A common question regarding the CARES Act distribution, loan and required minimum distribution (RMD) waiver provisions[i] is whether these provisions are optional or mandatory. In most cases, they are optional – but in the retirement world there are very few questions where a short answer will suffice.
A plan is not required to stop distributions in 2020 that would have been required minimum distributions (RMDs) but for the CARES Act. This is because plans are permitted to have mandatory distributions once a participant has attained the later of age 62 or the plan’s normal retirement age.
Even though the law does not require an RMD, a plan’s provisions that provide for minimum distributions could continue to be followed. The CARES Act provides that the distributions are not treated as eligible rollover distributions if they would have been ineligible but for the CARES Act. Thus, a plan that continues to follow the existing plan terms can continue to treat the distributions as though they were RMDs for processing purposes.
A plan is not required to, but could, provide an IRC §402(f) notice and offer the participant the right to directly rollover the distribution. But, the plan could not impose the mandatory 20% withholding if a direct rollover is not elected. Rather, the distribution is subject to the voluntary withholding rules (generally 10% unless otherwise elected by the participant).
The treatment of a distribution to the participant is not affected by how the plan processes the distribution. It doesn’t matter why the participant received the distribution (i.e., the participant elected to receive it or the plan didn’t allow a waiver and forced the distribution). No distributions from a defined contribution plan (or IRA) made in 2020 are RMDs. The distribution that would have been an RMD, but for the CARES Act, is an eligible rollover distribution (assuming it is not ineligible for another reason) and can be rolled back into the same plan (if permitted by the plan), or to any other plan or IRA that is allowed to accept eligible rollovers.
Robert M. Richter, J.D., LL.M, is the American Retirement Association’s Retirement Education Counsel. He is the editor of the ERISA Outline Book.
See also:
[i]Sections 2022, 2023 and 2024 of the CARES Act. This article does not explain the details of these provisions.
