In Notice 2022-53, the IRS stipulated that the minimum distribution rules for defined contribution plan balances (including IRAs) inherited from a beneficiary who had passed away after their required beginning date— as outlined in the proposed regulations under the SECURE Act—would not take effect until 2023 at the earliest. However, with the release of Notice 2023-54,[1] the IRS has further delayed the implementation of these rules by at least one year, meaning they will not be applicable until 2024 at the earliest.

The Notice also provides relief to individuals born in 1951 who, under the law prior to the enactment of the SECURE 2.0 Act, were informed they would need to take required minimum distribution (RMD) payments by April 1, 2024, as they would turn 72 in 2023. Payments to cover these initial RMDs could have been initiated as early as January 2023, and some taxpayers may have scheduled such payments accordingly.

However, the SECURE 2.0 Act, passed late in 2022, altered the required beginning date for these taxpayers to April 1 of the year following the one in which they turn 73. Consequently, these 2023 payments became eligible rollover distributions. However, taxpayers may not have been aware of this change until after the 60-day rollover period had expired. The Notice now offers an option to roll over those payments, originally intended to cover distributions that are no longer required, through September 30, 2023.

Proposed Regulations, RMDs and Prior IRS Relief

The Notice provides the following description of the rule found in Proposed Reg. §1.401(a)(9)-5(d)(1)(i):

In order to satisfy § 401(a)(9)(B)(i), the beneficiary of an employee who died after the employee’s required beginning date must take an annual RMD beginning in the first calendar year after the calendar year of the employee’s death. In order to satisfy § 401(a)(9)(B)(ii) (applied by substituting “10 years” for “5 years”), the remaining account balance must be distributed by the 10th calendar year after the calendar year of the employee’s death (subject to an exception under § 401(a)(9)(B)(iii), if applicable). In order to satisfy both of those requirements, the proposed regulations generally provide that, in the case of an employee who dies after the employee’s required beginning date with a designated beneficiary who is not an eligible designated beneficiary (and for whom the § 401(a)(9)(B)(iii) alternative to the 10-year rule is not applicable), annual RMDs must continue to be taken after the death of the employee, with a full distribution required by the end of the 10th calendar year following the calendar year of the employee’s death.

In the case of a designated beneficiary who is an eligible designated beneficiary, the proposed regulations include an alternative to the 10-year rule under which annual lifetime or life expectancy payments would be made to the beneficiary beginning in the year following the year of the employee’s death, in accordance with § 401(a)(9)(B)(iii). Under the proposed regulations, if an eligible designated beneficiary of an employee is using the lifetime or life expectancy payment alternative to the 10-year rule, then the eligible designated beneficiary (and, after the death of the eligible designated beneficiary, the beneficiary of the eligible designated beneficiary) would need to continue to take annual RMDs after the death of the employee (with the employee’s entire interest distributed by no later than the 10th year after the year of the eligible designated beneficiary’s death). The proposed regulations provide for similar treatment (that is, continued annual RMDs with a requirement that the employee’s entire interest be distributed no later than the 10th year after a specified event) in the case of a designated beneficiary who is a minor child of the employee (with the specified event being the child’s reaching the age of majority).[2]

The IRS received numerous comments from individuals who had understood that, irrespective of whether the original account owner had reached their required beginning date, inheritors of accounts simply needed to withdraw the entire balance by the end of the tenth year following the year of the account holder's death. This misunderstanding led the IRS to issue Notice 2022-53, which provided relief from penalties for those who did not interpret the law in the same way the IRS did in the proposed regulations.

In response to the comments received on the proposed regulations, the Treasury Department and the IRS issued Notice 2022-53, 2022-45 IRB 437. Notice 2022-53 announced that the final regulations will apply no earlier than the 2023 distribution calendar year and provided guidance regarding certain amounts that were not paid in 2021 or 2022. Specifically, Notice 2022-53 provided that a defined contribution plan will not fail to be qualified for failing to make a specified RMD (as defined in that notice) in 2021 or 2022 and the taxpayer who did not take a specified RMD will not be subject to the excise tax under § 4974 for failing to take the specified RMD.[3]

Relief Extended One Additional Year (At Least)

In the first Notice, the IRS did not definitively state that such distributions must be made in 2023, nor did it assert that penalty relief would not be granted if such payments were not made in 2023. Instead, the Notice left the issue open for future determination, stating only that the RMD rules of the proposed regulations would not be applied before 2023. It was clear that the implementation could be postponed further, and indeed, it has now been confirmed that these regulations will not take effect for at least one additional year.

In Section III of Notice 2023-54, the IRS states:

Final regulations regarding RMDs under § 401(a)(9) and related provisions will apply for calendar years beginning no earlier than 2024.[4]

Similar to the original Notice, the 2023 Notice does not definitively answer whether the rules outlined in the proposed regulations will be implemented in 2024, or if these rules could undergo modifications before being adopted as final regulations.

The penalty and plan qualification relief applies to a specified RMD as defined by the Notice. The definition of such a payment is as follows:

For purposes of this notice, a specified RMD is any distribution that, under the interpretation included in the proposed regulations, would be required to be made pursuant to § 401(a)(9) in 2023 under a defined contribution plan or IRA that is subject to the rules of § 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:

a designated beneficiary of an employee under the plan (or IRA owner) if: (1) the employee (or IRA owner) died in 2020, 2021, or 2022, and on or after the employee’s (or IRA owner’s) required beginning date, and (2) the designated beneficiary is not using the lifetime or life expectancy payments exception under § 401(a)(9)(B)(iii); or
a beneficiary of an eligible designated beneficiary (including a designated beneficiary who is treated as an eligible designated beneficiary pursuant to § 401(b)(5) of the SECURE Act) if: (1) the eligible designated beneficiary died in 2020, 2021, or 2022, and (2) that eligible designated beneficiary was using the lifetime or life expectancy payments exception under § 401(a)(9)(B)(iii) of the Code.[5]

The relief for the plan for possible violations of IRC §401(a)(9) found in Notice 2023-54 provides:

A defined contribution plan that failed to make a specified RMD (as defined in section V.C of this notice) will not be treated as having failed to satisfy § 401(a)(9) merely because it did not make that distribution.[6]

The relief from potential penalties that would apply to the person inheriting the account for failure to take the required minimum distribution found in Notice 2023-54 provides:

To the extent a taxpayer did not take a specified RMD (as defined in section V.C of this notice), the IRS will not assert that an excise tax is due under § 4974.[7]

Change in Required Beginning Date Short-Term Rollover Relief

Another significant provision in this Notice, which does not have a counterpart in Notice 2022-53, pertains to the changes to required beginning dates specified in the SECURE Act 2.0 enacted very late in 2022. Notice 2023-54 explains:

Following enactment of the SECURE 2.0 Act, plan administrators and other payors indicated that automated payment systems would need to be updated to reflect the change in the required beginning date under § 401(a)(9)(C) pursuant to § 107 of the SECURE 2.0 Act. They expressed concern that these revisions could take some time to implement and, as a result, plan participants and IRA owners who would have been required to begin receiving RMDs for calendar year 2023 but for § 107 of the SECURE 2.0 Act (i.e., those who will attain age 72 in 2023) and who receive distributions in 2023 could have had those distributions mischaracterized as RMDs (and therefore ineligible for rollover).[8]

The Notice provides special relief for those payments that were characterized as RMDs but are not actually RMD due to provisions in the SECURE 2.0 Act. The first relief applies to payors and plan administrators who did not treat these distributions as qualified rollover distributions. This relief is crucial primarily because of the mandatory withholding required from qualified rollover distributions when they are not directly transferred to another qualified retirement plan by a plan administrator. Additionally, there are notices that must be provided when such distributions are made.

A payor or plan administrator will not be considered to have failed to satisfy the requirements of §§ 401(a)(31), 402(f), and 3405(c) merely because of a failure to treat certain distributions as eligible rollover distributions. This relief applies with respect to any distribution made from a plan between January 1, 2023, and July 31, 2023, to a participant born in 1951 (or that participant’s surviving spouse) that would have been an RMD but for the change in the required beginning date under § 107 of the SECURE 2.0 Act.[9]

The IRS also provides relief to allow recipients of such distributions to roll them over. However, there are some key differences depending on whether the funds originated from a qualified employer retirement plan or an individual retirement account (IRA). First the IRS provides the rule for distributions from a qualified employer sponsored retirement plan:

Pursuant to § 402(c)(3)(B), the Treasury Department and the IRS are extending the 60-day rollover period for any distribution described in section IV.A of this notice so that the deadline for rolling over such a distribution will be September 30, 2023. For example, if a participant who was born in 1951 received a single-sum distribution in January 2023, part of which was treated as ineligible for rollover because it was mischaracterized as an RMD, that participant will have until September 30, 2023, to roll over that mischaracterized part of the distribution.[10]

The IRA relief begins similarly, but there will be a complication due to the limitation on one rollover every twelve months. The basic relief found in the Notice provides:

Pursuant to § 408(d)(3)(I), the Treasury Department and the IRS are extending the 60-day rollover period for certain IRA distributions made to an IRA owner (or the IRA owner’s surviving spouse), so that the deadline for rolling over that portion of the distribution will be September 30, 2023. The distributions that are subject to this extension are distributions made from an IRA between January 1, 2023, and July 31, 2023, to an IRA owner born in 1951 (or that individual’s surviving spouse) that would have been RMDs but for the change in the required beginning date under § 107 of the SECURE 2.0 Act.[11]

The IRS stipulates that this relief applies even if the taxpayer has made a rollover in the preceding twelve months.

This rollover is permitted even if the IRA owner or surviving spouse has rolled over a distribution within the last twelve months.[12]

However, this relief does not apply to rollovers made after a rollover executed under the relief provided by Notice 2023-54. As the IRS points out, any additional transfers to another IRA account in the subsequent twelve months will need to be conducted via a direct transfer.

However, making such a rollover of the portion of an IRA distribution mischaracterized as an RMD will preclude the IRA owner or surviving spouse from rolling over a distribution in the next twelve months. In that case, that individual could still make a direct trustee-to-trustee transfer as described in Rev. Rul. 78-406, 1978-2 CB 157.[13]

[1] Notice 2023-54. July 14, 2023, https://www.irs.gov/pub/irs-drop/n-23-54.pdf (retrieved July 14, 2023)

[2] Notice 2023-54. July 14, 2023

[3] Notice 2023-54. July 14, 2023

[4] Notice 2023-54. July 14, 2023

[5] Notice 2023-54. July 14, 2023

[6] Notice 2023-54. July 14, 2023

[7] Notice 2023-54. July 14, 2023

[8] Notice 2023-54. July 14, 2023

[9] Notice 2023-54. July 14, 2023

[10] Notice 2023-54. July 14, 2023

[11] Notice 2023-54. July 14, 2023

[12] Notice 2023-54. July 14, 2023

[13] Notice 2023-54. July 14, 2023