Financial Institutions Granted Relief for Issuing Erroneous Notices of RMDs Due to SECURE Act Changes if Corrected Notices Issued by April 15, 2020
In Notice 2020-06[1] the IRS has provided some relief to financial institutions due to the late change in the determination of IRA account owners who have required minimum distributions that was part of the SECURE Act. The SECURE Act was included as part of the Further Consolidated Appropriations Act, 2020 signed into law in late December.
The notice explains the requirements institutions have for reporting required minimum distributions due from IRA accounts they maintain:
If an IRA owner has an RMD due for 2020, the financial institution that is the trustee, custodian, or issuer maintaining the IRA must file a 2019 Form 5498 (IRA Contribution Information) by June 1, 2020, and indicate by a check in Box 11 that an RMD is required for 2020. The financial institution may also choose to provide further information in Box 12a (RMD Date) and Box 12b (RMD Amount). Additionally, under Notice 2002-27, 2002-1 C.B. 814, if an IRA owner has an RMD due for 2020, the financial institution must furnish an RMD statement to the IRA owner by January 31, 2020, that informs the IRA owner of the date by which the RMD must be distributed, and either provides the amount of the RMD or offers to calculate that amount upon request.
The RMD statement required under Notice 2002–27 should not be sent to IRA owners who will attain age 70½ in 2020. [2]
Of course, financial institutions are used to this deadline, and most likely have systems in place to automatically generate those notices based on the prior law. However, those systems are set to issue initial RMD notices to those who will attain age 70 ½ during 2020, along with notices for all of those who had received notices in earlier years.
The SECURE Act, especially in its phase-in period, has complicated this matter.
Those who attained age 70 ½ before the end of 2019 will receive notices based on the same rules as applied in prior years and thus will need to receive RMD notices for 2020 even though they may not attain age 72 before the end of 2020; and
Those who attain age 70 ½ after 2019 will be subject to RMD notices under the new rules, triggered in the year in which they attain age 72. None of these IRA owners should receive a notice indicating that an RMD is required for 2020, as none of them will attain age 72 in 2020.
Reprogramming software to take into account these distinctions will not be a simple process, and it will take time to program the systems and test them. Financial institutions have protested that these systems will not be revised and properly tested by the time the notices of RMD amounts are due to IRA owners on January 31, 2020.
The IRS therefore has decided to turn a blind eye to the fact that financial institutions may end up sending out erroneous RMD notices to taxpayers attaining age 70 ½ in 2020. The Notice provides:
…[I]n recognition of the short amount of time after the enactment of the SECURE Act that financial institutions have had to change their systems for furnishing the RMD statement, relief is being provided. Under this relief, if a financial institution provides an RMD statement to an IRA owner who will attain age 70½ in 2020 (including by providing a Form 5498), then the Internal Revenue Service (IRS) will not consider such a statement to have been provided incorrectly, but only if the IRA owner is notified by the financial institution no later than April 15, 2020, that no RMD is required for 2020.[3]
While the notice appears to allow for an initially wrong account holder copy of Form 5498 to go to the account holder showing a 2020 required minimum distribution, the notice implies that the agency expects the Forms 5498 eventually filed with the IRS will not have that error on the form, as the notice states:
For IRA owners who will attain age 70½ in 2020, the 2019 Form 5498 should not include a check in Box 11 or entries in Box 12a or 12b.[4]
The IRS uses this notice to ask a favor of financial institutions to remind those who turned 70 ½ in 2019 that they still must take distributions, stating:
The SECURE Act did not change the required beginning date for IRA owners who attained age 70½ prior to January 1, 2020. In order to reduce misunderstanding among IRA owners, the IRS encourages all financial institutions, in communicating these RMD changes, to remind IRA owners who attained age 70½ in 2019, and have not yet taken their 2019 RMDs, that they are still required to take those distributions by April 1, 2020.[5]
Since financial institution and plan software may still show RMDs for those that will attain age 70 ½ in 2020, some may start making distributions that are meant to be RMDs for that category of taxpayers—and tell them that, as RMDs, they are not eligible to be rolled over. The IRS recognizes this issue, but has not yet decided how to deal with the issue:
The Department of the Treasury and the IRS are considering what additional guidance should be provided with respect to the SECURE Act, including guidance for plan administrators, payors, and distributees if a distribution to a plan participant or IRA owner who will attain age 70½ in 2020 was treated as an RMD.[6]
What this all means is that certain clients of advisers will receive documents in the next few days erroneously telling the client that he/she has a required minimum distribution that must be taken for 2020 since he/she will attain age 70 ½ before the end of 2020. Some of those clients may end up taking some or all of what they believe are required minimum distributions before discovering, either when the adviser tells the client or when the client receives the corrected statement from the financial institution, that they have no required distributions for 2020.
Preferably, the client will be told the truth prior to taking any distributions from the plan or IRA. But, if not, the adviser will need to watch for the IRS guidance on whether any relief will be available and, if so, what steps the taxpayer will need to take.