COVID-19 Client Alerts:
August 31 Important Date for Additional COVID-19 Relief for Retirement Plans, Part 1
Late last month the IRS issued two important notices providing additional relief regarding allowing participants to repay 2020 required minimum distributions (RMDs) that were received prior to enactment of the CARES Act, and helping employers with safe harbor 401(k) or 403(b) plans to reduce or suspend employer contributions mid-year. Both notices provide that August 31 is an important deadline for the relief. These notices are discussed respectively in this two-part alert. Part 1 of this alert discusses the first of the notices, Notice 2020-51, that deals with required minimum distributions in 2020. Part 2 will discuss Notice 2020-52 that addresses amending safe harbor 401(k) and 403(b) plans to reduce or suspend employer contributions.
2020 RMDs-Notice 2020-51. RMDs are distributions that individuals are required to take because they have reached a certain age. The age was 70 1/2 until enactment of the SECURE Act in late 2019, raising the age to 72 for individuals turning age 70 1/2 after 2019. On June 23, 2020, the IRS issued Notice 2020-51 dealing with RMDs that have been received in 2020 despite the fact that the CARES Act eliminated RMDs for 2020. The CARES Act was enacted on March 27, 2020 and provided that due to the economic downturn caused by the COVID-19 Pandemic that Participants did not have to take RMDs from defined contribution plans or IRAs for the 2020 calendar year. However, since the first quarter of 2020 was almost over when the CARES Act was enacted some participants had already received some or all of their RMD for 2020. In general, RMDs do not qualify for tax free rollover treatment. The CARES Act permitted distributions in 2020 that would be RMDs but for the CARES Act to be rolled over within 60 days. However, people who had taken distributions in January could not meet the 60-day after receipt rollover requirement. In April, the IRS extended the rollover window to July 15 for any RMD received on or after February 1. Unfortunately, this still left those who received an RMD prior to February with no recourse.
In Notice 2020-51 the IRS remedies this by providing that any distribution received in 2020 that would be an RMD but for the CARES Act can be rolled over by the later of August 31, 2020 or 60 days after the date of distribution. It additionally permits nonspousal beneficiaries that inherit accounts to roll over 2020 RMDs. It also provides that such rollovers are not counted as a rollover for the purpose of the “one rollover per year” rule for IRAs.
The Notice also contains Q&As and a sample plan amendment providing participants a choice whether to receive RMDs in 2020 and employers options with respect to a default if the participant does not make an election as well as options with respect to direct rollovers. Adoption of the sample amendment preserves the employer’s reliance on a favorable opinion, advisory or determination letter from the IRS.
Action Needed. Employers need to decide how to handle 2020 RMDs and communicate the new rules to participants including notifying those who have already received them about their ability to roll those distributions back into the plan or IRA or another plan or IRA.
For more information, attend Scott Galbreath’s webinar Retirement Plans Update: SECURE Act, Supreme Court Cases, and CalSavers on Wednesday, July 22, 2020, 8:30- 9:30 AM PST at PWA’s HR and Compliance Virtual Conference. Click here or on the image below to register.
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