IRS Announces Additional Delay of “10-Year Rule” Compliance for RMDs

On April 16, 2024, the IRS published Notice 2024-35, which provided welcome relief (again) from required minimum distribution (“RMD”) compliance for post-death distributions under the 10-year rule for 2024. 

Required minimum distributions are amounts retirement plan participants (and individual retirement account (IRA) owners) must withdraw once they (a) retire, or (b) reach age 72 (age 73, for participants who reach age 72 after December 31, 2022), whichever is later.

The RMD rules also apply for participants and IRA owners who die: their beneficiaries are then subject to specific post-death RMD rules.  Prior to 2020, beneficiaries could “stretch” the RMDs over their lifetimes or life expectancies.  The SECURE Act of 2019 eliminated the ability for certain beneficiaries (except for “eligible designated beneficiaries”) to do so.  Instead, a beneficiary who is not an eligible designated beneficiary must cash out the entire balance of the participant’s account within 10 years of the participant’s death (the “10-year rule”), beginning in 2020.

The SECURE Act did not specify how often the distributions must be made to comply with the 10-year rule, so most experts assumed a beneficiary could wait until the tenth year to cash out the entire account balance. However, in February 2022, the IRS issued a proposed rule interpreting the SECURE Act as requiring beneficiaries to take annual distributions for each of the 10 years after the participant’s death. Most retirement plans were not administered to provide for these annual distributions, nor did most beneficiaries take such distributions. 

In response to commenters’ concerns, the IRS announced in October 2022 that the proposed rules would not apply until 2023, at the earliest. The IRS again extended the application of the proposed rules in 2023 to 2024. And most recently, the IRS again punted application of the rules to no earlier than 2025. Retirement plans that fail to make RMDs in accordance with the IRS’s proposed rule will not fail to be qualified, and beneficiaries who fail to take RMDs in accordance with the IRS’s proposed rule will not be subject to excise tax.

This comes as welcome relief for beneficiaries subject to the 10-year rule, granting yet another year before RMDs must be taken for retirement plan participants and IRA owners who died in 2020, 2021, 2022, or 2023. Retirement plan administrators and beneficiaries should be on the lookout for the IRS to finalize its proposed rules for application beginning in 2025…unless further delayed, again.