Back to Missives
George F. Bearup, J.D. Senior Legal Trust Advisor

8-Jul-20

More CARES Act Guidance on Distributions

Take-Away: The IRS issued Notice 2020-51, which was previously reported on, to extend the time to restore required minimum distributions taken earlier in 2020 to August 31, 2020. Other ‘rules’ regarding distributions from retirement plans were also covered in this Notice that were not as noteworthy as the ability to ‘restore’ a previously taken required minimum distribution.

Background: The CARES Act created a moratorium that suspends the obligation to take a required minimum distribution (RMD) for 2020. [IRC 401(a)(9)(1)(i).] That suspension affects qualified plan accounts, IRC 403(a) and (b) annuity accounts, and deferred compensation plans under IRC 457. The suspension also applies to IRA accounts and Roth IRA accounts. In addition, the Act waives the 10% penalty for coronavirus-related distributions of up to $100,000. How these new rules applied to various types of plans, and existing distributions from retirement accounts, prompted many questions.

Notice 2020-51: Most of the attention caused by this Notice was the authority given to a beneficiary to repay 2020 RMD distributed amounts to the beneficiary’s IRA by August 31, 2020. This rollover opportunity applies to plan participants, IRA owners and the beneficiaries of inherited IRAs. In short, all 2020 distributions that would have been RMDs had it not been for the CARES Act 2020 moratorium on RMDs may be rolled over.

Other Distribution Questions: Other positions taken in the Notice, or topics on which the Notice remained silent, follow:

  1. The suspension of RMDs does not apply to defined benefit plans. [Q&A-12.]
  2. While the Notice’s moratorium expressly applies to IRA accounts, it does not mention Individual Retirement Annuities, which implies there is no RMD relief for those who hold IRA annuities.
  3. IRA trustees and custodians are required to provide notices to IRA owners that there is no RMD distribution for 2020.
  4. The RMD suspension also applies to those account owners who currently receive periodic payments during 2020 from their retirement account.
  5. A repayment of an RMD previously taken this year will be treated as a rollover, but it will not violate the one-rollover-per-year rule, i.e. another transfer within the prior 12 month period.
  6. The required beginning date (RBD) age increase under the SECURE Act to age 72 will not have the effect of deferring the RBD of a plan participant or IRA owner who attained age 70 ½ prior to 2020. The CARES Act does not affect the participant or IRA owner’s RBD. [Q&A-4.]
  7. IRA custodial agreements do not have to be amended for an IRA owner to take advantage of the moratorium on taking RMDs in 2020. Qualified plans will have to be amended, but those amendments can be made retroactive, in order to permit a participant to not take an RMD from a qualified plan account in 2020.
  8. When a decedent’s retirement account (qualified plan or IRA) has no designated beneficiary, and the decedent dies before reaching his/her RBD, the decedent’s account must be distributed by December 31 of the year that contains the 5th anniversary of the account owner’s death. If any of those 5 years includes 2020, then the 5-year rule effectively becomes a 6-year rule. [Q&A-2.]
  9. Actions of custodians or plan administrators that normally must be taken with a distribution, but which are suspended for 2020, include: (i) providing a written explanation to the distributee that is required by IRC 401(a)(31); (ii) income tax withholding as required under IRC 3405(c); and (iii) the requirement to provide a written explanation advising of the availability of rollover treatment under IRC 402(f).
  • If a retiree was receiving monthly distributions from a plan that exceeded the retiree’s RMD, and that 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).]
  • If a former participant under age 59 ½ is taking a series of substantially equal periodic payments from their retirement account, that payment plan cannot be modified. The 2020 moratorium on the 10% penalty for early distributions will not apply to such payments as it would constitute a modification of that existing method of distribution. [Q&A-10.]

Conclusion: This Notice helps answer several questions. No doubt, as 2020 progresses, more questions will surface, so we can expect even more Notices from the IRS with answers on the moratorium of RMDs for 2020 and the waiver of the 10% penalty for early distributions.