Navigating Required Minimum Distribution (RMD) Relief: IRS Notice 2024-35

On April 16, 2024, the IRS released Notice 2024-35, extending the previously provided temporary relief from certain required minimum distribution (RMD) requirements for beneficiaries under qualified defined contribution plans until December 31, 2024.

Backdrop: Understanding RMD Rules

Qualified plans are mandated to make annual RMDs to plan participants starting from a participant’s required beginning date, typically occurring by April 1 following the later of either (1) the year a participant reaches the applicable age (age 73 if one reached age 72 after December 31, 2022), or (2) the year in which the participant retires. Beneficiaries are also subjected to RMD requirements.

The SECURE Act of 2019 brought about significant changes to the RMD rules for beneficiaries. Prior to the SECURE Act, distributions to most beneficiaries followed either the Five-Year Rule or the Life Expectancy Rule. The Five-Year Rule required the account balance to be distributed to beneficiaries by the end of the 5^th calendar year following the year of the participant’s death. The Life Expectancy Rule required the account balance to be distributed to beneficiaries over the life or life expectancy of the beneficiary.

Under the SECURE Act, the Life Expectancy Rule applies only to Eligible Designated Beneficiaries (surviving spouses, minor children, disabled or chronically ill persons, or beneficiaries not more than 10 years younger than the participant). Designated beneficiaries who are not Eligible Designated Beneficiaries fall under the so-called Ten-Year Rule. They must receive a full distribution of the participant’s account balance by the end of the 10^th calendar year following the year of the participant’s death. The Ten-Year Rule also applies to designated beneficiaries of Eligible Designated Beneficiaries and minor children once they reach majority.

Proposed Regulations and Temporary Relief Measures

Prior to the issuance of proposed regulations in February 2022, it was commonly assumed that the Ten-Year Rule was to operate similarly to the Five-Year Rule. It was assumed that beneficiaries subject to the Ten-Year Rule were permitted to wait 10 years following the year of the participant’s death before they had to take a distribution of the participant’s account balance. Given that assumption, RMDs were not taken by those beneficiaries subject to the Ten-Year Rule. However, the proposed regulations clarified that under the Ten-Year Rule, designated beneficiaries who are not Eligible Designated Beneficiaries must take RMDs annually throughout the 10-year period.

Responding to public concerns, the IRS released Notice 2022-53 and 2023-54. The IRS provided relief for missed RMDs that should have been paid to designated beneficiaries (who do not take benefits under the Life Expectancy Rule) of participants who passed away between 2020 and 2023. Under this guidance, the IRS would not disqualify a plan that failed to make annual distributions under the Ten-Year Rule in 2021, 2022, and 2023, and would not assess a penalty tax on the missed RMDs. Notice 2024-35 further extends this relief for 2024.

Looking Forward: Anticipating Final Regulations

The IRS regulations are anticipated to be finalized later in 2024 and take effect for calendar years beginning on and after January 1, 2025. This could potentially mark the end of the relief period, making the current extension the last one.

For more information or if you have any questions about the information in this newsletter, please contact your Quarles & Brady counsel or:

• Sarah Sise: (312) 715-5125 / sarah.sise@quarles.com
• Lauren Schuster: (314) 696-5115 / lauren.schuster@quarles.com
• Austin Anderson: (312) 715-5144 / austin.anderson@quarles.com
• Colleen Essid: (312) 715-2733 / colleen.essid@quarles.com
• Filip Grzelak: (202) 372-9564 / filip.grzelak@quarles.com