Rollover Deadline Extended for Required Minimum Distributions from Retirement Accounts Waived Under the CARES Act

by George J. Kasper

As highlighted in our recent Tax Alert, in Notice 2020-51 (the Notice) the Internal Revenue Service (IRS) provides an extension of the 60-day rollover period to August 31, 2020 for individuals who have already taken a required minimum distribution (RMD) in 2020. The extension applies to individuals who have taken an RMD from their employers’ retirement plan or from an individual retirement account (IRA), including RMDs taken prior to March 27, 2020, the date the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) became law.

In addition to the rollover period extension, the Notice addresses several issues regarding the waiver of RMDs for 2020 under the CARES Act. The CARES Act allows individuals with an RMD due in 2020 from a defined contribution retirement plan, including 401(k) and 403(b) plans, to skip their RMDs for 2020. This includes anyone who turned age 70½ in 2019 and would have otherwise been required to take their first RMD by April 1, 2020 and anyone who turns age 72 in 2020 and would otherwise be required to take their first RMD by April 1, 2021.  

Other key takeaways from the Notice:

  • The RMD amount is not an eligible rollover distribution for withholding purposes so mandatory 20% withholding does not apply. As such, plan sponsors and recordkeepers may retain the RMDs and ignore withholding treatment for the RMDs that are distributed without concern about plan qualification, 402(f) notice penalties, or under-withholding federal income taxes.
  • A 2020 RMD amount that is distributed is subject to voluntary withholding, unless directly rolled over.
  • Distributions from a plan may be rolled back into the same plan, provided the plan permits rollovers and the rollover rules are met.
  • The 2020 RMD waiver does not alter the participant’s required beginning date.
  • Rollover of the waived RMD amount is ignored for purposes of the one rollover per 12-month period limitation and the restriction on rollovers for inherited IRAs.
  • The extended rollover period is not available to nonspousal beneficiaries.
  • The RMD waiver does not apply to defined benefit plans.

Employers and other plan sponsors should administer their plans in accordance with this guidance beginning immediately, and plan amendments may be adopted later to reflect actual operations. A plan sponsor should determine now how it will administer RMDs; specifically, (i) whether to make the RMDs unless a participant chooses to defer it, or to not make the RMDs unless a participant chooses to take it; (ii) whether its plan will accept rollovers of 2020 RMDs; and (iii) what 2020 distributions it will treat as eligible rollover distributions. The Notice contains a sample plan amendment that plan sponsors may use as a template in drafting amendments for their plans. Plan amendments to reflect the RMD waiver must be adopted by the last day of the plan year beginning on or after January 1, 2022, although governmental plans have until the last day of the plan year beginning after January 1, 2024.  

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