IRS Issues Rollover Relief For RMDs Waived Under CARES Act

On June 23, 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-51 along with a related news release that permits 401(k) plan participants who took required minimum distributions (“RMDs”) in 2020 to roll over the amount of the distribution back into a 401(k) plan by no later than August 31, 2020. The guidance provides welcome relief for participants who, for example, had already taken RMDs prior to the CARES Act provision that rendered it unnecessary to do so.

Background. In response to the global pandemic, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law by President Trump on March 27, 2020. Among other things, the CARES Act eliminated the requirement to take RMDs from 401(k) retirement plans (as well as individual retirement accounts, or “IRAs”) for calendar year 2020 only.

Generally stated, the RMD rules are essentially a revenue-raising measure, meant to prevent participants from deferring paying income tax on 401(k) plan distributions indefinitely. In the absence of the CARES Act provision, 401(k) plan participants who attained 70½ in 2019 and were not still working would have been required to take RMDs by no later than April 1, 2020. (See our previous blog entitled “Congress Passes CARES Act in Response to COVI-19 Crisis, Contains 401(k) Ease of-Access and Other Provisions” for details.)

NOTE: This article is not intended to detail all the rules regarding the CARES Act provisions, including the waiver of RMDs for 2020, but merely to highlight the new guidance contained in Notice 2020-51 that applies to 401(k) plans. For a more complete explanation of the CARES Act’s 401(k) plan provisions, please refer to the earlier blog previously referred to above.

Because they represent money that is meant to be distributed and used, RMDs generally cannot be rolled back over, where the amounts would once again continue to enjoy tax-deferred treatment. Further, by statute rollovers generally must be accomplished within 60-days of the date of distribution in order to be valid. So, for example, if a participant took a distribution from a 401(k) plan on January 31, 2020, even if it was considered to be a regular distribution instead of an RMD, he or she normally would have to roll it over into another plan (or IRA) within 60 days, or by no later than March 31, 2020.

IRS Notice 2020-51 Comes to the Rescue. IRS Notice 2020-51 provides surprisingly broad relief, allowing anyone who took an RMD from a 401(k) plan during 2020 to roll over the amount of the distribution back into the same or another 401(k) plan. This allows not only participants who took RMDs prior to the enactment of CARES to reverse their decision, but other participants who may have taken RMDs post-CARES (the CARES Act waiver is optional), but now have “changed their minds.”

Furthermore, the deadline for making such tax-free rollovers is August 31, 2020, regardless of whether this date extends beyond the otherwise applicable statutory 60-day deadline.

EXAMPLE: A participant received a single-sum distribution from her 401(k) plan in January 2020. A portion of the distribution would normally be ineligible for tax-free rollover treatment because it was considered to be an RMD for calendar year 2020. Nevertheless, under Notice 2020-51, the participant may roll over into the same or another 401(k) plan the portion of the distribution that constitutes the RMD by no later than August 31, 2020 – notwithstanding the general prohibition against rolling RMDs back into a 401(k) plan, and without taking into consideration the otherwise applicable 60-day period rule.

Q&As Address Miscellaneous Issues and Two Sample Plan Amendments are Provided. Notice 2020-51 also includes a series of Q&As that address miscellaneous technical issues, some of which are only applicable to RMDs taken from IRAs, which are not addressed in this article. The Notice also provides two sample amendments that employers may adopt to give plan participants and beneficiaries a choice as to whether or not to receive waived RMDs.

OTHER COVID-19 RESOURCES:
For more information about how the COVID-19 crisis may affect your 401(k) plan and health & welfare plan, please see our previous blogs.

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.