The Internal Revenue Service (IRS) has issued Notice 2020-51 to provide defined contribution retirement plans with guidance relating to the waiver of 2020 required minimum distributions (RMDs) permitted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The guidance provides certain transition relief, advises plans on how to implement the RMD waivers through a series of FAQs, and includes a sample plan amendment for adopting the RMD waivers.
Under the CARES Act, defined contribution plans may waive RMDs that would otherwise have to be made by the end of 2020, including 2019 RMDs for individuals with a required beginning date of April 1, 2020 (collectively, 2020 RMDs). If, notwithstanding the permitted waiver, 2020 RMDs are made, they may be rolled over to another retirement plan or IRA. Even though the 2020 RMDs may be rolled over, the distributing plan does not have to treat the amounts as rollovers for purposes of complying with the direct and automatic rollover, notice, consent, and withholding requirements that typically apply to rollover distributions. The CARES Act provided that a retirement plan could implement these changes immediately, so long as the plan is amended to reflect the changes no later than the last day of the first plan year beginning in 2022 (or 2024 for a governmental plan).
Before the CARES Act, Congress had enacted the Setting Every Community Up for Retirement Enhancement Act (SECURE) Act, which also changed the administration of RMDs by increasing the age for taking RMDs from retirement plans and IRAs from 70½ to 72, effective as to any individual who had not yet reached age 70½ by January 1, 2020.
Transition Relief Under the SECURE Act – The guidance provides relief to plan administrators who fail to timely implement the SECURE Act changes and incorrectly treat a distribution made during 2020 to a participant who will reach age 70½ in 2020 as an RMD. Specifically, the plan administrator will not be treated as having failed to follow the direct and automatic rollover, notice, consent, and withholding requirements that should have applied to the distribution.
Example: John reached age 70½ in February 2020 and received a lump sum distribution in March 2020, part of which was treated as an RMD. Because John had not reached age 70½ by January 1, 2020, the SECURE Act change applied to him, and no portion of the distribution should have been treated as an RMD. The plan administrator will not be treated as having failed to follow the rollover, notice and consent, and withholding requirements that should have applied.
Rollover Guidance for Participants – A defined contribution retirement plan generally may distribute funds to an individual who has not reached age 59½ as substantially equal periodic payments without causing the individual to incur the 10% penalty on early distributions. Like RMDs, these distributions typically may not be rolled over to another employer plan or IRA. However, the guidance provides that, consistent with the intent of the CARES Act to permit individuals to avoid RMDs in 2020, the following distributions from a defined contribution may be rolled over:
- Distributions to a participant paid in 2020 (or paid in 2021 for the 2020 calendar year in the case of an employee who has a required beginning date of April 1, 2021) if the payments equal the amounts that would have been RMDs in 2020 (or for 2020), but for CARES Act change (2020 RMDs), or are one or more payments (that include the 2020 RMDs) in a series of substantially equal periodic payments made at least annually and expected to last for the life (or life expectancy) of the participant, the joint lives (or joint life expectancies) of the participant and the participant’s designated beneficiary, or for a period of at least 10 years; and
- For a plan participant with a required beginning date of April 1, 2021, distributions that are paid in 2021 that would have been an RMD for 2021 but for the change in the CARES Act.
Extension of 60-day deadline for rollovers – To assist plan participants who have already received any of the payments described above in 2020, the guidance extends the 60-day rollover period so that the deadline for rolling over the payment will not be before August 31, 2020.
Example: Assume the same facts as above. John has until August 31, 2020, to roll over some or all of the distribution to a retirement plan or IRA.
The guidance provides a sample amendment that sponsors of defined contribution plans may adopt to implement the 2020 RMD waivers. The sample amendment is provided in the style of an adoption agreement with selections that correspond to a basic plan document, which will be familiar to many sponsors of pre-approved plans. The options available in the sample amendment include whether the plan will default to a waiver in the absence of a participant’s election and the extent to which the plan will permit direct rollovers of distributed amounts that are eligible for a waiver.
Frequently Asked Questions
The guidance also provides some needed clarification on the implementation of the 2020 RMD waivers through a series of FAQs. Here are some of the highlights:
- The waiver of a 2020 RMD does not affect an individual’s required beginning date.
Example: Mary, who retired in 2017, reached age 70½ in 2019. Mary therefore has a required beginning date of April 1, 2020. Mary dies in May 2020. Mary is still treated as having died after her required beginning date, even though she would not have had to take an RMD in 2020 due to the waiver.
- An individual with a required beginning date of April 1, 2021, does not have to take an RMD for 2020 before such date. However, the individual will still have to take the 2021 RMD by the end of 2021.
Example: Bill, who reached age 70 ½ in 2019, did not retire until May 2020. Bill is not a 5% owner. Bill therefore has a required beginning date of April 1, 2021. Bill does not have to receive the 2020 RMD that would have been due by April 1, 2021, but he must still receive his 2021 RMD by December 31, 2021.
- 2020 RMDs may be rolled over to the same plan in accordance with the rollover guidance discussed above.
- A plan may not optionally treat a 2020 RMD as being subject to the 20% mandatory withholding rules. Rather the voluntary withholding rules apply if the distribution is not rolled over.
If you have any questions about the guidance, please contact one of the attorneys in the Employee Benefits and Executive Compensation Practice Group at Bradley.