RMDs Aren’t Required in 2020

By David J. Kupstas, FSA, EA, MSEA

David J. Kupstas, FSA, EA, MSEA

David J. Kupstas, FSA, EA, MSEA Chief Actuary

You may recall that the CARES Act says required minimum distributions (RMDs) don’t have to be taken in 2020 from IRAs and many employer retirement plans. This seems like a pretty simple concept, but it’s not. There were a number of unanswered questions which the IRS has been kind enough to address in Notice 2020-51.

Early in the COVID-19 pandemic, there was a focus on opening the spigot and allowing employees greater access to their retirement plan monies. (See Notice 2020-50 and this summary.) Why would Congress then tell us we didn’t have to take RMDs? Leaving money in the plan is the opposite of getting money into people’s hands, is it not? Great question.

You see, RMDs payable in 2020 were based on December 31, 2019 account balances. When COVID-19 hit, most employees who were invested in stocks saw their account balances take a deep dive. Should RMDs be paid while asset values are down, a greater percentage of the account would be paid out than was intended. Congress didn’t say you couldn’t take an RMD, just that you didn’t have to.

By the way, RMDs aren’t waived for defined benefit plans. Let’s make that clear here at the start. Technically, defined benefit plans don’t have RMDs, even if the distributions have been described that way because it’s easier for laypeople to understand. If you have been taking distributions from a DB for being older than 70½ or on account of death, those distributions must continue in 2020.

With that, let’s take a look at Notice 2020-51 and see what it cleared up.

Transition Guidance

One of the first items in Notice 2020-51 does not pertain to the CARES Act at all, but rather the SECURE Act, passed on December 20, 2019. Among the SECURE Act provisions was changing the usual beginning age for RMDs from 70½ to 72 effective in 2020. It may come as no surprise that some people didn’t get this memo and went ahead and started what they thought were RMDs early in 2020 for someone age 70½ or 71. If the distributions had been RMDs, no federal tax had to be withheld. Since the distributions weren’t RMDs, federal tax should have been withheld. If tax wasn’t withheld when it should have been, or the employee wasn’t notified appropriately about rollover options, Notice 2020-51 says that the payor and/or plan administrator will not be in trouble provided the amount paid was equal to what would have been the RMD had the required beginning age not changed.

It’s possible that someone received a distribution in 2020 thinking it was an RMD, but then it turned out not to be an RMD because the CARES Act suspended the RMD requirement. Is that person stuck paying tax on that distribution? Not necessarily. IRS says those non-RMDs can be rolled over. Such distributions include

  1. Distributions for the 2020 calendar year which would have been RMDs if not for the CARES Act. These will be mostly payable in 2020, but some might be payable in 2021 by April 1.
  2. One or more payments (that include the 2020 RMDs) in a series of substantially equal payments made over certain periods. These normally aren’t eligible for rollover.
  3. Distributions paid in 2021 that would have been 2021 RMDs if not for the CARES Act. In a nutshell, these are distributions to employees with a required beginning date of April 1, 2021, that are paid in 2021, which would have been RMDs for 2021 except for the fact that the RMD for 2020 was $0, so now the first distributions paid in 2021 are 2021 RMDs rather than 2020 RMDs, and anything beyond the 2021 RMD amount is no longer an RMD. If you didn’t follow that, it’s okay, but those distributions can be rolled over.

Now that we’ve gotten that out of the way, we can tell you that the normal 60-day deadline for rollovers and repayments has been extended. You’ve got until at least August 31, 2020. If someone got an RMD on March 15, 2020 and then heard it was no longer an RMD and could now be rolled over, the deadline to roll over is not 60 days after March 15, 2020, but rather August 31, 2020. If you get the distribution within 60 days preceding August 31, 2020, then the deadline to roll over is not August 31, 2020 but rather the usual 60 days from receipt of the distribution.

The same rule applies to repayments of RMDs previously distributed from IRAs. You have until the later of August 31, 2020 and 60 days to make the repayment. This is generally treated as a rollover, but it doesn’t count as the one rollover per 12 months under Section 408(d)(3)(B) nor as a rollover for restricted nonspouse beneficiaries.

Plan Amendments

If an employer wants to adopt the CARES Act provisions relative to RMDs, the plan needs to be amended by the last day of the plan year beginning on or after January 1, 2022. The amendment must reflect how the plan was operated. Notice 2020-51 provides a sample amendment. Those who draft plan amendments for a living will want to review this part of the Notice. There are some comments there about making sure you don’t illegally cut back benefits.

It is interesting to note that the CARES Act did not simply make 2020 RMDs go away. Instead, a plan or an employee, or both, have to take an action to make them go away. If an employee elects to have a 2020 RMD, then the appropriate amount distributed will be treated as such. This is important in the context of tax withholding and eligible rollover distributions.

Other Issues

Notice 2020-51 concludes with some Q&As. Some of them are esoteric, but here is a summary of certain points:

  • IRAs do not have to be amended to waive 2020 RMDs.
  • There is a one-year extension on the decision as to whether a beneficiary will take RMDs under the five-year rule or the life expectancy rule. For deaths in 2019, that election would have to be made by the end of 2021 rather than 2020. There is a similar extension for nonspouse beneficiaries deciding whether or not to determine the amount not eligible for rollover using the life expectancy rule.
  • Someone who attained age 70½ before 2020 and retired in 2020 would ordinarily need to take a distribution for the 2020 calendar year which wouldn't have to be paid until April 1, 2021.  This distribution does not have to be taken.  An RMD for 2021 would have to be taken by December 31, 2021. 
  • You may roll distributions back into the plan they came from, provided the plan allows it.
  • To the extent a distribution is treated as a 2020 RMD, the payor cannot make the distribution subject to the 20% mandatory tax withholding associated with eligible rollover distributions. RMDs are not eligible rollover distributions; therefore, there cannot be 20% mandatory withholding.
  • Payments that are part of a series of substantially equal periodic payments under the “RMD method” designed to avoid the 10% excise tax under Section 72(t) must continue to be made in their current pattern. Otherwise, this is considered a modification subjecting all the payments under the series to a recapture tax.

This is without a doubt some of the most unstimulating guidance you’ll see from the IRS. I struggled to read over this article before publication, and I usually like my own writing. Anyone looking for details on 2020 RMD relief may wish to read Notice 2020-51 itself or talk to someone who spends a lot of time working on this sort of thing.

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— Topics: 401(k), Investments, Wealth Management, Financial Planning, distribution planning, covid-19