 18, 2022, Section 3.02(b)

[22] Notice 2022-6, January 18, 2022, Section 3.02(b)

[23] Notice 2022-6, January 18, 2022, Section 3.02(c)

[24] Notice 2022-6, January 18, 2022, Section 3.02(d)

[25] Notice 2022-6, January 18, 2022, Section 3.02(d)

[26] Notice 2022-6, January 18, 2022, Section 3.03(a)

[27] Notice 2022-6, January 18, 2022, Section 3.03(b)

[28] Notice 2022-6, January 18, 2022, Section 3.04