IRS Notice 2022-55 Provides RMD Penalty Relief

The Internal Revenue Service (IRS) released Notice 2022-53, offering guidance and penalty relief for required minimum distributions (RMDs) for beneficiaries of inherited retirement accounts. This notice addresses significant uncertainty that arose following major legislative changes to retirement rules. This guidance provides a temporary reprieve from substantial penalties, clarifying obligations for specific years while the IRS finalizes regulations.

Background on the SECURE Act’s 10-Year Rule

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 fundamentally changed the rules for most beneficiaries of inherited retirement plans. Before the SECURE Act, beneficiaries could often “stretch” distributions over their own life expectancy. This “stretch IRA” concept allowed for decades of tax-deferred growth, with only small annual withdrawals required.

The SECURE Act largely eliminated this practice, replacing it with a 10-year rule. This rule mandates that the entire balance of an inherited retirement account must be fully distributed by the end of the tenth calendar year following the year of the original account owner’s death. This change applies to accounts inherited from individuals who passed away after December 31, 2019, and accelerates the payment of income taxes on those funds.

The law created different classes of beneficiaries. “Eligible Designated Beneficiaries” (EDBs) are exempt from the 10-year rule and can still use a life expectancy payout. EDBs include:

• The surviving spouse
• The owner’s minor children, until they reach the age of majority
• Disabled or chronically ill individuals
• Beneficiaries not more than 10 years younger than the decedent

Most other individual beneficiaries, such as adult children, are classified as “Designated Beneficiaries” and are subject to the 10-year rule.

The RMD Confusion from Proposed Regulations

Following the SECURE Act, a significant question remained for Designated Beneficiaries subject to the 10-year rule. The uncertainty was whether annual RMDs were required during the 10-year period if the original account owner had already started taking their own RMDs. The common interpretation was that no distributions were required for years one through nine, as long as the entire account was emptied by the end of the tenth year.

This understanding was upended in February 2022 when the IRS issued proposed regulations. These rules stated that if the original owner died on or after their required beginning date for RMDs, the beneficiary must take annual RMDs based on their own life expectancy for years one through nine. This was in addition to emptying the account within 10 years, and the interpretation caught many by surprise.

Beneficiaries who inherited accounts in 2020 and followed this interpretation would have already missed their first required distribution for the 2021 tax year. The penalty for failing to take an RMD is a steep excise tax on the amount that should have been withdrawn. This unexpected guidance meant many beneficiaries were suddenly facing potential penalties for non-compliance.

Penalty Relief Under Notice 2022-53

In response to the confusion, the IRS issued Notice 2022-53 in October 2022. This notice provides relief by waiving the penalty for failing to take these newly specified annual RMDs. The relief applies to certain beneficiaries for the 2021 and 2022 tax years, waiving a penalty that would have been 50% of the required distribution.

The relief is for Designated Beneficiaries who are subject to the 10-year rule. To qualify, the beneficiary must have inherited the account from an owner who died in 2020 or 2021 and was past their own required beginning date for taking RMDs. The notice states that the IRS will not assess a penalty for any missed annual distributions that would have been due for 2021 or 2022 under the new interpretation.

This relief is specific and does not apply to the year-of-death RMD that the original account owner may have failed to take. It also does not change the ultimate requirement that the entire account balance be distributed by the end of the 10-year period. Subsequent notices have extended this penalty relief through the 2024 tax year as the IRS continues to work on finalizing the regulations.

Implications for Affected Beneficiaries

For beneficiaries who did not take the specified annual RMDs for 2021 and 2022 because they were unaware of the requirement, no action is needed to claim the penalty waiver. They do not need to file Form 5329 to request a waiver for this specific issue.

Individuals who proactively paid the penalty for a missed 2021 RMD before the notice was issued may be entitled to a refund. These taxpayers should consider filing an amended tax return or consulting with a tax professional to determine the process for claiming a refund of the excise tax they paid.

This relief is a temporary measure, and the IRS intends to issue final regulations that will apply to RMDs for calendar years beginning on or after January 1, 2025. Beneficiaries should not assume that annual RMDs will not be required in the future. It is important to stay informed about the final rules to ensure compliance for 2025 and beyond.

Following the passage of the SECURE 2.0 Act, the penalty for a missed RMD is 25% of the required amount. This can be reduced to 10% if the shortfall is corrected in a timely manner.