Tax Law Update: September 2024

• Internal Revenue Service issues SECURE Act regulations—On July 18, 2024, the Treasury and the IRS released final regulations (final regs) under Internal Revenue Code Section 401(a)(9) concerning the required minimum distribution (RMD) requirements with respect to retirement plans and accounts. These final regs incorporate amendments made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and SECURE 2.0 Act of 2022 (SECURE 2.0 Act). The Treasury and IRS also released proposed regulations (proposed regs) that address other RMD issues under the SECURE 2.0 Act.

The IRS issued proposed regs under IRC Section 401(a)(9) in early 2022 under the SECURE Act. The final regs largely adopt these proposed regs, with certain changes in response to comments to the proposed regs and SECURE 2.0 Act enacted after the proposed regs were released. One notable change from the proposed regs is the inclusion of a broader exception to the general rule that Section 401(a)(9) may not be applied separately to the separate interests of each of the beneficiaries of a see-through trust. (A see-through trust is a trust designated as the beneficiary of a retirement plan that meets certain requirements that enable certain beneficiaries of the trust, rather than the trust itself, to be treated as having been designated as beneficiaries of the plan, thereby making them “designated beneficiaries” that can spread out distributions over a greater time period.) Under the final regs, if the terms of a see-through trust provide that it’s to be divided immediately on the death of the plan participant owner into separate see-through trusts and certain separate accounting requirements are met, Section 401(a)(9) will be applied separately to each separate trust. This will greatly simplify beneficiary designations when a client wants separate subtrusts (for example, for a client’s children) created under a client’s revocable trust on their death to be the beneficiaries of a client’s retirement plans. Previously, the separate subtrusts themselves (and the formula for allocating among them) needed to be included on the plan’s beneficiary designation forms to ensure that Section 401(a)(9) would be applied to each subtrust separately to determine each subtrust’s RMD requirements. Now, the client should be able to simply designate their revocable trust on the beneficiary designation forms. 

Also of note is the final regs’ retention of the controversial rule requiring a beneficiary of a plan participant/account owner who dies after such participant owner was required to start taking annual distributions (that is, after such participant’s/owner’s required beginning date) to continue taking such annual distributions. After the enactment of the SECURE Act and before the release of the proposed regs (which included this rule), many practitioners assumed that no distributions were required until the end of the year of the 10th anniversary of the participant’s/owner’s death (at which point the participant’s/owner’s entire interest in the plan/account had to be distributed to the beneficiary); however, the final regs make clear that the annual distributions must continue and the entire interest must be distributed before the end of the 10-year period.