The Coronavirus Aid, Relief and Economic Security (CARES) Act provides for a waiver of 2020 required minimum distributions (RMDs) from defined contribution (DC) plans and individual retirement accounts (IRAs). However, some participants and IRA holders had already received distributions thought to be RMDs before the CARES Act was passed. The IRS previously extended the 60 day rollover deadline to permit many, but not all, of them to recontribute the distributions by July 15.
IRS Notice 2020-51 has now provided guidance that explains how the Setting Every Community Up for Retirement Enhancement (SECURE) Act change that increased the age triggering the RMD requirement from 70.5 to 72 affects the waivers. The IRS also extended the 60 day rollover deadline for all who received these distributions in 2020 to August 31.
Distributions Eligible for the Waiver
The IRS has adopted a broad definition of 2020 RMD for purposes of the waiver, taking into account that the initial RMD can be delayed to April 1 of the following year. A participant who attained age 70.5 in 2019—and can’t use the new starting age of 72—and who did not receive the initial RMD in 2019 may waive the initial distribution that would have been required by April 1, 2020, as well as the 2020 RMD. A participant who is not a 5% owner, was 70.5 before January 1, 2020, and retires during 2020 must receive an initial 2020 RMD, but may delay the initial RMD to April 1, 2021. That 2020 RMD also qualifies for the waiver, even if distributed in 2021. The amount treated as a 2021 RMD does not.
The waived amount can be part of a series of payments made at least annually over the life expectancy of the participant or the participant and a designated beneficiary or over a period of 10 or more years. However, the waiver doesn’t apply to some participants who are receiving their benefits as a stream of payments determined using the “RMD Method” to avoid the 10% early distribution penalty. The 10% penalty must be paid retroactively if their 2020 payment is suspended.
Must Waived Distributions Be Taken Later?
No, although if installments are being paid, the account balance used to determine the amount required to be paid as a 2021 RMD might be higher than would be the case if the 2020 distribution had not been waived.
Does the Waiver Affect Deadlines for Paying Death Benefits?
Generally, no. For example, beneficiaries must still be determined by September 30 of the year following the year of death. However, if the participant died in 2019, plan beneficiary elections otherwise due in 2020 to determine the method of calculating RMD amounts are extended to the end of 2021. In addition, if the participant died between 2015 and 2019, and distributions were required to be made within five years of death, the distribution deadline is extended by one year. The guidance clarifies that if a participant dies in 2020, there is no extension of the five year rule or of the 10 year payment deadline that applies to certain non-spouse beneficiaries.
The prior IRS extension of the 60 day rollover deadline didn’t apply to those who received distributions thought to be RMDs in January and wanted to “undo” the transaction by returning the distribution to a plan. Under the new guidance, all recipients of 2020 distributions that were intended to be RMDs have until August 31 to complete their rollovers to avoid current federal tax. They may recontribute these distributions to the same plan that made the distribution.
IRA distributions must be recontributed to the IRA. The IRS has temporarily waived the requirement that only one IRA rollover can be made in a 12 month period for these rollovers and also temporarily allowed non-spouse beneficiaries of inherited IRAs, who are ordinarily prohibited from making 60 day rollovers, to recontribute them.
Withholding and Administration
The relief protects plan administrators who thought they were distributing 2020 RMDs that weren’t eligible to be rolled over because they were unaware of the SECURE Act change in the required beginning age. A distribution made in 2020 to a participant who will attain age 70.5 in 2020 is not an RMD (because under the SECURE Act, distributions for such participants generally don’t need to start until April 1 following their 72nd birthday). However, the IRS says that plan administrators and payors are not penalized for not treating these distributions as rollover-eligible or subject to mandatory 20% withholding, or for failing to distribute 402(f) notices on rollover rights. In addition, 20% withholding may not be applied to waived distributions.
For plans that require spousal consent to receive distributions, the IRS says that an RMD waiver will not require spousal consent if the plan does not establish a new annuity starting date.
As it did when a similar waiver was enacted as part of a 2008 law known as the Worker, Retiree and Employer Recovery Act (WRERA), the IRS provided sample amendments that permit a plan sponsor to select either payment or waiver as the default if no participant election is made. There are also several direct rollover choices. Adoption of these amendments will not affect a plan’s previously determined qualified status. However, the IRS cautions that if an employer adopts its own amendments, the employer cannot eliminate payment timing options in violation of Internal Revenue Code Section 411(d). For example, if plan language would permit a participant to elect payment in 2020, the plan sponsor couldn’t unilaterally suspend all 2020 RMDs. In addition, although the CARES Act says that amendments are not required until 2022, the IRS cautions that amendments must indicate the date when plans began operating in accordance with the amendment terms.
IRAs are not required to be amended. However, IRA providers are required to provide notice to IRA owners that no 2020 RMDs are required.
Plan Sponsor Responses
If they have not already done so, plan sponsors need to consult with their vendors to determine which options for compliance they will apply. If they want to modify the rules in the IRS sample amendments, plan sponsors should review with their attorneys whether current plan language raises Section 411(d) issues and requires that current payment timing options be retained. Plan sponsors also need to track the date the plan began operating in compliance with its selected rules, as this will be required when the amendments are adopted.
Given the complexity of these rules, plan sponsors will want to include language in their communications that they cannot give personal tax advice.
Carol Buckmann is a co-founding partner of Cohen & Buckmann P.C. As a highly regarded employee benefits and ERISA [Employee Retirement Income Security Act] attorney, Buckmann deals with the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities and investment fund formation.
She has 40 years of practice in this area of the law and a depth of experience on complex pension law and fiduciary problems. She regularly shares her thoughts on new developments in the benefits industry on Insights, Cohen & Buckmann’s blog, and writes and speaks on ERISA topics. Buckmann has been recognized by Martindale-Hubbell as an AV Pre-eminent Rated Lawyer, was selected for inclusion in the Best Lawyers in America and was named one of the Super Lawyers in Employee Benefits.This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.
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