The CARES ACT: Helping Your 401(K) Participants During the Coronavirus Crisis

Waiver of Required Minimum Distributions

By Fred Reish, Bruce Ashton and Betsy Olson

This is the third in our series of articles on special CARES Act provisions designed to help your 401(k) participants.  In our prior articles, we discussed the temporary loan enhancement rules and coronavirus-related distributions (CRDs).  Here we discuss the temporary relief from taking required minimum distributions.

What the CARES Act Provides

For defined contribution plans (e.g., 401(k) plans, 403(b) plans, and 457(b) governmental plans) and IRAs, the CARES Act provides temporary relief from the required minimum distribution (“RMD”) rules.  The following chart explains this relief in the context of plans; the rules for IRAs are much the same:

Pre-CARES Act RMDs Post-CARES Act RMDs
For years before 2020, the law required distributions to a participant beginning no later than the participant’s “required beginning date”, which is April 1following the later of the calendar year in which the participant attainedage 70-1/2 or the calendar year in which the participant retired…except that a 5% or more owner of the plan sponsor is required to start taking RMDs even if he has not retired.

With the adoption of the SECURE Act at the end of 2019, the age requirement for RMDs was set at 72.

The RMD requirement is waived for distributions required in 2020.

Note that if a participant turned 70-1/2 in 2019, the first RMD would have to be made by April 1, 2020, and then another would be required on or before December 31, 2020. Under the CARES Act, both of these are waived.

The waiver applies only to 2020, so RMDs will need to resume in 2021 and thereafter.

RMDs are not considered eligible rollover distributions, so they are not subject to the 20% tax withholding that applies to other cash distributions. Distributions during 2020 that would have been RMDs except for this waiver would ordinarily be considered eligible rollover distributions, and thus subject to the 20% withholding requirement. However, the CARES Act provides that 20%withholding will not be required.
RMDs cannot be rolled over to a plan or IRA. Plans that make distributions during 2020 that would have been RMDs but for the waiver are not required to comply with the rollover rules. However, these distributions can be rolled over by a participant, though the rules are complicated. See the discussion that follows this chart.
RMDs are mandatory. If not made, the RMD amount is subject to a 50% excise tax, which is imposed on the individual. It is unclear whether plans need to provide for the RMD waiver or whether it is optional. Based on similar relief in a prior law, it seems likely that it is optional. Specifically, the RMD relief in the CARES Act is similar to past relief for 2009 RMDs under the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA). The IRS clarified that the waiver of 2009RMDs under WRERA was an optional change. Since RMDs are not required for 2020, there will be no excise tax imposed.
The RMD rules must be set forth in the plan document. The RMD waiver may be adopted administratively but a plan amendment is required by the last day of the plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year plans).

Rollover Relief

Most plan distributions are treated as “eligible rollover distributions” and require a plan to provide participants with a notice, comply with a participant’s instructions to roll over the amount as a direct rollover, and withhold 20% of the distribution if it is not rolled over (as a direct rollover).  Under the pre-CARES Act rules, a plan is not required to provide the notice for RMDs or to withhold, and may not directly roll over the distribution to an IRA.  In addition, RMDs were not eligible to be rolled over to another plan or IRA by the recipient.  The RMD had to be taken into income in the year of distribution.

Even though the CARES Act provides a waiver of the requirement to make RMDs, it goes on to say that, if a plan makes a distribution that would otherwise have been an RMD, the plan is  not obligated to comply with the notice, participant instructions and withholding requirements that apply to non-RMD distributions.  However, a participant is able to roll over the distribution so long as he does so within the time period provided for in the Code (normally within 60 days of receipt).  The effect of these rules is that the distribution is not treated as an eligible rollover distribution at the plan level, but it is eligible for rollover at the participant level.

We realize this may seem contradictory, but the CARES Act waiver is essentially identical to a similar provision adopted in 2009 to provide relief from the Katrina Hurricane disaster.  In Notice 2009-82, the IRS indicated that distributions that would be RMDs but for the waiver would be eligible to be rolled over in the participant’s hands.  The Katrina relief included distributions that were made prior to the enactment of the WRERA waiver.

Since the provisions in WRERA and in the CARES Act are essentially identical, we believe the same treatment should be accorded distributions that are at least equal to the RMD for 2020.   (Also, in our view, a careful reading of the changes made under the CARES Act leads to this conclusion.)   Thus, there is an opportunity for an individual to do a rollover if the participant had already received a payout in 2020 before the adoption of the CARES Act on March 27 or if the participant receives such a payout after that date.  In addition, in Notice 2020-23, the IRS has already indicated that if the 60-day rollover period would have ended on or after April 1, the rollover period is extended to July 15.

To illustrate this point, consider the following example:  an individual received a payout of his RMD early in 2020 before the enactment of CARES or receives one later in 2020.  If the distribution occurred in January, he could not do a rollover because the 60-day period expired before April 1.  On the other hand, if the distribution was made in early February, so that the 60-day rollover period would have ended on or after April 1, the individual may roll over the distribution until July 15.   It is possible that a further extension of the permissible rollover date may be issued by the IRS later in the year to provide relief to individuals who received an RMD in January and to extend the rollover period beyond July 15.

Conclusion

The plan loan and CRD provisions of CARES, which we discussed in our prior articles, are designed to give qualified individuals* access to their money in your plan.  This is intended to assist those who have been furloughed or laid off.  The RMD delay is just the opposite.  It permits participants to avoid taking money out of the plan.  Presumably, the reason is to avoid having to liquidate funds in the plan that may have sustained significant losses in the market downturn due to the coronavirus crisis.  Those losses would be locked in if assets in the participant’s account or IRA must be liquidated to generate the cash needed for an RMD.

You should review your plan document to see whether it needs to be amended to be consistent with an administrative decision to waive RMDs for 2020.  (Keep in mind that a formal amendment would not have to be adopted until 2022.)  Further, you may want to continue making the distributions unless an eligible participant opts out, since some participants may need the money to live on.  Regardless of your decision, we suggest that you discuss the alternatives with your plan recordkeeper, plan advisor or benefits counsel.


*  Section 2202(a)(4)(A)(ii) of the CARES Act defines a “qualified individual,” as an individual “(I) who is diagnosed with the virus SARS– CoV–2 or with coronavirus disease 2019 (COVID– 19) by a test approved by the Centers for Disease Control and Prevention, (II) whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test, or (III) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).”  Employees may self-certify that they meet this definition.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.

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