The Coronavirus Aid, Relief, and Economic Security Act (the ‘‘CARES Act’’) was passed into law March 27, 2020. The CARES Act provides a temporary waiver of required minimum distribution (“RMD”) rules for certain retirement plans and accounts.
Plans and Accounts to Which RMD Waiver Applies
The RMD waiver applies to the following types of plans and accounts:
- Defined contribution plans that are tax qualified under Internal Revenue Code (“Code”) Sections 401(a), 403(a), or 403(b).
- Governmental employer eligible deferred compensation plans under Code Section 457(b) that are defined contribution plans.
- Individual retirement accounts under Code Section 408(a) and individual retirement annuities under Code Section 408(b) (“IRAs”).
The plans listed in the first two bullets are referred to collectively herein as “Applicable DC Plans.”
Distributions to Which RMD Waiver Applies
The RMD waiver applies to the following amounts that would otherwise have been a required minimum distribution but for the CARES Act:
- Participants in Applicable DC Plans and IRA Account Owners
- An RMD that would otherwise be required for the 2020 calendar year.
- For example, a participant in an Applicable DC Plan who is retired and is 76 years old would ordinarily be required to receive an RMD for 2020 not later than December 31, 2020. An Applicable DC Plan or IRA is not required to pay the 2020 RMD to this participant or account owner.
- An RMD for the 2019 calendar year that would otherwise have been required to be paid by April 1, 2020 for a participant or IRA account owner whose required beginning date is April 1, 2020 and which was not actually paid before January 1, 2020.
- For example, for a participant in an Applicable DC Plan who reached age 70½ and retired during 2019, the RMD for 2019 would ordinarily be required to be paid not later than April 1, 2020.
- To the extent the RMD for 2019 was paid during 2019, the RMD waiver does not apply.
- To the extent the RMD for 2019 was not paid in 2019, the RMD waiver applies. It no longer needs to be paid by April 1, 2020.
- Special Rules for Death Beneficiaries Subject to Five-Year Rule
- If a participant in an Applicable DC Plan or an IRA account owner died before reaching his or her required beginning date and death benefits would otherwise have been required to be paid to a death beneficiary by the fifth year after the death of the participant or the IRA owner, the 2020 calendar year is ignored. Effectively, this allows the entire interest to be distributed by the end of the sixth year after the death of the participant or IRA owner.
Options for Stopping RMDs and Rollover Considerations
- Administrators of Applicable DC Plans should evaluate as soon as possible whether the plan will automatically stop paying amounts for which the RMD waiver applies, or if amounts will continue to be paid unless a participant or beneficiary affirmatively directs that the amount not be distributed.
- If an amount for which an RMD waiver is available is paid in any event, the Applicable DC Plan or IRA is not required to treat the distribution as an eligible rollover distribution for purposes of Code Section 401(a)(31) or the otherwise applicable 20% mandatory federal income tax withholding rules.
- IRS guidance with respect to similar RMD waivers for 2009 provided Applicable DC Plans the option to permit distributees of a waived RMD to rollover the distribution to another eligible retirement plan.
- IRS guidance with respect to similar RMD waivers for 2009 also provided transitional relief extending the 60-day period for indirect rollovers for certain amounts.
- The IRS is likely considering whether to provide similar relief with respect to RMDs waived under the CARES Act.
Plan Amendments, Operational Compliance, and Questions
Amendments to Applicable DC Plans and IRAs are not required to be made until the last day of the first plan year beginning on or after January 1, 2022 (or 2024 for governmental employer plans). However, later adopted plan amendments will need to conform the terms of the Applicable DC Plan and IRA to actual operations for periods on or after January 1, 2020.
Some recordkeepers and third-party administrators may commence administering your Applicable DC Plan in a particular default manner, unless you opt-out or provide them with alternative directions.