This post outlines CARES Act provisions that affect your plan sponsor clients, plan participants and IRA clients, so you can help them navigate the new rules. This post addresses the rules on required minimum distributions (RMDs). In future posts, we’ll discuss the special coronavirus-related distributions (CRDs) and the temporary loan enhancement rules.
What the CARES Act Provides
For defined contribution plans (e.g., 401(k) plans, 403(b) plans and 457(b) governmental plans) and Individual Retirement Accounts (IRAs), the CARES Act provides temporary relief from the RMD rules. The following chart explains this relief:
|Pre–CARES Act RMDs||Post–CARES Act RMDs|
|For years before 2020, the law required distributions to a plan participant or IRA holder beginning no later than the participant’s “required beginning date,” which is April 1 following the calendar year in which the individual attained age 70 ½. RMDs from a plan (as opposed to an IRA) can be delayed to the calendar year in which a participant retires (although a 5% or more owner of a plan sponsor is required to start taking RMDs even if he has not retired).
Note: the age requirement for RMDs was set at 72 under the SECURE Act.
|The RMD requirement is waived for distributions required in 2020 only.
Note that if a participant turned 70 ½ in 2019, the first RMD would have to be made by April 1, 2020, and another would be required on or before December 31, 2020. Under the CARES Act, both of these are waived, but the waiver would not apply if they took the RMD in 2019.
The waiver applies only to 2020, so RMDs will need to resume in 2021 and thereafter. Also, the waiver will not apply to individuals who turn 72 in 2020, since their first distribution is not due until April 1, 2021, after the CARES Act waiver expires.
|RMDs from a plan are not subject to the 20% tax withholding that applies to other cash distributions. There is no similar requirement for distributions from IRAs.||Distributions from a plan during 2020 that would have been RMDs except for this waiver would ordinarily be subject to the 20% withholding requirement. However, the CARES Act provides that 20% withholding does not apply.|
|RMDs cannot be rolled over to a plan or to an IRA.||Plans that make distributions during 2020 that would have been RMDs but for the waiver are not required to comply with the direct rollover rules … but these distributions can be rolled over by a participant. See the discussion that follows this chart.|
|RMDs are mandatory. If not made, the RMD amount is subject to a 50% excise tax, which is imposed on the individual.||It is unclear whether plans need to provide for the RMD waiver or whether it is optional. Based on similar relief in a prior law, it seems likely that it is optional. Specifically, the RMD relief in the CARES Act is similar to past relief for 2009 RMDs under the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA). The IRS clarified that the waiver of 2009 RMDs under WRERA was an optional change. Since RMDs are not required for 2020, there will be no excise tax imposed.
If a plan does not adopt the waiver administratively and makes a distribution to a participant in the amount of his RMD, it will be up to the participant to decide whether to include it in income or roll it over. Similarly, it will be up to an IRA holder whether to forego his 2020 RMD or to proceed with the distribution.
|The RMD rules must be set forth in plan documents.||The RMD waiver may be adopted by a plan sponsor administratively but a plan amendment is required by the last day of the plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year plans).|
We first discuss application of the rules to plans. We follow that with comments about their application to IRA holders.
Most plan distributions require a plan to provide participants with a notice, comply with a participant’s instructions to roll over the amount as a direct rollover, and withhold 20% of the distribution if it is not rolled over (as a direct rollover). Under the pre–CARES Act rules, a plan is not required to provide the notice for RMDs or to withhold, and may not directly roll over the distribution to an IRA. In addition, RMDs, whether taken from a plan or an IRA, were not eligible to be rolled over to another plan or IRA by the recipient. The RMD had to be taken into income in the year of distribution.
Even though the CARES Act provides a waiver of the RMD requirement, it goes on to say that if a plan makes a distribution that would otherwise be an RMD, the plan doesn’t have to comply with the notice and withholding requirements or with participant rollover instructions that apply to non-RMD distributions. However, a participant is able to roll over the distribution so long as he does so within 60 days of receipt. We discuss a limited exception to the 60-day rule later.
We realize it may seem contradictory to say that a plan doesn’t have to treat a distribution in 2020 as eligible for rollover but a participant can roll it over. The reason for this is that the CARES Act waiver is essentially identical to a similar provision adopted in 2009 to provide relief from the Katrina Hurricane disaster. In Notice 2009-82, the IRS indicated that distributions that would be RMDs but for the waiver would be eligible to be rolled over in the participant’s hands. The Katrina relief included distributions that were made prior to the enactment of the WRERA waiver.
Since the provisions in WRERA and in the CARES Act are essentially identical, we believe the same treatment should be accorded RMD distributions for 2020. (Also, in our view, a careful reading of the changes made under the CARES Act leads to this conclusion.) Thus, there is an opportunity for an individual plan participant or an IRA holder to do a rollover if the participant had already received a payout in 2020 before the adoption of the CARES Act on March 27 or if the individual receives such a payout after that date. Also, in Notice 2020-23, the IRS has indicated that if the 60-day rollover period would have ended on or after April 1, the rollover period is extended to July 15.
Example: An individual received a payout of his RMD amount from the plan in which he participates or from his IRA early in 2020 before the enactment of CARES or receives one later in 2020. If the distribution occurred in January, he could not do a rollover because the 60-day period expired before April 1. On the other hand, if the distribution was made in early February, so that the 60-day rollover period would have ended on or after April 1, the individual may roll over the distribution until July 15. It is possible that a further extension of the permissible rollover date may be issued by the IRS later in the year to provide relief to individuals who received an RMD in January and to extend the rollover period beyond July 15.
Some of the CARES Act provisions, which we’ll discuss in subsequent posts, are designed to give qualified individuals* access to their money. This is intended to assist, for example, those who have been furloughed or laid off due to the coronavirus pandemic. The RMD delay is just the opposite. It permits participants and IRA holders to avoid taking money out of their retirement savings, presumably to avoid having to liquidate funds that may have sustained significant losses in the market downturn due to the coronavirus crisis.
As an advisor to plans, participants or IRA clients, we think it is important for you to understand these temporary RMD rules.
- For a plan sponsor client, the discussion would center on whether or not it wants to adopt the RMD relief administratively.
- For a plan participant client, the discussion could center on whether he wants to take a distribution equal to the RMD amount in any case because he needs the money; alternatively, you could discuss the possibility of taking the funds and rolling them over to an IRA.
- For an IRA client, the discussion would likely be the same, whether he needs the money or took an RMD not realizing it was not required and now would like to roll it over.
* A “qualified individual” is an individual who is diagnosed with the coronavirus, whose spouse or dependent is diagnosed with the virus, or who, because of the virus, experiences “adverse financial consequences” because of quarantine, furlough or layoff, having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of the individual’s business, or “other factors as determined by the Secretary of the Treasury.” Individuals may self-certify that they meet this definition.