The IRS has been busy issuing guidance on the retirement plan provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The latest is Notice 2020‑51 (Notice), which gives direction on the waiver of 2020 required minimum distributions.
What Are RMDs and When Are They Distributed?
Generally, retirement plan participants are required to receive minimum yearly distributions when they reach a certain age, or if they work beyond that age, when they terminate employment. Participants who are more than 5% owners of the business, however, must take distributions at the specified age regardless of whether they remain employed or not. These are called required minimum distributions (RMDs). RMDs must be taken no later than December 31 of each calendar year. The deadline for the first year’s RMD, however, is extended until April 1 of the following calendar year.
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) changed the age requirement from age 70½ to age 72 for those reaching age 70½ in 2020 or later. The Secure Act did not change any other RMD requirements. So, for example, if a terminated participant turns 72 in 2020, he would have until April 1, 2021, to receive his first RMD for 2020. The participant would also have to take another RMD by the end of 2021 (the RMD for 2021) and by the end of every year after that.
Beneficiaries of deceased participants must also receive RMDs. The RMD rules apply to IRAs as well.
Most retirement plan distributions may be rolled over to another retirement plan or IRA and are subject to 20% mandatory income tax withholding. In addition, the plan administrator must provide a special tax notice to recipients explaining their rollover rights. But an RMD is not an eligible rollover distribution. This means a payor does not need to comply with the income tax withholding and notice requirements applicable to eligible rollover distributions, and a participant or beneficiary may not defer taxes by rolling the distribution to another retirement plan or IRA. Rather, RMDs are subject to optional 10% withholding.
SECURE Act Guidance
The Notice includes one piece of guidance related to the SECURE Act change from age 70½ to age 72 for RMDs. It gives relief to plan administrators who improperly treated distributions made during 2020 to participants turning 70½ in 2020 as RMDs not eligible for rollover to another retirement plan or IRA. If the plan administrator or payor incorrectly characterized the distribution as an RMD and, because of that, did not provide the special tax/rollover notice and did not withhold the mandatory 20% for income taxes, all is forgiven. For example, if a participant who turns age 70½ in 2020 received a distribution in January 2020 and the distribution was not properly treated as an eligible rollover distribution because it was incorrectly characterized as an RMD for 2020, the payor and plan administrator will not be considered to have failed the withholding and rollover notice requirements for 2020.
What’s Unique for 2020?
Under the CARES Act, the RMD requirements for calendar year 2020 are waived for 401(k) plans, 403(a) plans, 403(b) plans, government‑sponsored 457(b) plans, and IRAs (Waiver). This means defined contribution plan participants and IRA owners with an RMD due in 2020 will not receive an RMD during 2020. This includes participants already receiving yearly RMDs, someone who turned age 70½ in 2019 and would normally have been required to take their first RMD by April 1, 2020, and those who have to take their first RMD for 2020, even though they have until April 1, 2021, to take it. The Waiver does not apply to RMDs from defined benefit plans.
The Notice clarifies some details of the Waiver and gives relief on rollovers:
Rollovers. Normally, RMDs are not eligible for a tax‑deferred rollover to another qualified plan or IRA. The Notice provides that distributions paid in 2020 (or paid in 2021 for the 2020 calendar year for participants with a required beginning date of April 1, 2021) and that normally would have been RMDs if not for the Waiver, may be rolled over. The Notice clarifies that RMDs due in 2021 must be distributed by December 2021 and do not qualify for the relief.
To assist plan participants who already received distributions in 2020 that would have been RMDs if not for the Waiver, the Notice extends the usual 60‑day rollover deadline to August 31, 2020. So, if a participant received a distribution in March 2020 that was treated as ineligible for rollover because it was improperly considered an RMD (i.e., because all RMDS are waived for 2020 under the CARES Act), the participant has until August 31, 2020, to roll over the distributed amount. It may be repaid to the distributing plan if that plan accepts rollovers or to the distributing IRA.
The Notice makes it clear that the relief applies to distributions made during 2020 that are wholly RMDs, as well as distributions of amounts larger than the required RMD, such as a lump sum distribution of a participant’s account that is part RMD and part eligible rollover distribution. The portion that would have been an RMD in 2020 if not for the Waiver is permitted to be rolled over with the rest of the distribution, but rollovers of the waived RMD amount must be made no later than August 31, 2020.
The Notice also allows for rollover of installment payments made during 2020 that include 2020 RMDs. Normally, installment payments, even those that do not include RMDs, cannot be rolled over.
Beneficiary Elections for Participants Who Died in 2019. Some plans give the beneficiary a choice between the life expectancy rule or the five-year rule in determining RMDs. Under the life expectancy rule, certain beneficiaries can stretch distributions over the beneficiary’s lifetime. For the five‑year rule, the entire account must be distributed by the end of the year that includes the fifth anniversary of the participant’s death. For a participant who died in 2019, the deadline to make the election typically would have been December 31, 2020. The Notice allows the plan to be amended to extend the beneficiary’s election deadline to December 31, 2021, for a participant who died in 2019. A nonspouse designated beneficiary also has until the end of 2021 to make a direct rollover to an IRA if the participant died in 2019.
The Notice includes a sample plan amendment that plan sponsors may adopt to implement the 2020 RMD waiver provisions of the CARES Act.
The sample amendment gives two default options for the treatment of 2020 RMDs in the absence of a participant or beneficiary election: (1) pay out distributions that would have been a 2020 RMD or (2) suspend those distributions.
The sample amendment also includes three options with respect to direct rollovers of amounts that would have been 2020 RMDs if not for the Waiver. These options are: (1) allow direct rollover of only 2020 RMDs; (2) allow direct rollover of 2020 RMDs and one or more installment payments that include 2020 RMDs; or (3) allow direct rollover of the entire amount of the distribution but only if the distribution consists of part or all of a 2020 RMD amount and an additional amount that is an eligible rollover distribution without regard to the Waiver.
Plan amendments will need to specify the options under which the plan was operated and the effective date of those options. Amendments must be adopted by December 31, 2022, for calendar year plans (December 2024 for governmental plans). All employers must sign and date a plan amendment, even employers that have adopted a pre-approved plan, including prototype and volume submitter documents.
Implications for Employers
Employers should discuss the handling of 2020 RMDs with their plan’s recordkeeper and decide which default options will apply. No specific communications to participants are required, but employers should review any communications prepared by the recordkeeper.
If your plan is based on the Warner pre-approved plan document, we will be in touch when it is time to amend your plan.
For More Information on COVID-19 Compliance
Warner is here to help! Visit Warner’s COVID-19 Resource Center for the latest insight into COVID‑19 developments.
If you need assistance with implementing the CARES Act retirement plan provisions, please contact Jennifer Watkins
, Lisa Zimmer
, or any member of Warner’s Employee Benefits and Executive Compensation Practice Group.