The IRS has issued final regulations on minimum required distributions to implement the changes in law made by the SECURE Act.¹ In addition, the IRS has proposed regulations to implement the further changes to the minimum required distributions made by the SECURE 2.0 Act.² In general, the changes increased the threshold age for minimum required distributions from age 70½ to age 75. This alert describes the key changes with respect to defined benefit pension plans made by the final regulations, and the in the proposed regulations.

Effective Date: The final regulations are effective on September 17, 2024, and apply for purposes of determining the minimum required distribution to calendar years beginning on or after January 1, 2025.

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)³ 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 Code section 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. The SECURE 2.0 Act further amended section 401(a)(9) to raise age 72 to ages 73 or 75 depending on when the individual attained age 73.

Regulations under the SECURE Act were proposed on February 24, 2022, to 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.

Final Regulations

In general, the final regulations follow the changes in the proposed regulations. However, certain changes made by the SECURE 2.0 Act were incorporated into the final regulations as well. The key provisions applicable to defined benefit pension plans are described below.

1) Required Beginning Date -

The final regulations would base the required beginning date on the birth date of the participant. Accordingly, the required beginning date would be determined as follows:

Under the proposed regulations, the required beginning date for an individual born in 1959 would be the April 1 following the later of (1) the calendar year of attaining age 73, or (2) the calendar year in which the employee retires from employment with the employer maintaining the plan.

A plan is permitted to provide a "uniform required beginning date" of the April 1 following the calendar year of attainment of the “applicable age” (age 70 ½, 72, 73, or 75, depending on the date of birth as described in the table), without regard to whether the employee is a 5-percent owner.

Cheiron Observation: The final 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. The preamble to the final regulations did note that, subject to the requirements of Code section 411, the provisions of section 1.401(a)(9)-6(k) allow a defined benefit plan to require that distributions commence by the April 1 following the calendar year of attainment of age 70 1/2 and, if the requirements of the regulations are satisfied, that date would be treated as the required beginning date for purposes of section 401(a)(9). 

Section 1.401(a)(9)-6(k) provides that if distributions start prior to the required beginning date in a 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 otherwise provided in that section, the annuity starting date will be treated as the required beginning date.   For example, the determination of the designated beneficiary and the amount of distributions will be made as of the annuity starting date.

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 an applicable age.

 The final regulations include a new provision concerning plans maintained by more than one employer. Under the new provision, an individual who has retired from one employer maintaining the plan but continues to be employed by another employer maintaining the plan is not treated as having retired for purposes of determining whether the individual has reached their required beginning date.

2) Actuarial Increases -

Section 1.401(a)(9)-6(g)(1) of the regulations requires actuarial increases to the retirement benefit 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. 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 the applicable age.

Cheiron Observations: 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 (or ages 73 or 75) 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 preamble to the final regulations clarified that the actuarial increase requirement does not have to be applied to benefits that are not vested. This is because the regulations treat benefits that are not vested as not having accrued, and the actuarial increase requirement applies to accrued benefits. This would apply to a participant who is not vested and 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.

3) Coordination With Section 436(d) Restrictions -

The final 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. Section 1.401(a)(9)-6(j) provides 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 final regulations, like the existing regulations, provide that all payments under a defined benefit plan must be nonincreasing, subject to certain exceptions. The final regulations retain the exceptions in the existing regulations and add additional exceptions. Under the final 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.

5) Separate Treatment of Components -

The final regulations contain a new provision that applies to a defined benefit that consists of separate identifiable components that are subject to different distribution elections. Under the new provision, the minimum distribution rules for defined benefit plans may be applied separately to each of the components.

Cheiron Observation: While it is somewhat unclear as to when different components are subject to different distribution options, this provision can be useful when changing plan designs. It also can be useful upon a merger of plans, where the benefit formula under one plan is frozen and future accruals occur under a formula for the ongoing plan that has different distribution elections.

Cheiron pension consultants can assist you in evaluating the impact of the final 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.

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

²SECURE 2.0 Act of 2022, enacted as Division T of the Consolidated Appropriations Act, 2023.

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