Alerts and Updates

IRS Provides Rollover Relief for Required Minimum Distributions

July 8, 2020

The notice provides relief for taxpayers who had already taken RMDs in 2020 before the CARES Act.

Recently, the IRS issued Notice 2020-51 in order to provide taxpayers with guidance associated with the potential waiver of 2020 requirements for required minimum distributions (RMDs) from a defined contribution retirement plan, including a 401(k) plan, 403(b) plan or an IRA. The notice also provides relief for taxpayers who have already taken their RMDs before the Coronavirus Aid, Relief and Economic Security (CARES) Act. In summary, the notice:

  • Permits rollovers of waived RMDs and other related payments, as well as extends the 60-day rollover period to August 31, 2020;
  • Answers an exhaustive list of questions relating to the 2020 waiver of RMDs; and
  • Provides a template for plan amendments that, if adopted, would provide participants with a choice as to whether they wish to receive waived RMDs.

As a result, unwanted 2020 RMDs can be repaid by way of rollover to an IRA or company plan by August 31, 2020, with no tax implications whatsoever.

Background

IRS Code Section 401(a)(9) sets forth the rule that certain employer-sponsored retirement plans (IRAs, pensions, profit-sharing plans) must make minimum distributions starting by the required beginning date, which historically (prior to the SECURE Act, discussed below) has been April 1 of the calendar year after the taxpayer turns 70½ years of age. Any inability to make the prescribed payments will be subject to a tax penalty, which is generally 50% of the required distribution.

The CARES Act, which we wrote about in a previous Alert, enabled any taxpayer with an RMD due in 2020 from a defined contribution plan, including a 401(k) plan, 403(b) plan or an IRA, to skip required RMDs for the year. This includes anyone who turned age 70½ in 2019 and would have otherwise been required to take their first RMD by April 1, 2020, under the law in effect before the enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, enacted in December 2019, which we wrote about in an Alert

The SECURE Act amended § 401(a)(9) to make changes to the required beginning date applicable to the relevant retirement plans. Under the SECURE Act, the new required beginning date for RMDs to be made is typically April 1 of the calendar year in which the taxpayer attains age 72.

Notice 2020-51

The notice provides relief for taxpayers who had already taken RMDs in 2020 before the CARES Act. The CARES Act, enacted in March, suspended the RMD requirement for 2020 in response to the coronavirus pandemic and its effect on taxpayers, the economy and the stock market. With the release of this new notice, taxpayers who already took an RMD in 2020 from certain retirement accounts now have the opportunity to roll those funds back into a retirement account. To provide taxpayers time to take advantage of this opportunity, the 60-day rollover period for any RMDs already taken this year has been extended to August 31, 2020.

The notice comes in response to the American Institute of CPAs recommendation that the IRS should allow taxpayers that had already withdrawn RMDs (including from inherited IRAs) in 2020 to return the distributions to the account.

In addition to the rollover opportunity, an IRA owner or beneficiary who has already received a distribution from an IRA of an amount that would have been an RMD in 2020 can repay the distribution to the IRA by August 31, 2020. This repayment is also not subject to the one rollover per 12-month period limitation and the restriction on rollovers for inherited IRAs. Thus, if a beneficiary received multiple distributions, it is possible that they all may be rolled back.

Additional Guidance

An appendix to Notice 2020-51 provides a template plan amendment for defined contribution plans that plan sponsors may adopt to implement the changes under the new rules. The sample amendment allows participants and beneficiaries a choice between receiving and not receiving certain distributions; however, the sample plan amendment has no effect on other distribution provisions. Prior to the implementation of any plan amendments, professional guidance is highly recommended.

The notice also attempts to anticipate and answer a number of questions regarding the RMD waiver, including but not limited to:

  • New deadlines for designated beneficiaries to make direct rollovers,
  • Electing the rule under which the RMDs will be determined (five-year rule or the life expectancy rule),
  • The impact of the waiver on a taxpayer’s required beginning date, and
  • How the waiver may impact taxpayers with a required beginning date in 2021.

The section also notes certain deadlines that are not affected by this guidance, as well as to confirm that distributions may be rolled back into the same plan only if certain criteria are met and it is allowed within the guidelines of the plan itself.

TAG’s Perspective

Individuals are living and working longer and desire, in many cases, to continue contributing to their retirement plans while not having to take RMDs until a future date and later age. This is a favorable outcome for taxpayers, particularly those who took their RMDs early in the year.  However, utilizing the waiver may not always be the most beneficial course. For example, taxpayers in lower income tax brackets may find it advantageous to keep their RMDs. As with any new and developing tax legislation, careful and diligent planning is required.

For More Information

If you would like more information about this topic or wish to discuss your own unique situation, please contact Sean R. Schoppy, Steven M. Packer, any of the practitioners in the Duane Morris Tax Accounting Group or the person in the firm with whom you are regularly in contact. For information about other pertinent tax topics, please visit the Tax Accounting Group publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.