IRS Guidance About the SECURE Act's Beneficiary Provisions Requires Revision
49 Comp. Plan. J. No. 5, 78 , 2021
9 Pages Posted: 14 May 2021 Last revised: 14 Jun 2021
Date Written: May 7, 2021
The IRS has presented its first and only guidance about how the SECURE Act changed the Required Minimum Distribution (RMD) Rules. This was done in a detailed IRS guide for preparing 2020 returns, and an IRS FAQ web site that referenced the guide that had been released a day earlier. The SECURE Act limited the set of individual beneficiaries permitted to use their own life expectancy to stretch out the benefit distributions after the death of participant. Non-favored individual beneficiaries became subject to a 10-year rule similar to the 5-year rule upon which it is based. The 5-year rule does not require any benefit distributions before the end of the 5-year period, but requires distribution on or before the final day of the period. The 5-year rule is applicable to an estate or trust not treated as a pass-through entity when the participant died before attaining the participant’s required beginning date.
The IRS correctly treats the 10-year rule as replacing a disfavored individual beneficiary’s ability to use the beneficiary’s life expectancy to determine annual RMDs. The return guidance incorrectly describes the 10-year rule as requiring annual distributions in each year following the participant’s death even though the 5-year rule has no such requirement. Furthermore, if the participant dies after attaining the participant’s required beginning date, the IRS guidance prevents a disfavored individual beneficiary from continuing to use the participant’s life expectancy to determine annual minimum required distributions. The IRS does this even though such continuation would result in no further stretch-out of the benefit distributions, and an estate or trust not treated as a pass-through entity may so use the participant’s life expectancy. These limitations are not consistent with the stated purpose of the SECURE Act RMD provisions, the long-standing IRS regulations interpreting the RMD rules, or the amended RMD statute as a whole. Moreover, they may be readily avoided by well-advised participants.
Keywords: Minimum Required Distributions, MRDs, Required Minimum Distributions, RMDs, Saving Plans, Pension Plans, Retirement Plans, IRAs, Participant, Beneficiary, Estate, Trust, Income Tax, Tax Deferral, Stretch-Out, Withdrawal, Distribution, Estate Planning, Tax Planning
JEL Classification: I18, J26, J32, J33, K34, K39
Suggested Citation: Suggested Citation