The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), became law on March 27, 2020 and included several provisions related to qualified retirement plans. We previously addressed on those provisions here: Initial Update on CARES Act Qualified Plan and Distribution Rules. Since then, the IRS has issued additional guidance on these topics and in this update we address IRS Notice 2020-51, in which the IRS clarified and favorably augmented the CARES Act waiver of required minimum distributions (“RMDs”).
As we noted in our initial update, under the CARES Act, RMDs due to be taken in 2020 are no longer required from qualified defined contribution plans, 403(b) plans, IRAs, and governmental 457(b) plans. If the required beginning date was in 2020 (i.e., the first RMD was to be made on or prior to April 1, 2020), and the plan hasn’t already distributed the first RMD, that RMD is also waived.
In other words, for situations in which the first distribution year was 2019, but an individual intended to take their first RMD by April 1, 2020 (the ‘required beginning date’ for such RMDs), the CARES Act waives the requirement for both the first RMD (attributable to 2019, and required by April 1, 2020) and the second RMD (also due in 2020). However, if the individual in this example took their first RMD in 2019 (instead of waiting until 2020), the CARES Act is not retroactive and that RMD will be still be treated as an RMD taxable in 2019.
Prior to the issuance of Notice 2020-51, if a plan participant or IRA owner had already taken an RMD in 2020, the CARES Act permitted that individual to effectively roll the RMD back into a retirement account within 60 days, treating the distribution as if it had not occurred. But, for situations where the 60-day period expired prior to such a repayment, the distribution remained taxable.
Under Notice 2020-51, the IRS has preserved the intent of the CARES Act RMD waiver by extending the 60-day repayment window for distributions described above in which the 60-day repayment window lapsed without action. In these cases, the 2020 distribution can still be repaid (and treated as nontaxable) on or before August 31, 2020 (or, if later, the expiration of the 60-day period beginning on the distribution date).
Under these rules, all other RMDs paid in 2020 (or paid in 2021 for the 2020 calendar year, in the case of an individual with a required beginning date of April 1, 2021), may also be rolled over (or repaid to an IRA) on or before August 31, 2020, or, if later, the expiration of the 60-day period beginning on the distribution date)
These rules are also applicable for beneficiaries of inherited IRAs who have already taken an RMD in 2020.
Practically, these rules present a few nuances:
- If income tax was withheld from an RMD, and the individual recipient now wishes to rollover/repay that distribution and avoid income tax, the individual must repay the entire amount of the distribution – including income tax amounts withheld. In other words, the repayment obligation may be greater than the cash amount actually received. The individual, in this case, will use the withheld/remitted tax as a prepayment against other taxable income.
- If the RMD could also qualify as a coronavirus related distribution (a “CRD”, and because the recipient is also a “qualified individual”, and only up to the applicable $100,000 CRD limitation), the repayment window is actually three years because the CRD rules permit a repayment anytime during – or up to – that period of time. In this case, the individual would need to be able to appropriately document the distribution as a CRD.
- For RMDs beginning in 2021, the guidance suggests that calculation of RMD amounts will take place as if 2020 distributions occurred. In other words, an individual subject to the RMD rules would determine the amount of their RMD for the 2021 year using the value of retirement plan accounts as of December 31, 2020, divided by the applicable life expectancy factor.
- With respect to beneficiaries subject to the 5-year rule for inherited IRAs that applied prior to the SECURE Act, the 5-year distribution period (and actions associated with the 5-year distribution period) is effectively extended one year.