The Coronavirus Aid, Relief and Economic Security (CARES) Act suspended required minimum distributions (RMDs) due to be made in 2020 for many retirement plans and all individual retirement accounts (IRAs). This came on the heels of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which delayed the required commencement age for participants who were not yet age 70.5 to age 72 and provided for faster payment of death benefits to many beneficiaries. The interplay of the two new laws and the fact that the CARES Act was enacted after some 2020 RMDs had already been made has created a great deal of confusion about what is optional, what is required and whether payments already made could be reversed. However, while further guidance is expected, guidance issued by the IRS when RMDs were also suspended under a 2008 law called the Worker, Retiree and Employer Recovery Act (WRERA) provides helpful indications to plan sponsors, administrators and participants of how the new law will be applied.
Which Plans Are Covered?
The CARES Act waived 2020 RMDs from tax-qualified defined contribution (DC) plans, 403(b) plans, SIMPLE [savings incentive match plan for employees] IRAs, SEP [simplified employee pension] IRAs, 457(b) plans of governmental entities and individual retirement accounts. RMDs were not waived for defined benefit (DB) pension plans and 457(b) plans of non-governmental employers. In addition, Roth IRAs are not required to follow the RMD rules, so the waiver does not affect Roth IRAs.
Which Distributions Are RMDs?
The SECURE Act delayed the date at which distributions must normally commence to April 1 following attainment of age 72, but that increase does not apply to individuals who attained age 70.5 by December 31, 2019. The exception that participants who are not 5% owners and who work past the required commencement age can delay payments until the April 1 after they stop working was not changed by either the SECURE Act or the CARES Act. Distributions made before those dates are not RMDs.
Defined Contribution Plans
2020 RMDs for participants who commenced payments before January are waived, together with any payment otherwise due to be made in 2020 for participants who attained age 70.5 before January 1. Two distributions may be eligible to be waived if participants attained age 70.5 in 2019. This would be the case if they elected to delay the first 2019 RMD to 2020 and also to waive their 2020 distributions. Participants who became subject to RMDs in 2019 and elected to take their initial distribution in 2019 may not have two waived distributions. Waived distributions do not need to be taken in 2021 or later.
The waiver also applies to required payments to beneficiaries and can affect their payment deadlines. Some beneficiaries who are not eligible beneficiaries as defined in the CARES Act must receive all payments within 10 years of death, and estates and trusts beneficiaries are required to receive all payments within five years of death. When calculating these payment periods, 2020 does not count.
Defined Benefit Plans
Defined benefit (DB) plans must still commence benefits by the dates required by the SECURE Act. If that date fell on April 1, the general IRS deadline extensions issued under the CARES Act could have permitted a delay until July 15. However, DB plans must still start payments required in 2020 and cannot waive plan annuity payments due in 2020 if payments started before 2020.
Is the Waiver Mandatory?
While the CARES Act doesn’t say so, we expect the rules to be similar to those that applied when RMDs were suspended under WRERA. In that situation, the IRS in model amendments gave plan sponsors the choice of adopting amendments that either paid 2020 distributions unless the participant elected not to receive them or waived the 2020 distribution unless the participant requested a distribution. Most sponsors I dealt with elected to make the RMD waiver the default when presented with this choice.
What Happens if a Waived Distribution Is Made?
RMDs are not permitted to be rolled over, but distributions taken anyway in 2020, including those taken before the CARES Act became effective, are not RMDs and generally may be rolled over to “undo” them. Distributions that could have been made as RMDs are not subject to the 20% withholding that normally applies to eligible rollover distributions and plan sponsors are not required to provide rollover notices to the recipients.
The complicated rollover rules do create some surprising traps for those eligible to make 60-day IRA rollovers of distributions that would have been 2020 RMDs, though this does not include nonspouse beneficiaries. IRS guidance extended the rollover deadline to July 15 if the 60 day rollover period ended between April 1 and July 14, but it did not provide any relief for those who received distributions in January. In addition, IRA rollovers are subject to a restriction that only one rollover can be made in a 12 month period. Individuals who made an IRA rollover within the last 12 months may either roll the distribution into an employer plan instead, since the one rollover per year rule does not apply to other retirement plans, or, if they are a “qualified individual” as defined in the CARES Act, roll it back within three years of the date of the distribution—without regard to the one rollover per year rule—into another eligible plan that permits such rollovers.
Look Out for Further Guidance
We expect more guidance from the IRS on the RMD waivers, including whether there are circumstances where spousal consent may be required. Hopefully, there will be additional relief for distributees who received distributions in January and aren’t helped by the IRS’ existing extension of the rollover deadline. Although plan amendments are not required yet, plan sponsors, plan administrators and their vendors should coordinate their procedures and determine their default rule, as well as be on the lookout for further guidance.
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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