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George F. Bearup, J.D. Senior Legal Trust Advisor

24-Jun-20

2020 Rollover Extended to August 31, 2020

Take-Away: The IRS just published yet another Notice, this time extending the 60-day rollover period in 2020 to August 31, 2020. This change is intended to help those individuals who took a required minimum distribution from their retirement account early in 2020, prior to the suspension of required minimum distributions for 2020 as part of the CARES Act. This extension of time enables those individuals to return the distribution to a retirement account and thus avoid having to declare the distribution as part of their 2020 taxable income.

IRS Notice: Notice 2020-51

Background: The CARES Act provided for a waiver of required minimum distributions from retirement plans and IRAs for 2020. [IRC 401(a)(9)(1)(i).] This waiver also applied to 2019 required minimum distributions for an individual who had a required beginning date of April 1, 2020 that was not paid in 2019 (but would have been due to be paid between January 1, 2020 and April 1, 2020.) Many individuals took required minimum distributions from their retirement accounts early in 2020 before Congress waived required minimum distributions for this calendar year. If an individual took a distribution from her IRA in January or February 2020 as a required minimum distribution, they would only have 60 days in which to return the distribution to avoid having to include the distributed amount in their taxable income for 2020.

Notice: This Notice is intended to assist plan participants and IRA owners who have already received required minimum distributions in 2020. Treasury extends the customary 60-day rollover period to a fixed deadline of August 31, 2020. This extension applies to required minimum distributions from qualified plans [IRC 402(c)(3)(B)] and to the required minimum distribution from an IRA [408(d)(3).]

Example: Lyndsay, age 73, an IRA owner, received a single-sum distribution from her IRA in January, 2020. Part of the distribution taken by Lyndsay was treated as ineligible for a rollover because it was considered to be her required minimum distribution for 2020.  You will recall that the ‘first money out’ in a retirement plan distribution, if the participant is older than 70 ½ [now age 72 after the SECURE Act], is a required minimum distribution that is not able to be rolled over to another qualified plan or an IRA. Under this Notice, Lyndsay will now have until August 31, 2020 to return the January, 2020 part of her distribution that was her required minimum distribution for the year to her IRA. Note that the extension to August 31, 2020 is only for that part of Lyndsay’s distribution that was her required minimum distribution for the calendar year.

Repayments: Notice 2020-51 provides: “D. Permitted repayments of RMDs previously distributed from an IRA. In the case of an IRA owner or beneficiary who has already received a distribution of an amount that would have been an RMD in 2020 but for section 2203 of the CARES Act or section 114 of the SECURE Act, the recipient may repay the distribution to the distributing IRA, even if the repayment is made more than 60 days after the distribution, provided the repayment is made no later than August 31, 2020. The repayment will be treated as a rollover for purposes of Section 408(d)(3) of the Code, but will not be treated as a rollover for purposes of the one rollover per 12-month period limitation in Section 408(d)(3)(B) and the restrictions on rollovers for nonspousal beneficiaries in Section 408(d)(3)(C).”

Questions and Answers: The Notice also includes 12 questions and answers. Some of the answers are not new, e.g. the IRA custodian must inform IRA owners of the 2020 waiver of required minimum distributions; the waiver does not apply to distributions from defined benefit plans; IRAs do not have to be amended to reflect the waiver in required minimum distributions. A couple of Q&As are new.

  • RBD Not Impacted: The waiver of 2020 required minimum distributions does not affect an individual’s required beginning date. If an individual has a required beginning date of April 1, 2020, and he/she dies after April 1, 2020, then that individual will be treated as having died after his/her required beginning date, regardless of whether that individual had commenced receiving distributions or had delayed commencing distributions until 2021. [IRC 401(a)(9)(1).] This authorizes the use of the ghost life expectancy distribution option for an inherited IRA or retirement plan account.
  • No Other Deadlines Extended: No other extensions are impacted by this Notice. For example, there is no extension of the September 30 following the year of the owner’s death which is the deadline to determine designated beneficiaries of the decedent’s retirement account. Similarly, the October 31 deadline where a plan’s designated beneficiary, e.g. a trustee,  must provide to the plan administrator specific information with regard to a see-through trust. Or the last-day-of-the-year deadline that relates to the date by which separate accounts must be established. Finally, if the account owner dies in 2020, there is no extension of the 5-year period or 10-year period for taking required distributions from that inherited retirement account.
  • Roll-Backs are Permitted: Previously taken required minimum distributions can be rolled over back into the same plan, but only if the plan permits rollovers to it.
  • Mandatory Tax Withholding Rules Not Affected: A plan sponsor does not have the option of treating a 2020 required minimum distribution paid from a qualified plan in 2020 as subject to the mandatory 20% tax withholding rate for eligible rollover distributions. For example, a qualified plan makes a distribution in 2020 to Tom, a retiree, of his entire account balance under the plan. Part of that distribution is Tom’s 2020 required minimum distribution. The portion of Tom’s distribution that is not his 2020 required minimum distribution is an eligible rollover distribution, and thus subject to the 20% mandatory withholding rules. [IRC 3405(c).] The portion of Tom’s distribution that is a 2020 required minimum distribution is not an eligible rollover distribution and it is subject to the 10% optional tax withholding rules. [IRC 3405(b).] Conversely, if Tom as a retiree, had been receiving monthly distributions from the plan that exceeded his required minimum distributions and the distributions are expected to last for a period of at least 10 years, then the entire amount of each monthly distribution is subject to the periodic payment optional tax withholding rules. [IRC 3405(a).]

 

  • Substantially Equal Periodic Payments Not Affected: Allison, who has separated from her employment, is currently taking substantially equal periodic payments from her retirement account. This is a series of payments  to Allison that are designed to satisfy the statutory exception to the 10% penalty tax for retirement plan distributions prior to attaining age 59 ½. [IRC72(t)(2)(A)(iv); Revenue Ruling 2002-62.] If Allison’s payment plan is stopped, it will be treated as a modification of her plan and all previously received payments under that plan are subject to recapture and subjected to the 10% early distribution penalty. If Allison stops taking a distribution in 2020, other than due to her death or disability, that will constitute a cessation of the payments and thus a modification of the plan, subjecting her to the 10% penalty on all of the payments that she previously received. [IRC 72(t)(4).] The waiver of required minimum distributions for 2020 has no impact on the substantially equal periodic payment plan.

Conclusion: This IRS Notice is welcome news to those who got caught ‘flat-footed’ by taking their required minimum distributions early in 2020. They now have until August 31 to add the distribution back to their retirement account and avoid income taxation on the distribution for this calendar year.