Setting the stage—why we need relief and guidance regarding changes to RMD rules
In response to the economic crisis caused by the coronavirus, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (enacted on March 27, 2020), Congress suspended RMDs that would otherwise be paid in 2020 for IRAs and inherited IRAs, as well as for defined contribution plans. But even before that, Congress increased the RMD age to 72, from 70½, as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act (enacted on December 20, 2019); however, due to the timing of these acts, many recordkeepers could not change their systems before certain scheduled RMDs were processed. Although the 2020 RMD waiver is similar to the 2009 RMD waiver (under the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA)), guidance issued under IRS Notice 2009-82 (WRERA Notice ) could not be relied on. The recently released notice provides similar transition relief and other guidance for 2020 RMDs, tailored to the current situation.
Extended indirect rollover period
Under the notice, the 60-day indirect rollover deadline is extended and will not be before
August 31, 2020, for payments that would have been RMDs if not for the SECURE Act or the CARES Act. This generally affects RMDs received on or after January 1, 2020, through July 2, 2020. The regular 60-day rollover period applies for RMDs received after July 2, 2020, through December 31, 2020, since the 60th day is later than August 31, 2020. This extended deadline applies to both rollovers to retirement plans that accept such rollovers and to IRAs.
Further, to the extent any such RMD is paid from an IRA, the one rollover per year rule and the restriction on rollovers for nonspousal beneficiaries do not apply, provided the RMD is repaid to the distributing IRA. This is a surprise bonus, as the WRERA Notice contained no such exceptions.
The notice answers other RMD-related questions
The 2020 waiver does not extend an individual’s required beginning date (RBD) for purposes of determining whether the individual died before or after the RBD. For example, if a participant retires at the age of 72 in 2020, the RBD is April 1, 2021, even though no RMD is required for 2020. If such individual dies on May 1, 2021, the rules for death after the RBD will apply and an RMD will be required for the 2021 distribution year.
John Hancock observation: At this time, it is unclear how the SECURE Act changed the rules for RMDs to beneficiaries when death occurs before the RBD versus when death occurs after the RBD.
For any participant whose RBD is April 1, 2021, payments made in 2021 are first considered a 2021 RMD and not eligible for rollover. Generally, payments made that exceed the 2021 RMD amount may be rolled over to an IRA or other retirement plan.
John Hancock observation: This is the general rule under U.S. Department of Treasury Regulation §1.402(c)-2, Q&A-7, which provides that amounts distributed during any calendar year are treated as RMDs to the extent that the total RMD for the calendar year has not been satisfied.
If a participant dies in 2019:
- For plans that allow a beneficiary to choose the five-year rule or life expectancy rule, the deadline to make such election may be extended to December 31, 2021, if the deadline would have otherwise been December 31, 2020. This may require a plan amendment.
- For plans that require the five-year rule, the deadline for a nonspousal beneficiary to apply the life expectancy rule by receiving the RMD (based on the life expectancy calculation) and directly rolling over the non-RMD portion of the account to an inherited IRA is extended from December 31, 2020, to December 31, 2021.
- There is no extension of deadlines relating to: (1) the determination of designated beneficiaries (September 30 following year of death), (2) the date by which the trustee of a trust beneficiary must provide the plan administrator certain information (October 31 following the year of death), or (3) the date by which separate accounts must be established (the last day of the year following the year of death).
If the five-year rule applies to a beneficiary as a result of a participant’s death prior to 2020, the five-year period is determined without regard to 2020; however, if a participant dies in 2020, there is no extension of the 5-year period or the new 10-year period (added under the SECURE Act).
John Hancock observation: This appears logical, as the first year of the five-year period is the year following death. The year of death is always disregarded when determining the five-year period, and it appears this same logic applies to the 10-year rule.
Distributions made from a plan may be rolled over to the same plan provided the plan permits such rollovers.
John Hancock observation: Many retirement plans do not accept rollovers from terminated participants. If employers opt to amend their retirement plan to accept these rollovers, care should be taken to ensure the time period is limited to 2020, if that is the intent.
Payers do not have the option of treating a 2020 RMD as an eligible rollover distribution from a plan for purposes of applying the mandatory 20% withholding rate. Instead, the 10% optional withholding rules apply.
John Hancock observation: Payers must provide a withholding election form and give payees the right to make a tax withholding election for the RMD portion in the same manner as if the RMD waiver did not apply. Generally, payers will have to carve out the RMD portion if payments are made in excess of the RMD. Keep in mind that the SECURE Act increased the penalty for failure to provide a withholding election form to $100 per failure (from $10).
2020 RMDs are not waived under a defined benefit (DB) plan. This is also true where such RMD is carved out from a single-sum payment.
John Hancock observation: The notice makes no exception for DB plans, even if they calculate the carved out RMD using a method permitted under a defined contribution plan.
An IRA trustee, issuer, or custodian (IRA provider) must notify an IRA owner that no RMD is due for 2020. An IRA provider may satisfy this requirement by providing a Form 5498 to the IRA owner.
John Hancock observation: If an IRA provider chooses to satisfy the requirement by providing a Form 5498, the deadline to file this form was extended to August 31, 2020 (IRS Notice 2020-35).
Although the waiver of 2020 RMDs also applies to IRAs, an IRA does not have to be amended to reflect the waiver.
John Hancock observation: Yay! One less thing to do.
Sample retirement plan amendment
The notice provides a sample plan amendment with optional defaults—one where the default is to distribute the 2020 RMD and the second where the default is to suspend the 2020 RMD. In both cases, participants and beneficiaries must be given the option to elect whether to take their RMD in lieu of the default. The sample plan amendment also provides an employer with direct rollover options for 2020 distributions.
Reminder: Plan amendments must be adopted no later than the last day of the plan year that begins in 2022 (or 2024 for governmental plans).
A word of warning to retirement plan fiduciaries
One of the notice’s notable omissions, which was provided in the WRERA Notice, is plan operation relief. The WRERA Notice essentially provided blanket relief in the event plans operated differently than the plan amendment. Prior to the issuance of the WRERA Notice, plan sponsors were unsure of the options available to them, so they may have operated inconsistently during the year. The 2009 relief permitted flexibility when drafting amendments, since plans were deemed to comply with their operation.
Again, the notice provides no plan operation relief. Consequently, extra care must be taken to draft amendments with effective dates that accurately reflect plan operation throughout the year.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
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