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IRS Proposes Rule Changes To 403(b) Retirement Accounts

The Internal Revenue Service (IRS) is proposing rule changes to Section 403(b) retirement plans that might change required minimum distributions (RMD), how to start accessing the funds, and the accounting methods for plan administrators. The adjustments are due to changes in various laws updated in the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). Among the adjustments made by sections of the SECURE Act apply to an employee who dies on or after Jan. 1, 2020, with a later effective date for certain collectively bargained plans or governmental plans.

The proposed regulations include changes to minimum distributions from qualified plans; section 403(b) annuity contracts, custodial accounts, and retirement income accounts; individual retirement accounts (IRA) and annuities; and, eligible deferred compensation plans under Section 457. These regulations will affect administrators of, and participants in, those plans; owners of IRAs and annuities; employees for whom amounts are contributed to section 403(b) annuity contracts, custodial accounts, or retirement income accounts; and beneficiaries of those plans, contracts, accounts, and annuities.

The proposed regulations also change the definition of an eligible designated beneficiary. Specifically, an eligible designated beneficiary is a designated beneficiary who, as of the date of the employee’s death, is (1) the surviving spouse of the employee, (2) a child of the employee who has not yet reached the age of majority, (3) disabled, (4) chronically ill, or (5) not more than 10 years younger than the employee.

The proposed regulations provide that distribution would be the required beginning date of April 1 of the calendar year following the later of (1) the calendar year in which the employee attains age 72, and (2) the calendar year in which the employee retires from employment with the employer maintaining the plan. They also provide that for an employee who was born before July 1, 1949, the required beginning date remains April 1 of the calendar year following the later of (1) the calendar year in which the employee attains age 70½, and (2) the calendar year in which the employee retires from employment with the employer maintaining the plan.

The effective date language to apply the amendments to an employee who died before attaining age 70½ if the employee would have attained age 70½ on or after Jan. 1, 2020 (that is, the employee’s date of birth is on or after July 1, 1949). It also extends to a surviving spouse who is waiting to begin distributions. For example, if an employee who was born on June 1, 1952, died in 2018, and the employee’s sole beneficiary is the employee’s surviving spouse, then the surviving spouse may wait until 2024 (the calendar year in which the employee would have attained age 72) to begin receiving distributions.

These proposed regulations provide that if an employee is a participant in more than one plan, the plans in which the employee participates are not permitted to be aggregated for purposes of testing whether the distribution requirements of section 401(a)(9) are met. They also reflect the exception for existing annuity contracts for which an irrevocable election as to the method and the amount of the annuity payments was made before Dec. 20, 2019, as described in section 401(b)(4) of the SECURE Act.

The comment period for the proposed RMD rules ends May 25. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-105954-20) by following the online instructions for submitting comments. A public hearing is scheduled for June 15 at 10 a.m.

Go here to get all 275 pages of the proposed changes: https://public-inspection.federalregister.gov/2022-02522.pdf

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