Guidance has been issued by the IRS to deal with the removal of required minimum distributions from various retirement accounts added by Section 2203 of the CARES Act in Notice 2020-51.[1] The Notice indicates that it does the following:

Permits rollovers of waived required minimum distributions (RMDs) and certain related payments, including an extension of the 60-day rollover period for certain distributions to August 31, 2020;
Answers questions relating to the waiver of 2020 RMDs; and
Provides a sample plan amendment that, if adopted, would provide participants a choice whether to receive waived RMDs and certain related payments.[2]

Rollover of Certain Distributions No Longer Treated as RMDs

The guidance provides relief for taxpayers that took amounts they believed were required minimum distributions for 2020 that, due to the CARES Act, were no longer required to be taken in 2020. The Notice provides that the following distributions from a plan other than a defined benefit plan may be rolled over, provided that all other rollover rules are satisfied:

Distributions to a plan participant paid in 2020 (or paid in 2021 for the 2020 calendar year in the case of an employee who has a required beginning date of April 1, 2021) if the payments equal the amounts that would have been RMDs in 2020 (or for 2020), but for section 2203 of the CARES Act (2020 RMDs), or are one or more payments (that include the 2020 RMDs) in a series of substantially equal periodic payments made at least annually and expected to last for the life (or life expectancy) of the participant, the joint lives (or joint life expectancies) of the participant and the participant’s designated beneficiary, or for a period of at least 10 years; and
For a plan participant with a required beginning date of April 1, 2021, distributions that are paid in 2021 that would have been an RMD for 2021 but for section 2203 of the CARES Act (as described in Q&A-5 of section V of this notice).[3]

Q&A 5, referenced in the above bullet point, reads as follows:

Q-5. How does § 401(a)(9)(I) impact an employee who has a required beginning date of April 1, 2021?

A-5. Section 401(a)(9)(I) waives the RMD for 2020 regardless of whether the employee’s required beginning date is April 1, 2021. Thus, for example, if an employee who is not a 5% owner attained age 70½ before January 1, 2020, and retires in the 2020 calendar year, that employee’s required beginning date is April 1, 2021. Pursuant to § 401(a)(9)(I), the employee is not required to receive an RMD for 2020 before April 1, 2021, but must still receive the RMD for the 2021 calendar year by December 31, 2021. If the employee receives a distribution during 2021, then under the rules of § 1.402(c)-2, Q&A-7, that distribution is an RMD for the 2021 calendar year to the extent the total RMD for 2021 has not been satisfied even if the distribution is made on or before April 1, 2021, and accordingly, is not an eligible rollover distribution pursuant to § 402(c)(4)(B). However, to the extent the RMD for 2021 has been satisfied, subsequent amounts distributed in 2021 that would otherwise not be eligible rollover distributions pursuant to § 402(c)(4)(A) and § 1.402(c)-2, Q&A-5, may be rolled over consistent with the rollover guidance provided in section III.B.2 of this notice.[4]

The Notice first describes relief available to those receiving a covered distribution from an employer retirement plan:

To assist plan participants who have already received distributions in 2020, the Treasury Department and the IRS, pursuant to § 402(c)(3)(B), are extending the 60-day rollover period for any payments described in section III.A and section III.B of this notice so that the deadline for rolling over such a payment will not be before August 31, 2020. For example, if a participant received a single-sum distribution in January 2020, part of which was treated as ineligible for rollover because it was considered an RMD, that participant will have until August 31, 2020, to roll over that part of the distribution. In addition, the Treasury Department and the IRS, pursuant to § 408(d)(3)(I), are extending the 60-day rollover period for IRA distributions in 2020 that would have been an RMD in 2020 but for section 2203 of the CARES Act or section 114 of the SECURE Act, so that the deadline for rolling over such distributions will not be before August 31, 2020.[5]

So long as a plan allows for rollover contributions, the amount can be rolled back into the same plan.[6]

The Notice continues to provide similar relief to IRA recipients and, most importantly for many who received monthly payments, gives relief from the one rollover per 12-month rule as well as allowing beneficiaries holding inherited IRAs to also return the funds:

In the case of an IRA owner or beneficiary who has already received a distribution of an amount that would have been an RMD in 2020 but for section 2203 of the CARES Act or section 114 of the SECURE Act, the recipient may repay the distribution to the distributing IRA, even if the repayment is made more than 60 days after the distribution, provided the repayment is made no later than August 31, 2020. The repayment will be treated as a rollover for purposes of § 408(d)(3) of the Code, but will not be treated as a rollover for purposes of the one rollover per 12-month period limitation in § 408(d)(3)(B) and the restriction on rollovers for nonspousal beneficiaries in § 408(d)(3)(C).[7]

Sample Plan Amendment

The Notice provides a sample plan amendment that may be adopted to implement IRC §401(a)(9)(l) as added by the CARES Act. The amendment, along with employer adoption agreement options, is found in the Appendix at the end of the Notice.

The IRS sample amendment provides participants and beneficiaries a choice to receive or not receive what otherwise was going to be a required distribution. As the Notice describes the issue:

The sample amendment provides participants and beneficiaries the choice between receiving and not receiving distributions described in section III.B of this notice. The sample plan amendment has no impact on other distribution provisions. For example, a 75-year-old retiree’s request to have her remaining plan account balance distributed in 2020 in a lump sum, or in five approximately equal annual installments over a period that includes 2020, would not be affected by the amendment.[8]

While an employer is not required to use the sample language and can make other amendments, the IRS makes clear that employers will not be allowed to simply remove the ability to take an RMD for 2020:

Employers may adopt other amendments pursuant to section 2203 of the CARES Act. However, the Treasury Department and the IRS are exercising their authority under section 2203(c) of the CARES Act to deny § 411(d)(6) relief for a plan amendment that eliminates an optional form of benefit. Thus, for example, if plan language provides for a distribution of amounts equal to the 2020 RMD to a participant or beneficiary without regard to § 401(a)(9)(I), then an amendment to eliminate the right to take that distribution would violate § 411(d)(6)(B). Similarly, if plan language automatically suspends a distribution of amounts equal to the 2020 RMD to a participant or beneficiary pursuant to § 401(a)(9)(I), then an amendment to eliminate the right to defer that distribution would also violate § 411(d)(6)(B). By contrast, an employer will not have eliminated an optional form of benefit in violation of § 411(d)(6)(B) merely because the plan’s default for whether a distribution occurs in the absence of a participant’s or beneficiary’s election is different than the default for whether a distribution occurs in the absence of a plan amendment. [9]

The Notice describes the options made available to the employer when adopting the sample amendment:

The format of the sample plan amendment generally follows the design of preapproved plans that employ a “basic plan document” and an “adoption agreement.” Thus, the sample plan amendment includes language designed for inclusion in a basic plan document and language designed for inclusion in an adoption agreement to allow the employer to select among options related to the application of the basic plan document provision. Sponsors of plans that do not use an adoption agreement (including employers using individually designed plans) should modify the format of the amendment to incorporate the desired options in the terms of the amendment.

The first option provides that the default that applies in the absence of a participant’s or beneficiary’s election is to pay out distributions that include 2020 RMDs, and the second option provides that the default that applies in the absence of a participant’s or beneficiary’s election is to suspend distributions that include 2020 RMDs. An employer may choose either option, regardless of current plan language. However, an employer must select one of these options and must include in the adoption agreement the date as of which the plan begins operating in accordance with these terms.

The sample plan amendment also provides an employer three options with respect to the availability of direct rollover choices for distributions in 2020, with the default being that the plan offers a direct rollover option only for pre-CARES Act eligible rollover distributions (that is, a direct rollover option is not offered for 2020 RMDs or for amounts that may be rolled over solely due to the rollover guidance provided in section III.B of this notice). The first option provides for the availability of a direct rollover of only 2020 RMDs. The second option provides for the availability of a direct rollover of 2020 RMDs and of other amounts that may be rolled over pursuant to the rollover guidance provided in section III.B of this notice (the latter amounts referred to as “Extended 2020 RMDs” in the sample amendment). The third option provides for the availability of a direct rollover of the entire amount of a distribution but only if the distribution consists of part or all of a 2020 RMD amount and an additional amount that is an eligible rollover distribution without regard to § 401(a)(9)(I). [10]

The Notice reminds plan sponsors of the deadline for adoption of such an amendment:

Under section 2203(c) of the CARES Act, any plan amendment pursuant to section 2203 must be adopted no later than the last day of the first plan year beginning on or after January 1, 2022 (January 1, 2024, for governmental plans), and must reflect the operation of the plan beginning with the effective date of the plan amendment. The timely adoption of the amendment must be evidenced by a written document that is signed and dated by the employer (including an adopting employer of a pre-approved plan).[11]

IRAs do not need to be amended for the waiver of the RMD rules.[12]

Other Issues

The Notice ends with a series of Q&As that explain issues related to the suspension of the required distributions for 2020. Selected questions of interest are discussed below.

The Notice provides that the suspension of RMDs would serve to extend the time period for a beneficiary inheriting an interest to choose between a 5-year or life expectancy distribution:

Q–2. For a plan that permits an employee or beneficiary to elect whether RMDs are determined using the 5-year rule in § 401(a)(9)(B)(ii) or the life expectancy rule in § 401(a)(9)(B)(iii) and (iv), does § 401(a)(9)(I) extend the time for making the election?

A–2. Yes, if a plan permits an employee or beneficiary to elect whether the 5-year rule or the life expectancy rule applies in determining RMDs, then the deadline for making that election typically would be the end of calendar year following the calendar year of the employee’s death. For example, if a 50-year-old employee in a plan providing the election described in § 1.401(a)(9)–3, Q&A–4(c) died in 2019 with his sister as his designated beneficiary, the plan provision would require the election by the end of 2020. However, pursuant to § 401(a)(9)(I), that type of plan may be amended to permit the extension of the election deadline to the end of 2021.[13]

Similarly, the time period for a non-spouse beneficiary to make a direct rollover is also extended:

Q–3. Does § 401(a)(9)(I) extend the time for making a direct rollover for a nonspouse designated beneficiary pursuant to § 402(c)(11)?

A–3. Yes, § 401(a)(9)(I) extends the time for making a direct rollover for a nonspouse designated beneficiary if the participant died in 2019. The “special rule” at Q&A–17(c)(2) in Notice 2007–7, 2007–1 C.B. 395, provides that if the 5-year rule applies to a benefit under a plan, the nonspouse designated beneficiary may determine the amount that is not eligible for rollover because it is an RMD using the life expectancy rule in the case of a distribution made prior to the end of the year following the year of death. This special rule in Notice 2007–7 is hereby modified so that if the employee’s death occurred in 2019, the nonspouse designated beneficiary has until the end of 2021 to make the direct rollover and use the life expectancy rule.[14]

Q&As 4 and 5 deal with the impact on an individual’s required beginning date:

Q-4. Does § 401(a)(9)(I) affect an individual’s required beginning date?

A-4. No, the waiver of 2020 RMDs under § 401(a)(9)(I) does not change an individual’s required beginning date. Thus, for example, if an individual has a required beginning date of April 1, 2020, and dies after April 1, 2020, then that individual will be treated as having died after his or her required beginning date regardless of whether that individual had commenced receiving distributions or had delayed commencing distributions until 2021 pursuant to § 401(a)(9)(I).

Q-5. How does § 401(a)(9)(I) impact an employee who has a required beginning date of April 1, 2021?

The relief provided in the Notice does not extend to all deadlines. Specifically, the Notice provides:

Q–6. Besides the extensions provided in Q&A–2 and Q&A–3 of this notice and the rollover guidance provided in section III of this notice, are any other deadlines extended or rollover requirements modified in light of section 2203 of the CARES Act?

A–6. No, section 2203 of the CARES Act and section III of this notice address only certain deadlines and rollover requirements. Thus, for example, there is no extension of the deadline of September 30 following the year of death in § 1.401(a)(9)–4, Q&A–4 (relating to the determination of designated beneficiaries); the October 31 deadline in § 1.401(a)(9)–4, Q&A–6(b) (relating to the date by which the trustee of a trust that is a plan’s designated beneficiary must provide the plan administrator certain information); or the last-day-of-the-year deadline in § 1.401(a)(9)–8, Q&A–2(a)(2) (relating to the date by which separate accounts must be established). Similarly, if a participant or beneficiary dies in 2020, there is no extension of the 5-year period described in § 401(a)(9)(B)(ii) or the 10-year period described in § 401(a)(9)(H)(i) or § 401(a)(9)(H)(iii), as applicable.[16]

The interaction with spousal consents is described in the Notice:

Q–7. For a plan subject to §§ 401(a)(11) and 417, is spousal consent required to suspend distributions that include 2020 RMDs and restart distributions in 2021?

A–7. A plan subject to §§ 401(a)(11) and 417 may provide for either option described in Q&A–8 of Notice 97–75, 1997–2 C.B. 337, choosing whether or not to have a new annuity starting date when distributions restart. If the plan does not provide for a new annuity starting date, spousal consent is not required under most circumstances. If the plan provides that there is a new annuity starting date, spousal consent may be required for the suspension of distributions that include 2020 RMDs and the restart of distributions in 2021, depending on the form of distribution in each case.[17]

The Notice discusses how these rules interact with the mandatory withholding rules for rollover distributions:

Q–9. Does a payor have the option of treating a 2020 RMD paid from a plan in 2020 as subject to the mandatory 20-percent withholding rate for eligible rollover distributions under § 3405(c)?

A–9. No. Under the last sentence of § 402(c)(4), a 2020 RMD that is paid from a plan in 2020 is not treated as an eligible rollover distribution for purposes of the withholding rules under § 3405. For example, if a plan makes a distribution in 2020 to a retiree of his entire account balance under the plan and part of the distribution is a 2020 RMD, the portion of the distribution that is not a 2020 RMD is an eligible rollover distribution and is subject to the 20-percent mandatory withholding rules under § 3405(c), and the portion of the distribution that is a 2020 RMD is not an eligible rollover distribution for purposes of § 3405(c) and is subject to the 10-percent optional withholding rules under § 3405(b). On the other hand, if the retiree was receiving monthly distributions from the plan that exceeded his RMDs and that are expected to last for a period of at least 10 years, then the entire amount of each distribution is subject to the periodic-payment optional withholding rules under § 3405(a).[18]

The Notice also clarifies that the removal of the RMD requirement for 2020 does not provide relief for a taxpayer receiving substantially equal periodic payments to escape a premature distribution tax under IRC §72(t):

Q–10. Does § 401(a)(9)(I) apply to payments that are part of a series of substantially equal periodic payments under the “RMD method” (a series of payments described in Notice 89–25 and Rev. Rul. 2002–62 that are designed to satisfy the § 72(t)(2)(A)(iv) exception to the 10-percent additional tax under § 72(t)) so that the cessation of the payments for 2020 would not be considered a modification under § 72(t)(4)?

A–10. No. Section 401(a)(9)(I) does not apply to these payments; accordingly, if they are stopped in 2020 (other than because of death or disability) prior to age 59½ (or prior to 5 years from the date of the first payment), the cessation of the payments is a modification under § 72(t)(4) so that all the payments made under the series are subject to a recapture tax under § 72(t)(4).[19]

As well, the Notice indicates this relief does not extend to defined benefit plans even if they are calculating RMDs as if the distributions were coming from an individual account plan:

Q-12. Does the waiver of 2020 RMDs apply in the case of a distribution from a defined benefit plan that uses the rule in § 1.401(a)(9)-6 Q&A-1(d)(1) (under which the plan determines the portion of a single sum distribution that is an RMD as if the plan were an individual account plan)?

A-12. No, the waiver of 2020 RMDs under § 401(a)(9)(I) does not apply to a defined benefit plan. This is the case even if the defined benefit plan is using the rule in § 1.401(a)(9)-6 Q&A-1(d)(1) to determine the portion of a single sum distribution that is an RMD.[20]

[1] Notice 2020-51, June 23, 2020, https://www.irs.gov/pub/irs-drop/n-20-51.pdf (retrieved June 23, 2020)

[2] Notice 2020-51, Section I

[3] Notice 2020-51, Section III.B

[4] Notice 2020-51, Section V

[5] Notice 2020-51, Section III.C

[6] Notice 2020-51, Section V, Q&A 8

[7] Notice 2020-51, Section III.D

[8] Notice 2020-51, Section IV

[9] Notice 2020-51, Section IV

[10] Notice 2020-51, Section IV

[11] Notice 2020-51, Section IV

[12] Notice 2020-51, Section V, Q&A 1

[13] Notice 2020-51, Section V, Q&A 2

[14] Notice 2020-51, Section V, Q&A 3

[15] Notice 2020-51, Section V, Q&As 4, 5

[16] Notice 2020-51, Section V, Q&A 6

[17] Notice 2020-51, Section V, Q&A 7

[18] Notice 2020-51, Section V, Q&A 9

[19] Notice 2020-51, Section V, Q&A 10

[20] Notice 2020-51, Section V, Q&A 12