The SECURE 2.0 Act of 2022, signed into law on December 29, 2022 as part of the Consolidated Appropriations Act, 2023, contains over 90 provisions impacting retirement savings. This Client Action Bulletin breaks down how the required minimum distribution (RMD) rules are changing for employer-sponsored defined benefit (DB) and defined contribution (DC) plans. We also describe how excise taxes are changing for those who do not receive their RMDs in a timely manner.
March 8, 2024 Update: IRS issued Notice 2024-2 in December 2023 extending the deadlines for plan sponsors to adopt required and discretionary plan amendments related to SECURE 2.0. Changes to this article are shown in green.
June 6, 2023 Update: The Chairs and Ranking Members of the House Committee on Ways and Means and the Senate Committee on Finance sent a joint letter to the Internal Revenue Service (IRS) and the U.S. Department of Treasury on May 23, 2023, clarifying Congressional intent on some of the provisions in SECURE 2.0. One of these clarifications is that the applicable age for RMDs for those who attain age 73 after December 31, 2032, is age 75. This change to this article is highlighted in red.
Individuals participating in employer-sponsored DB and DC plans do not pay taxes on the benefits they earn until they are distributed (except for Roth and other employee after-tax amounts). However, the federal government does not allow individuals to defer paying those taxes indefinitely and specifies the required beginning date when payments must commence and the minimum amounts that must be paid. If RMDs are not sufficient or paid on time, excise taxes may apply.
In general, the required beginning date (i.e., the date the first RMD must be made from the plan) is the April 1 following the calendar year in which the individual attains the RMD age. However, some plans may permit individuals who are not 5% owners to defer even later, so that the required beginning date is the April 1 following the calendar year of the RMD age or the date the individual retires, if later. After the first RMD is made, subsequent payments are due by December 31 of each year.
Section 107 of SECURE 2.0 increased the RMD age for distributions made after December 31, 2022, for individuals attaining age 72 after December 31, 2022. The table in Figure 1 summarizes the recent changes to the RMD age.
| Effective for individuals attaining | RMD age | |
|---|---|---|
| Age 70 ½ before 1/1/2020 | 70 ½ | Prior to the SECURE Act* |
| Age 70 ½ after 12/31/2019 and age 72 before 1/1/2023 | 72 | Change with the SECURE Act* |
| Age 72 after 12/31/2022 and age 73 before 1/1/2033 | 73 | Change with SECURE 2.0 |
| Age 73 after 12/31/2032 | 75 | Change with SECURE 2.0 |
* The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).
Example 1: Jack attains age 72 on December 31, 2022. His RMD age is 72 and his first RMD payment must be made by April 1, 2023.
Example 2: Jill attains age 72 on July 4, 2023. Her RMD age is 73. Because she turns 73 in 2024, her first RMD payment must be made by April 1, 2025.
Section 325 of SECURE 2.0 eliminates the pre-death RMD requirement for designated Roth accounts in 401(k), 403(b), and governmental 457(b) plans starting with the 2024 taxable year. Pre-death RMDs continue to be required on Roth accounts for 2022 and 2023 taxable years, including the payment due on April 1, 2024.
Changes made by the SECURE Act and SECURE 2.0 did not change when actuarial increases apply for DB plans. 1 Actuarial increases apply beginning April 1 following the calendar year the participant attains age 70½, regardless of whether the plan provided the participant a suspension of benefits notice.
A suspension of benefits notice informs participants that their benefit has been suspended and why it has been suspended, along with the plan provisions that authorize such suspension. It may also advise that benefits suspended after normal retirement age will not be actuarially increased during the time of the suspension. These notices are typically provided when a retiree returns to work or when a participant continues to work in active employment beyond their normal retirement date with their employer (or, for multiemployer plans, in the same industry, trade, or craft, and in the same geographic area).
Benefit calculations for retirees who return to work or participants who continue working past their normal retirement date can be quite complex. The plan’s terms, whether the participant is working in covered or non-covered employment, when (or if) the suspension notice is provided, and the number of hours they are working each month are some of the factors impacting how the benefit is calculated. Plan sponsors are advised to contact their Milliman consultant for assistance or to review the plan’s procedures for these calculations.
Individuals who fail to receive RMDs in a timely manner may be subject to an excise tax equal to a percentage of the difference between the RMD and the amount distributed during the taxable year. Section 302 of SECURE 2.0 reduced the excise tax from 50% to 25% starting with the 2023 taxable year. The tax is paid by the individual, not the plan.
The excise tax can be further reduced to 10% if the RMD deficiency is corrected during the correction window and the individual submits a tax return during the window period reflecting the excise tax. The correction window is defined as the period from when the excise tax is imposed (i.e., when the RMD was due) to the earliest of the following:
The IRS may waive the excise tax if the individual can demonstrate that the RMD deficiency was due to reasonable error and reasonable steps have been taken to correct the deficiency.
Individuals are advised to consult with their tax advisers to ensure they receive their RMDs and that they are accurately reflected for tax purposes.
Plan sponsors can wait to amend their plans for SECURE 2.0 until December 31, 2026 (December 31, 2028, for collectively bargained plans, or December 31, 2029, for most governmental plans) , if in the meantime they operate as if the new provisions were in effect from the date the required or optional change went into effect. A full summary of the amendment deadlines can be found here .
Please contact your Milliman consultant for how these provisions may impact your plan(s).
1 These actuarial increases do not apply to church or governmental DB plans. .