The IRS has issued new proposed regulations on minimum required distributions to implement the changes in law made by the SECURE Act.¹ In general, the SECURE Act increased the threshold age for minimum required distributions from age 70½ to age 72. This alert describes the key changes made by the proposed regulations with respect to defined benefit pension plans.

Comments and Public Hearing: Comments on the proposed regulations must be received by May 25, 2022.  The IRS strongly encourages that comments be submitted electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-105954-20) by following the online instructions for submitting comments. The IRS requests comments on all aspects of the proposed regulations.  A public hearing has been scheduled for June 15, 2022.

Background

Section 401(a)(9) of the Internal Revenue Code (Code) requires qualified plans to provide for minimum distributions for participants who have reached the required beginning date. The required beginning date (prior to the SECURE Act changes) was the April 1 following the later of the calendar year in which the participant attained age 70½, or the calendar year when the participant retired from service with the employer maintaining the plan. For participants who were 5-percent owners (as defined) in the plan year ending in the calendar year when they attained age 70½, the required beginning date was simply the April 1 following that calendar year.

Section 401(a)(9) of the Code also required that defined benefit plans provide actuarial increases in benefits to participants who commenced benefits after the April 1 following the calendar year of attainment of age 70½. Thus, a qualified plan could not suspend benefits under Code section 411(a)(3)(B)² for participants who were employed in covered service after the April 1 following the calendar year of attainment of age 70½. The actuarial increase requirement does not apply to government plans or certain church plans.

The SECURE Act amended section Code 401(a)(9) to change age 70½ to age 72. The change applied to distributions required to be made after December 31, 2019, to individuals who attain age 70½ after that date.

Proposed Regulations

The proposed regulations issued on February 24, 2022, would update the existing regulations under Code section 401(a)(9), section 402(c) (pertaining to rollovers), section 408 (pertaining to IRAs), and section 4974 (pertaining to excise taxes). The existing regulations were written in question-and-answer format. The proposed regulations would replace the question-and-answer format with a standard format for regulations.

Aside from making changes to reflect the SECURE Act, the proposed regulations would make other changes to reflect statutory changes since the existing regulations were issued, and to clarify certain issues that have been raised in public comments and private letter ruling requests. In general, other than the changes to reflect the SECURE Act, the proposed regulations contain few substantive changes for defined benefit plans. The key changes applicable to defined benefit pension plans are described below.

1)  Required Beginning Date

The proposed regulations would base the required beginning date on the birth date of the participant to take into account the effective date of the SECURE Act. Accordingly, the required beginning date would be determined as follows:

A plan is permitted to provide a uniform required beginning date of the April 1 following the calendar year of attainment of age 70½ for those born before July 1, 1949, and a required beginning date of April 1 following the calendar year of attainment of age 72 for those born on or after July 1, 1949, in both situations without regard to whether the employee is a 5-percent owner.

Cheiron Observation: It appears that the proposed regulations do not allow a defined benefit plan to provide a single uniform required beginning date of April 1, following the calendar year of attainment of age 70 ½. That means that a plan amendment would be required to change the required beginning date for those born on or after July 1, 1949.

Proposed section 1.401(a)(9)-6(k) provides that if distributions start prior to the required beginning date in a distribution form distribution form that is an annuity under which distributions are made in accordance with the provisions of paragraph (a) of 1.401(a)(9)-6(a) and are made over a period permitted under Code section 401(a)(9)(A)(ii), then, except as provided as otherwise provided in that section, the annuity starting date will be treated as the required beginning date. Thus, for example, the determination of the designated beneficiary and the amount of distributions will be made as of the annuity starting date. The proposed rules continue the similar provision in the existing regulations, including the requirement for adjustment in the survivor annuity percentage where the designated non-spouse beneficiary is much younger than the participant. The table of adjustment factors is the same table as in the existing regulations.

Cheiron Observation: The treatment of distributions that start prior to the statutory required beginning date allows a plan to provide that distributions will commence at normal retirement age, or other ages prior to age 70½. Thus, the rule facilitates in-service annuity distributions to participants, and does not require a plan to change distributions in pay status merely because the participant has attained age 70½ or age 72.

2)  Actuarial Increases

Section 1.401(a)(9)-6(g)(1) of the proposed regulations requires actuarial increases starting with the April 1 following the calendar year in which the employee attains age 70½. Like the existing regulations, the retirement benefits payable to participants is generally determined as the actuarial equivalent of the benefit payable at the starting date of April 1, plus the actuarial equivalent of additional benefits accrued after that date, reduced by the actuarial equivalent of any distributions made with respect to the employee’s retirement benefits after that date.  Proposed section 1.401(a)(9)-6(g)(2) provides that the actuarial increase requirement does not apply to an employee who is a 5-percent owner with respect to the plan year ending in the calendar year in which the employee attains age 72.

Cheiron Observations: The proposed section 1.401(a)(9)-6(g)(2) resolves the question as to whether a 5-percent owner who had a required beginning date of the April 1 following the calendar year of attainment of age 72 was required to have an actuarial increase from the April 1 following the calendar year of attainment of age 70½. The answer is “no.”

The proposed regulations did not address the question of whether, or how, the actuarial increase requirement would apply to a participant who has not yet attained normal retirement age by the April 1 following the calendar year of attainment of age 70½. This can occur where an employee is hired after age 65 (for example, at age 69) and has a normal retirement age of the 5^th anniversary of the commencement of participation.  Depending on the terms of the plan, the benefit payable at the April 1 following the calendar of attainment of age 70½ may be zero, or may be an early retirement benefit.

3)  Coordination With Section 436(d) Restrictions

The proposed regulations include a new provision to address the situation where a participant in a single-employer plan dies before the required beginning date and the entire interest must be distributed in accordance with the 5-year rule of Code section 401(a)(9)(B)(ii), but the plan is restricted from paying lump sums or other prohibited payments by the provisions of Code section 436.  Proposed section 1.401(a)(9)-6(j) would provide an exception to the 5-year rule provided that the payments start by the fifth year after the employee’s death and are paid in a form that is accelerated as permitted under Code section 436(d).

4)  Increasing Payments

The proposed regulations, like the existing regulations, provide that all payments under a defined benefit plan must be nonincreasing, subject to a number of exceptions. The proposed regulations retain the exceptions in the existing regulations, and add additional exceptions. Under the proposed regulations, annuity payments may also increase as a result of the resumption of benefits that were suspended pursuant to:

• • • Code section 411(a)(3)(B), which pertains to employment or re-employment after normal retirement age;
    • Code section 418E, which pertains to an insolvent multiemployer plan; and
    • Code section 432(e)(9), which pertains to a multiemployer plan in critical and declining status.

Cheiron Observation: The additional exceptions are helpful and prevent a plan from failing to satisfy the requirements of Code section 401(a)(9) simply because they utilized (or followed) other provisions of the law.

Cheiron pension consultants can assist you in preparing any comments on the proposed regulations.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.

¹ Setting Every Community Up for Retirement Enhancement Act of 2019, which was included in the Further Consolidated Appropriations Act, 2020.

² Or under section 203(a)(3)(B) of the Employee Retirement Income Security Act of 1974 (ERISA), as amended.