Additional Relief For Participants Who Already Took an RMD in 2020

In IRS Notice 2020-51, the IRS provides much anticipated guidance on the CARES Act provision waiving 2020 required minimum distributions (RMDs).   Much of the guidance in the IRS Notice deals with the beyond the scenes nuts and bolts of how the RMD waiver and any repayments of RMDs taken earlier this year would work.  But there are a number of items that plan sponsors and participants will also have interest in.

The CARES Act waives RMDs for any participant required to receive an RMD in 2020, which includes: (i) participants who turned 70½ in calendar year 2019 and did not take their first RMD prior to January 1, 2020 (which would normally be due April 1, 2020); (ii) participants who turned 70½ prior to calendar year 2020 and would normally be required to take their annual RMD by December 31, 2020; and (iii) participants whose required beginning date is April 1, 2021.  The Notice clarifies that an individual whose required beginning date is April 1, 2021, will not be required to take the initial RMD due by April 1, 2021 but is required to take the 2021 annual RMD due by December 31, 2021.

The major piece of relief provided by this guidance is that the IRS is extending the period of time that a participant or IRA owner can recontribute any distribution that would have been an RMD but for the waiver relief in the CARES Act to an eligible retirement plan or IRA so that the deadline is no earlier than August 31, 2020.   Previously, the IRS had provided relief for RMDs taken after February 1, 2020 until July 15, 2020.  So this relief not only further extends the relief period from July 15 to August 31, but it also picks up RMDs that were taken in January of this year.   This relief also applies to any individual who turned 70.5 after December 31, 2019 and took an RMD without realizing that the SECURE Act changed the required beginning age to 72 effective as of January 1, 2020.

Recontributions may be made to the same plan or to another eligible retirement plan or IRA, as long as the plan permits rollover contributions.  Any rollovers made pursuant to this relief will not be treated as a rollover for purposes of the one rollover per 12-month period limit for IRAs.  This relief means that an individual who otherwise has already made a rollover to an IRA or intends to later this year would still be permitted to “rollover” any distribution that but for the CARES Act would have been an RMD.  Similarly, the relief provides that a recontribution can also be made by individuals who took a distribution that but for the CARES Act would be an RMD from an inherited IRA.

The guidance goes on to provide that the CARES Act RMD waiver relief also extends the deadline for beneficiaries to elect whether to take their benefit over 5-years or using the life expectancy rule.  For example, if a 50-year old employee in a plan providing for this election died in 2019 with his sister as his designated beneficiary, the plan would normally require the election by the end of 2020.  However, pursuant to this relief, the plan may be amended to permit the extension of such deadline to the end of 2021.

Retirement plans must be amended to provide the RMD waiver relief to participants.  This amendment is not due until the end of the plan year beginning on or after January 1, 2022 (or in the case of a governmental plan 2024).  IRA documents do not need to be amended.

For questions about this Notice or any other benefit issues, please reach out to any of Graydon’s employee benefits attorneys.

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