IRS Provides Guidance on Required Minimum Distributions Under the CARES Act and SECURE Act | Practical Law

IRS Provides Guidance on Required Minimum Distributions Under the CARES Act and SECURE Act | Practical Law

The Internal Revenue Service (IRS) has issued Notice 2020-51, which provides guidance on the waiver of required minimum distributions (RMDs) from certain retirement plans for 2020 under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the changes made to the required beginning date (RBD) for RMDs under the Setting Every Community Up for Retirement Enhancement Act (SECURE Act).

IRS Provides Guidance on Required Minimum Distributions Under the CARES Act and SECURE Act

by Practical Law Employee Benefits & Executive Compensation
Law stated as of 26 Jun 2020 • USA (National/Federal)
The Internal Revenue Service (IRS) has issued Notice 2020-51, which provides guidance on the waiver of required minimum distributions (RMDs) from certain retirement plans for 2020 under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the changes made to the required beginning date (RBD) for RMDs under the Setting Every Community Up for Retirement Enhancement Act (SECURE Act).
On June 23, 2020, the IRS issued Notice 2020-51, which provides guidance on the:
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Background

The SECURE Act, enacted in December 2019, increases the age for the RBD applicable to IRAs and other retirement plans (see Legal Update, Government Funding Legislation Includes the SECURE Act, Which Changes Retirement Plan Requirements). Under the SECURE Act, RMDs from an IRA or employer-sponsored retirement plan must start on April 1 of the calendar year following the calendar year in which the individual attains age 72, rather than age 70.5. This change is effective for distributions required to be made after December 31, 2019, with respect to individuals who turn 70.5 after December 31, 2019.
The CARES Act amends Code Section 401(a)(9) (26 U.S.C. § 401(a)(9)) by waiving the RMD requirements for the 2020 calendar year for:
  • Defined contribution plans, including 403(a) plans, 403(b) plans, and governmental 457(b) plans.
  • IRAs.
(See Legal Update, CARES Act Contains Numerous Employee Benefit and Executive Compensation Provisions, Including Changes to COVID-19 Testing Mandate: 2020 Required Minimum Distribution Waiver.)
The RMD waiver does not apply to defined benefit plans.
Plan amendments for the RMD waiver are not due until the end of the plan year beginning on or after January 1, 2022 (January 1, 2024, for governmental plans), as long as the plan operates as if the amendment is in effect.
For more information on RMDs, see Practice Note, Required Minimum Distributions from Retirement Plans.

Transition Guidance Under Notice 2020-51

Notice 2020-51 provides transition guidance regarding the changes made by the SECURE Act and CARES Act. Under this guidance:
  • Distributions that are made in 2020 that would have been RMDs but for the SECURE Act changes are not required to be treated as eligible rollover distributions for purposes of Code Sections 401(a)(31), 402(f), and 3405(c) (26 U.S.C. §§ 401(a)(31), 402(f), and 3405(c)).
  • Participants may roll over the following distributions to an eligible retirement plan (even if they are part of a series of substantially equal periodic payments):
    • distributions that are paid in 2020 (or in 2021 for the 2020 calendar year) that equal the amounts that would have been 2020 RMDs absent the CARES Act changes, or are one or more payments that include the 2020 RMDs in a series of substantially equal periodic payments that are expected to last for certain periods of time; and
    • for participants with a required beginning date of April 1, 2021, distributions paid in 2021 that would qualify as RMDs but for the CARES Act changes.
  • The 60-day rollover deadline for distributions received in 2020 that would qualify as RMDs but for the SECURE Act or CARES Act changes is extended until August 31, 2020.
  • Distributions paid from IRAs in 2020 that would qualify as RMDs but for the SECURE Act or CARES Act changes may be repaid to the IRA. Distributions must be repaid by August 31, 2020. The repayments are not treated as a rollover for purposes of the one rollover per 12-month limitation under Code Section 408(d)(3)(B) (26 U.S.C. § 408(d)(3)(B)) or the restriction on non-spousal beneficiary rollovers in Code Section 408(d)(3)(C) (26 U.S.C. § 408(d)(3)(C)).

Plan Amendments to Provide for RMD Waiver

The appendix to Notice 2020-51 includes a sample amendment that defined contribution plan sponsors may use to amend their plans to provide for the RMD waiver. The sample adoption agreement includes options concerning:
  • Whether a participant or beneficiary who would have been required to receive a 2020 RMD will, or will not, receive the distribution (in the absence of an election).
  • For purposes of direct rollovers, what will be considered an eligible rollover distribution in 2020.
Adoption of the sample plan amendment will not cause:
  • Loss of reliance on a favorable opinion, advisory, or determination letter.
  • Loss of pre-approved plan status.
Notice 2020-51 provides that while plan sponsors may include other amendments pursuant to the CARES Act, relief from ERISA's anti-cutback rule will be unavailable for amendments that impermissibly eliminate an optional form of benefit (see Practice Note, Protected Benefits Under Code Section 411(d)(6)).

Q&A Guidance

Notice 2020-51 also includes Q&A guidance in which the IRS provides that:
  • IRAs do not have to be amended to provide for the RMD waiver (Notice 2020-51, Q&A-1).
  • For plans that allow employees or beneficiaries to elect the five-year rule or life expectancy rule to calculate RMDs, the deadline for making that election may be extended to December 31, 2021 (Notice 2020-51, Q&A-2) (see Practice Note, Required Minimum Distributions from Retirement Plans: Death Before RBD).
  • If a participant dies in 2019, a nonspouse designated beneficiary has until the end of 2021 to make a direct rollover and use the life expectancy rule in determining RMDs. This guidance modifies the "special rule" in Notice 2007-7, Q&A-17(c)(2). (Notice 2020-51, Q&A-3.)
  • The RMD waiver does not change a participant's RBD (Notice 2020-51, Q&A-4).
  • The CARES Act and Notice 2020-51 do not extend deadlines other than those specifically identified. If a participant or beneficiary dies in 2020, there is no extension of the 5-year period in Code Section 401(a)(9)(B)(ii) (26 U.S.C. § 401(a)(9)(B)(ii)) or the 10-year period in Code Section 401(a)(9)(H) (26 U.S.C. § 401(a)(9)(H)). (Notice 2020-51, Q&A-6.)
  • For plans subject to Code Sections 401(a)(11) and 417 (26 U.S.C. §§ 401(a)(11) and 417) that suspend distributions that include 2020 RMDs and restart distributions in 2021, spousal consent may be required if the plan provides for a new annuity starting date. Spousal consent is generally not required if the plan does not provide for a new annuity starting date. (Notice 2020-51, Q&A-7.)
  • Distributions may be rolled back into the distributing plan, provided the plan allows rollovers and the requirements of Code Section 402(c) (26 U.S.C. § 402(c)) are met (Notice 2020-51, Q&A-8).
  • 2020 RMDs that are paid in 2020 are not eligible rollover distributions for purposes of Code Section 3405 (26 U.S.C. § 3405), and therefore are not subject to Section 3405's mandatory withholding rules (Notice 2020-51, Q&A-9).
  • The RMD waiver does not apply to payments made as part of a series of substantially equal periodic payments. Accordingly, suspension of these payments in 2020 could result in the payments losing the exemption from the 10% early-withdrawal tax (26 U.S.C. § 72(t)(4)). (Notice 2020-51, Q&A-10.)
  • IRA trustees, issuers, or custodians must notify IRA owners that RMDs are not due in 2020. This requirement may be met by providing a copy of the Form 5498 to the IRA owner. (Notice 2020-51, Q&A-11.)
  • The RMD waiver does not apply to defined benefit plans, even if the plan treats a distribution as a single sum distribution from an individual account plan for purposes of determining the portion of the distribution that is an RMD (26 C.F.R. § 1.401(a)(9)-6 Q&A-1(d)(1)); see Practice Note, Required Minimum Distributions from Retirement Plans: Defined Benefit Plans). (Notice 2020-51, Q&A-12.)

Practical Implications

Notice 2020-51 addresses many questions that have been outstanding for retirement plan sponsors and administrators since the passage of RMD changes in both the CARES Act and the SECURE Act. Although the 2020 RMD waiver under the CARES Act does not apply to defined benefit plans, Notice 2020-51 does address transition relief in connection with the SECURE Act's increase in the required beginning date (which applies to both defined benefit and defined contribution plans). Defined contribution plan sponsors should review the sample plan amendment provided in the Notice and consider the options regarding direct rollover choices for distributions in 2020. Plan administrators should also consider any necessary participant communications regarding elections on receiving RMDs.