New IRS Guidance Discusses Required Minimum Distribution Rollover Relief
7/7/2020Articles & Podcasts
The CARES Act was enacted in an attempt to mitigate the economic effects of the COVID-19 pandemic. Among other things, it extends favorable tax treatment to qualified individuals who take “coronavirus-related distributions” (CRDs) from IRAs, 401(k) plans and certain other retirement plans.
Rollover of RMDs
The CARES Act waives the Required Minimum Distribution (RMD) rules for certain defined contribution plans and IRAs for calendar year 2020. The waiver applies to both 2019 RMDs required to be taken by April 1, 2020, and RMDs required for 2020. It applies for calendar years beginning after December 31, 2019.
However, because the law was not enacted until late March 2020, some individuals had already taken RMDs for the year. If they wanted to roll over those now non-RMD distributions to an eligible retirement account, they needed to satisfy the rule that generally requires tax-free rollovers to be made within 60 days of distribution. Moreover, IRAs generally are subject to a “one-rollover-per-12 month” restriction.
The new IRS guidance permits an IRA owner or beneficiary who has already received a distribution that would have been an RMD for 2020 to repay it to the IRA by the later of 60 days after receipt or August 31, 2020 (non-spouse beneficiaries generally are prohibited from doing rollovers of distributions). The repayment is exempt from the one-rollover-per-12 month limit on IRAs.
Loans from Qualified Plans
Specifically, the CARES Act waives the 10% early distribution penalty for CRDs taken between January 1, 2020, and December 31, 2020. Under the law, the waiver applies to CRDs made to an individual:
Who is diagnosed with COVID-19,
Whose spouse or dependent is diagnosed with COVID-19, or
Who experiences adverse financial consequences as a result of COVID-19.These include being quarantined, furloughed or laid off; having work hours reduced; being unable to work due to lack of childcare; closing (or reducing the hours of) a business owned by the individual; or other factors determined by the Treasury Secretary.
IRS Notice 2020-50 expands the definition of qualified individuals for purposes of CRDs and plan loans to take into account additional factors, such as a reduction in pay or self-employment income, the rescission of a job offer and the delay of a start date for a job. In addition, the definition now also considers adverse financial consequences arising for the impact of COVID-19 suffered by an individual’s spouse or household member.
Eligible individuals can withdraw up to $100,000. They can repay withdrawn funds within three years of the day after the CRD without regard to the applicable cap on annual contributions. To the extent such early distributions are not repaid within three years or eligible for tax-free rollover treatment, the related income tax can be prorated over three years.
The CARES Act also allows plans to implement certain relaxed rules for qualified individuals on plan loan amounts and repayment terms. For example, plans can suspend loan repayments due from March 27, 2020, through December 31, 2020 (delaying each payment up to one year), and the limit on loans made on or after March 27, 2020, and before September 23, 2020, is increased from $50,000 to $100,000. The limit on the aggregate amount of loans in that period is increased from 50% of the employee’s vested accrued benefit to 100%.
Notice 2020-50 also makes it clear that the $100,000 limit on CRDs applies to a qualified individual’s aggregate CRDs from all eligible retirement plans — the limit does not apply on a per-plan basis. It explains that CRDs can be used for purposes not related to COVID-19 and that repayments to an IRA do not count against the one-rollover-per-12 months limit on IRA rollovers. It also warns that qualified individuals who elect to include the entire amount of a CRD in their 2020 income, rather than prorating it over three years, will be held to that choice after they file their 2020 income tax returns and they cannot subsequently revoke the election.
If you have questions about the CARES Act and its impact on RMDs, please contact a member of your DGC client service team or Sahri Zeger, JD, MBA at 781-937-5774 / firstname.lastname@example.org. You can also visit DGC's coronavirus web page at dgccpa.com/coronavirus which is frequently updated with new resources to help you deal with the financial impact of the coronavirus on you and your business.
If you would like to get alerts and insights like this sent directly to your inbox, sign up here.