The Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”) contained a number of provisions directly relating to 401(k) retirement plans. (See our article entitled “Congress Passes CARES Act in Response to COVID-19 Crisis, Contains 401(k) Ease-of-Access and Other Provisions” for details.) Among the many 401(k) provisions was a temporary suspension of required minimum distributions (“RMDs”) for the calendar year 2020 only.
Background. In general, 401(k) plan participants who are not still actively employed must begin taking RMDs from their plan accounts by no later than the April 1st following the year that they attain age 72 (prior to January 1, 2020, age 70 ½). The RMD rules are essentially a revenue raising measure, meant to prevent participants from deferring paying income tax on plan distributions indefinitely.
Neglecting to take RMDs can have serious consequences, including imposition of a 50% penalty tax on the amount that should have been withdrawn.
EXAMPLE: If you are required to take $10,000 as a RMD for 2021 and you only withdraw $6,000, you will, in effect, forfeit 50% of the remaining $4,000 to the IRS at tax time, resulting in a $2,000 loss. This is on top of regular income tax on the entire $10,000!
CARES Act Gave Relief – For One Year Only. To help assist participants and beneficiaries who might be adversely affected by the COVID-19 pandemic, the CARES Act included the one-year only suspension of RMDs for 2020. For participants or beneficiaries who had already taken an RMD for 2020, special rules were later released to allow these individuals to roll the amount of the RMD back into the plan without adverse consequences, as long as this was accomplished by no later than August 31, 2020.
Back to the Future. But with the turn of the new year 2021, we are back to the old rules – and back to RMDs. This means that, even if you got a break from having to take your RMD last year, you will have no such luck this year. Accordingly, unless you have since then returned to active work with the employer who sponsors your 401(k) plan, you must receive an RMD from your plan by no later than April 1, 2021. As always, you should consult with your own professional tax accountant or attorney for individualized advice as to the particulars of your situation.
For more information on RMDs, our article entitled “401(k) Plan Distributions and Vesting.”
The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.