The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from California is representative of a common inquiry related to required minimum distributions (RMDs) from 401(k) plans. The advisor asked:
“My client was told by his human resources representative that the 401(k) plan from his former place of work will distribute his 2020 RMD from the plan this year as usual. I thought that under the CARES Act, all RMDs were waived for 2020. Can you clarify, please?”
Highlights of the Discussion
The application of the IRS’s waiver of 2020 RMDs can be confusing for qualified retirement plans, because the plan sponsor can choose whether it will suspend all RMDs for 2020 or continue to distribute RMDs as usual under the terms of the plan.[1] Plans have the ability to distribute a participant’s plan balance without his or her consent once the assets are no longer “immediately distributable,” which is the later of the time a participant attains normal retirement age or age 62 [Treasury Regulation 1.411(a)-11(c)(4)]. Consequently, despite the IRS not treating the distribution as an RMD for 2020, a plan may continue to force the payment for the year. A likely reason would be to maintain consistent distribution processing procedures from year to year.
There is good news for your client, however. While, typically RMDs are ineligible for rollover [IRC Sec. 402(c)(4)(B)], in this case, because the IRS does not consider the distribution as an RMD for 2020 (as a result of the CARES Act waiver), your client may roll over the amount—if it is otherwise eligible. (Note that the plan does not have to offer a direct rollover of the distributed amount; a 60-day indirect rollover would still remain an option.) Furthermore, a qualified retirement plan is not allowed to withhold 20% for federal tax purposes; instead, a 2020 RMD is subject to the 10% optional withholding rules under IRC § 3405(b).
IRS Notice 2020-51, released in June 2020, provides, in part, some additional clarification for amounts that otherwise would have been 2020 RMDs but for the waiver:
- the deadline for rolling over 2020 RMDs is the later of Aug. 31, 2020, or 60 days after the distribution;
- a 2020 RMD that is rolled over does not count toward the one-rollover-per-12-month rule applicable for IRA-to-IRA rollovers;
- beneficiaries (spouse and nonspouse) are allowed to roll over 2020 RMDs as well; and
- a 2020 RMD from a plan may be rolled back into the same plan, provided the plan permits rollovers
Conclusion
Despite the temporary waiver of RMDs for 2020 allowed under the CARES Act, qualified plans may still choose to distribute such amounts. The IRS released additional guidance in IRS Notice 2020-51. Consequently, it is imperative for participants and their financial advisors to know how their plans intend to address the optional 2020 RMD waiver and plan accordingly.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2020, Retirement Learning Center, LLC. Used with permission.
[1]The 2020 RMD waiver does apply to defined benefit plans.
