The IRS in Notice 2022-53[1] has announced that the agency will not impose penalties on failures to take specified RMDs for 2021 and 2022 that were required under provisions of proposed regulations issued to deal with changes in required minimum distributions under the SECURE Act passed in late 2019.

The notice described the provisions of the proposed regulations as follows:

In order to satisfy section 401(a)(9)(B)(i), the beneficiary of an employee who died after the employee’s required beginning date must take an annual required minimum distribution beginning in the first calendar year after the calendar year of the employee’s death. In order to satisfy section 401(a)(9)(B)(ii), the remaining account balance must be distributed by the 10th calendar year after the calendar year of the employee’s death (subject to an exception under section 401(a)(9)(B)(iii), if applicable). In order to satisfy both of those requirements, the proposed regulations generally provide that, in the case of an employee who dies after the employee’s required beginning date with a designated beneficiary who is not an eligible designated beneficiary (and for whom the section 401(a)(9)(B)(iii) alternative to the 10-year rule is not applicable), annual RMDs must continue to be taken after the death of the employee, with a full distribution required by the end of the 10th calendar year following the calendar year of the employee’s death.

In accordance with section 401(a)(9)(B)(iii), in the case of a designated beneficiary who is an eligible designated beneficiary, the proposed regulations include an alternative to the 10-year rule under which annual lifetime or life expectancy payments are made to the beneficiary beginning in the year following the year of the employee’s death. Under the proposed regulations, if an eligible designated beneficiary of an employee is using the lifetime or life expectancy payment alternative to the 10- year rule, then the eligible designated beneficiary (and, after the death of the eligible designated beneficiary, the beneficiary of the eligible designated beneficiary) must continue to take annual distributions after the death of the employee (with a full distribution made no later than the 10th year after the year of the eligible designated beneficiary’s death). The proposed regulations provide for similar treatment (that is, continued annual RMDs with a requirement to take a full distribution no later than the 10th year after a specified event) in the case of a designated beneficiary who is a minor child of the employee (with the specified event being the child’s reaching the age of majority).[2]

The IRS noted that a number of commentators indicated that they had not interpreted the law in this fashion and, for that reason, many individuals who inherited accounts from decedents in pay status had not taken such distributions in 2021.  As the IRS did not release the proposed regulations until February 24, 2022, it was too late to timely take any such required distribution for 2021:

During that period, some individuals who are owners of inherited IRAs or are beneficiaries under qualified defined contribution plans or section 403(b) plans submitted comments indicating that they thought the new 10-year rule would apply differently than what was proposed in the proposed regulations. Specifically, commenters believed that, regardless of when an employee died, the 10-year rule would operate like the 5-year rule, under which there would not be any RMD due for a calendar year until the last year of the 5- or 10-year period following the specified event (the death of the employee, the death of the eligible designated beneficiary, or the attainment of the age of majority for the employee’s child who is an eligible designated beneficiary). Commenters in those situations who are heirs or beneficiaries of individuals who died in 2020 explained that they did not take an RMD in 2021 and are unsure of whether they would be required to take an RMD in 2022. Commenters asserted that, if final regulations adopt the interpretation of the 10-year rule set forth in the proposed regulations, the Treasury Department and the IRS should provide transition relief for failure to take distributions that are RMDs due in 2021 or 2022 pursuant to section 401(a)(9)(H) in the case of the death of an employee (or designated beneficiary) in 2020 or 2021.[3]

Delayed Application of the Provision

In the Notice, the IRS announced that the provisions in the regulations will apply no earlier than 2023:

Final regulations regarding RMDs under section 401(a)(9) of the Code and related provisions will apply no earlier than the 2023 distribution calendar year.[4]

Relief from the Consequences of Failing to Make or Take an RMD

Per the title of Section IV of the Notice, the guidance covers “Certain RMDs for 2021 and 2022.”[5]

The notice first provides relief to defined contribution retirement plans that did not make a specified RMD:

A defined contribution plan that failed to make a specified RMD (as defined in Section IV.C of this notice) will not be treated as having failed to satisfy section 401(a)(9) merely because it did not make that distribution.[6]

For individuals who failed to take a specified RMD the following relief is provided:

To the extent a taxpayer did not take a specified RMD (as defined in Section IV.C of this notice), the IRS will not assert that an excise tax is due under section 4974. If a taxpayer has already paid an excise tax for a missed RMD in 2021 that constitutes a specified RMD, that taxpayer may request a refund of that excise tax.[7]

The Notice defines a specified RMD as follows:

For purposes of this notice only, a specified RMD is any distribution that, under the interpretation included in the proposed regulations, would be required to be made pursuant to section 401(a)(9) in 2021 or 2022 under a defined contribution plan or IRA that is subject to the rules of 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:

• a designated beneficiary of an employee under the plan (or IRA owner) if: (1) the employee (or IRA owner) died in 2020 or 2021 and on or after the employee’s (or IRA owner’s) required beginning date, and (2) the designated beneficiary is not taking lifetime or life expectancy payments pursuant to section 401(a)(9)(B)(iii); or

• a beneficiary of an eligible designated beneficiary (including a designated beneficiary who is treated as an eligible designated beneficiary pursuant to section 401(b)(5) of the SECURE Act) if: (1) the eligible designated beneficiary died in 2020 or 2021, and (2) that eligible designated beneficiary was taking lifetime or life expectancy payments pursuant to section 401(a)(9)(B)(iii) of the Code.[8]

[1] Notice 2022-53, October 7, 2022, https://www.irs.gov/pub/irs-drop/n-22-53.pdf (retrieved October 7, 2022)

[2] Notice 2022-53, October 7, 2022

[3] Notice 2022-53, October 7, 2022

[4] Notice 2022-53, October 7, 2022

[5] Notice 2022-53, October 7, 2022

[6] Notice 2022-53, October 7, 2022

[7] Notice 2022-53, October 7, 2022

[8] Notice 2022-53, October 7, 2022