Taxpayers Have Until August 31 to Roll 2020 RMDs Back into a Retirement Accounts

(Parker Tax Publishing July 2020)

The IRS issued guidance relating to a change made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act which allows taxpayers to waive their 2020 required minimum distributions (RMD). Under this guidance, any taxpayer who already took an RMD in 2020 from certain retirement accounts has until August 31 to roll those funds back into a retirement account. Notice 2020-51.

Background

Section 114 of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) amended Code Sec. 401(a)(9) to change the required beginning date applicable to Code Sec. 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 70 1/2) and the new required beginning date applies to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70 1/2 by that date.

Section 2203(a) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act added Code Sec. 401(a)(9)(I) to the Code. Code Sec. 401(a)(9)(I)(i) provides for a waiver of RMDs for defined contribution plans and IRAs for 2020. This waiver also applies to the 2019 RMD for an individual who has a required beginning date of April 1, 2020, that was not paid in 2019 (and therefore would have been due to be paid between January 1, 2020 and April 1, 2020). If this rule applies to a beneficiary (under which the entire amount of the plan must be distributed within five years of the participant's death), then the five-year period is determined without regard to 2020. An individual's required beginning date is determined without regard to Code Sec. 401(a)(9)(I) for purposes of applying Code Sec. 401(a)(9) for calendar years after 2020.

Section 2203(b) of the CARES Act amended Code Sec. 402(c)(4) to provide that any amount distributed during 2020 that is an eligible rollover distribution, but would not have been an eligible rollover distribution had Code Sec. 401(a)(9) applied during 2020, is not treated as an eligible rollover distribution for purposes of Code Sec. 401(a)(31) (relating to direct and automatic rollovers of eligible rollover distributions), Code Sec. 402(f) (relating to notices to recipients of eligible rollover distributions), and Code Sec. 3405(c) (relating to mandatory 20 percent withholding on eligible rollover distributions).

Section 2203(c) of the CARES Act provides that a plan or contract may operate in accordance with an expected plan or contract amendment relating to the changes made by Section 2203, provided the plan or contract amendment is adopted no later than the last day of the first plan year beginning in 2022 (or, in the case of a governmental plan, 2024). Section 2203(c) of the CARES Act also provides that a plan or contract will not fail to satisfy Code Sec. 411(d)(6) by reason of such an amendment, except as provided by the IRS.

Notice 2020-51

In Notice 2020-51, the IRS provides that a distribution from a plan made during 2020 to a participant who will attain age 70 1/2 in 2020 that would have been an RMD but for the change in the required beginning date under Section 114 of the SECURE Act is not required to be treated as an eligible rollover distribution for purposes of Code Secs. 401(a)(31), 402(f), and 3405(c). Thus, for example, if a participant who attains age 70 1/2 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, pursuant to this relief, the payor and plan administrator will not be considered as having failed to satisfy the requirements of Code Secs. 401(a)(31), 402(f) and 3405(c) merely because of that treatment.

Consistent with the legislative intent with respect to Section 2203 of the CARES Act to permit taxpayers to avoid taking RMDs in 2020, the IRS is providing relief to allow taxpayers who receive certain distributions to roll them into an eligible retirement plan (even if the distribution normally would be treated as part of a series of substantially equal periodic payments). Specifically, the following distributions from a plan (other than a defined benefit plan) may be rolled over, provided the other rules of Code Sec. 402(c) are satisfied (and regardless of whether the distributions would otherwise be made as part of a series of substantially equal periodic payments):

(1) 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 (or for 2020), but for section 2203 of the CARES Act (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

(2) 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 Section 2203 of the CARES Act.

To assist plan participants who have already received distributions in 2020, the IRS is extending the 60-day rollover period for any payments described above so that the deadline for rolling over such a payment will not be before August 31, 2020. For example, if a participant 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 has until August 31, 2020, to roll over that part of the distribution. In addition, the IRS is extending the 60-day rollover period for IRA distributions in 2020 that would have been an RMD in 2020 but for Section 2203 of the CARES Act or Section 114 of the SECURE Act, so that the deadline for rolling over such distributions will not be before August 31, 2020.

In the case of an IRA owner or beneficiary who has already received a distribution of an amount that would have been an RMD in 2020 but for Section 2203 of the CARES Act or Section 114 of the SECURE Act, the recipient may repay the distribution to the distributing IRA, even if the repayment is made more than 60 days after the distribution, provided the repayment is made no later than August 31, 2020. The repayment will be treated as a rollover for purposes of Code Sec. 408(d)(3), but will not be treated as a rollover for purposes of the one rollover per 12-month period limitation in Code Sec. 408(d)(3)(B) and the restriction on rollovers for nonspousal beneficiaries in Code Sec. 408(d)(3)(C).

Finally, in the appendix to Notice 2020-51, the IRS provides a sample plan amendment for defined contribution plans that plan sponsors may adopt to implement Code Sec. 401(a)(9)(I).

For a discussion of the rules relating to required distributions from qualified plans, see Parker Tax 131,505.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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