Practice Management
For those who want to take advantage of the waiver provisions under the CARES Act, new guidance from the IRS extends the rollback period for required minimum distributions already taken in 2020.
The guidance also includes a series of FAQs and provides plans with transition relief and sample amendments.
The CARES Act, signed into law March 27, 2020, permitted taxpayers in a defined contribution plan or an IRA with a required RMD in 2020 to skip those RMDs this year. This includes anyone who turned age 70½ in 2019 and would have had to take the first RMD by April 1, 2020. If an RMD had already been received during 2020, a participant could roll it over and defer paying taxes, including rolling it back into the plan, but that had to be done within 60 days of receipt.
In Notice 2020-51, the IRS extends the 60-day rollover period to Aug. 31, 2020. For example, if a participant in a 401(k) plan received a single-sum distribution in January 2020, part of which was treated as ineligible for rollover because it was considered an RMD, that participant will have until Aug. 31 to roll over that part of the distribution.
An IRA owner may also repay a distribution to the distributing IRA, provided the repayment is made by Aug. 31, 2020. The notice also provides that this repayment is not subject to the one rollover per 12-month period limitation and the restriction on rollovers for inherited IRAs.
Transition Relief
Transition relief is provided for plan administrators and payors in relation to the change in required beginning date for RMDs under Code Section 401(a)(9), as amended by section 114 of the SECURE Act. [1]
Under the notice, a distribution from a plan made during 2020 to a participant who will turn age 70½ in 2020 that would have been an RMD but for the change in the required beginning date is not required to be treated as an eligible rollover distribution for purposes of Code Sections 401(a)(31), 402(f) and 3405(c).
Thus, if a participant who attains age 70½ in 2020 received a distribution in January 2020, and part of the distribution was not treated as an eligible rollover distribution because it was improperly characterized as an RMD, then, under the relief in the notice, the payor and plan administrator will not be considered as having failed to satisfy the above code-section requirements merely because of that treatment.
Rollover guidance for plan participants: The IRS notes that it is also providing relief to allow taxpayers who receive certain distributions, including those that would normally be treated as part of substantially equal periodic payments (SEPPs), to roll them into an eligible retirement plan.
Specifically, the following distributions may be rolled over, provided the other rules of Section 402(c) are satisfied (and regardless of whether the distributions would otherwise be made as part of SEPPs):
- distributions to a plan 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, but for the CARES Act, or are one or more payments (that include the 2020 RMDs) in a series of SEPPs made at least annually and expected to last for the life of the participant, the joint lives 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 CARES Act (see also Q&A-5 of section V of the notice).
Sample Plan Amendment
The notice also provides a sample plan amendment that DC plan sponsors may adopt to give plan participants and beneficiaries whose RMDs are waived a choice as to whether or not to receive the waived RMD.
The format generally follows the design of preapproved plans and includes language designed for inclusion in a “basic plan document,” as well as an “adoption agreement.” Plan sponsors that do not use an adoption agreement (including employers using individually designed plans) should modify the format of the amendment to incorporate the desired options in the terms of the amendment.
The adoption of the sample plan amendment—even if modified to conform to the plan’s terms and administrative procedures—will not result in the loss of reliance on a favorable opinion, advisory or determination letter, and will not cause the plan to fail to be a pre-approved plan, the IRS notes.
Employers may also adopt other amendments under the RMD waiver provisions, but the IRS warns that it is exercising its authority under the CARES Act to deny anti-cutback relief under Section 411(d)(6) for a plan amendment that eliminates an optional form of benefit.
Frequently Asked Questions
Notice 2020-51 also provides a helpful set of answers to 12 questions regarding the RMD waiver provisions under the CARES Act, including these:
- For a plan that permits an employee or beneficiary to elect whether RMDs are determined using the 5-year rule in Section 401(a)(9)(B)(ii) or the life expectancy rule in Section 401(a)(9)(B)(iii) and (iv), does Section 401(a)(9)(I) extend the time for making the election?
- Does Section 401(a)(9)(I) extend the time for making a direct rollover for a non-spouse designated beneficiary pursuant to Section 402(c)(11)?
- Does Section 401(a)(9)(I) affect an individual’s required beginning date?
- How does Section 401(a)(9)(I) impact an employee who has a required beginning date of April 1, 2021?
- For a plan subject to Sections 401(a)(11) and 417, is spousal consent required to suspend distributions that include 2020 RMDs and restart distributions in 2021?
- May distributions made from a plan be rolled over back into the same plan?
- Does a payor have the option of treating a 2020 RMD paid from a plan in 2020 as subject to the mandatory 20% withholding rate for eligible rollover distributions under Section 3405(c)?
- Does Section 401(a)(9)(I) apply to payments that are part of a series of SEPPs under the “RMD method” so that the cessation of the payments for 2020 would not be considered a modification under Section 72(t)(4)?
Footnote
[1] Section 114 of the SECURE Act amended Code Section 401(a)(9) to change the required beginning date applicable to Section 401(a) plans and other eligible retirement plans, including IRAs. The new required beginning date for an employee or IRA owner is generally April 1 of the calendar year following the calendar year in which the individual attains age 72 (rather than April 1 of the calendar year following the calendar year in which the individual attains age 70½) and the new required beginning date applies to distributions required to be made after Dec. 31, 2019, with respect to individuals who attain age 70½ after that date.
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