Disabled and Chronically Ill Eligible Designated Beneficiaries

Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in California is representative of a common question on determining who a disabled or chronically ill eligible designated beneficiary under the SECURE Act is.

“Can you explain how to determine whether a beneficiary is disabled or chronically ill for purposes of being classified as an Eligible Designated Beneficiary under the SECURE Act and treasury regulations, and what documentation is required to substantiate the same?”

Highlight of the discussion on the rules regarding who is a disabled or chronically ill beneficiary under the SECURE Act for eligible designated beneficiary purposes, and what documentation is required to substantiate the classification.

The SECURE Act created a new class of beneficiaries for required minimum distribution (RMD) purposes, the eligible designated beneficiaries (EDB). An EDB is an individual who is the retirement account owner’s spouse, disabled beneficiary, chronically ill beneficiary, beneficiary who is not more than 10 years younger than the decedent, or a minor child of the decedent. This classification is important because these beneficiaries may stretch the RMDs from inherited retirement accounts over their lifetimes using the Single Life Table instead of having to comply with the 10-year rule.

Who is a Disabled or Chronically Ill Beneficiary?

Under SECURE Act 1.0 and the final regulations, the definition of who is “disabled” is similar to the definition used by the Social Security Administration. An individual will be considered disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or be of long continued and indefinite duration.

The beneficiary’s age must also be considered in determining whether this definition is satisfied. A beneficiary who is age 18 or older must be unable to engage in any substantial gainful activity. However, a beneficiary who is under age 18 must have marked and severe functional limitations such that later substantial gainful activity is unlikely [see IRC §72(m)(7)].

The definition of “chronically ill” is found in IRS §7702B(c)(2). There are three tests used to satisfy the definition of the individual being chronically ill. The beneficiary must

1. Need assistance to perform two of the six activities of daily living;

2. Have a disability that is like the level of disability described in 1. above; or

3. Need substantial supervision to protect the beneficiary from threats to health and safety due to significant cognitive impairment.

When Does a Beneficiary Have to Show They are Disabled or Chronically Ill?

To qualify as a disabled or chronically ill beneficiary, the beneficiary must be able to prove that he or she is disabled or chronically ill at the time the account owner dies, not a later time.

The documentation evidencing the beneficiary’s disability or chronic illness must be submitted no later than October 31st of the year following the retirement account owner’s death. There is a transition rule for beneficiaries of participants who died in years 2020 through 2023, in these limited cases, the deadline is October 31, 2025.

If a participant’s minor child is also disabled or chronically ill, the responsible individual for the child must provide the necessary documentation of disability or chronic illness by October 31 of the year after the participant’s death to remain an EDB after reaching the age of majority.

What Documentation is Required?

A beneficiary is not permitted to self-certify that he or she is disabled or chronically ill, but the Final Regulations acknowledge the issues relating to having plan sponsors or administrators reviewing medically sensitive information of beneficiaries. Therefore, the Final Regulations state that the documentation doesn’t need to be overly detailed.

In proving that a beneficiary is disabled, the Final Regulations do not specify any particular documentation requirements. There is a safe harbor which provides that if the beneficiary is receiving Social Security disability benefits or Supplemental Security Income at the time of the participant’s death, the beneficiary will automatically qualify as disabled. However, the beneficiary does not need to receive these benefits to qualify as being disabled. The beneficiary can provide a certification from a healthcare practitioner that, as of the date of death of the retirement account owner, the beneficiary is unable to engage in any substantial gainful activity by reason of a physical impairment that can be expected to be of long-lasting and indefinite duration.

Likewise, to prove that a beneficiary is chronically ill, the beneficiary simply needs to provide certification from a licensed health care professional that the beneficiary is chronically ill and, if applicable, that the individual is unable to perform at least 2 activities of daily living and the period of that inability is an indefinite one that is expected to be lengthy in nature.

It is worth noting that documentation of disability or chronic illness does not have to be provided to an IRA custodian.

Conclusion

A beneficiary who qualified as an EDB because of a disability or chronic illness needs to be aware of the October 31st submission deadline and the documentation required, or he or she will be subject to the 10-year distribution rules.