This article is Part III of a series on coronavirus relief offered by the CARES Act. For information on coronavirus-related distributions, see Part I, and for plan loans, see Part II.
Minimum Distribution Requirements
Anyone who was at least age 70½ during 2019 would generally be required to receive a required minimum distribution (RMD) from their IRA or retirement plan during 2020. This age was raised to 72 for individuals who attained age 70½ during 2020 or later, and the requirement is waived in general for individuals who have not yet retired and who are not 5% owners with respect to employer-sponsored retirement plans (other than SEP-IRAs).
For participants whose first RMD was due for the 2019 calendar year, that is, individuals who turned age 70½ in 2019 and who were either 5% owners or retired, or who were already over age 70½ but only retired during 2019, their required beginning date was April 1, 2020. For others who had previously commenced RMDs, they are required to receive an RMD no later than December 31 of each year.
For defined contribution plans (including 401(k) plans and profit sharing plans) and IRAs, the amount of the RMD is calculated by taking the account balance at the end of the prior calendar year and dividing it by a life expectancy factor. The effect of this is that the 2020 RMD is based on the account balance as of December 31, 2019. However, many individuals’ account balances have declined significantly since the beginning of the year. As a result the 2020 RMD amount would now represent a disproportionately larger portion of their account.
Requirements Waived
Section 2203 of the CARES Act waives all RMDs with due dates during 2020 with respect to defined contribution plans and IRAs. Unlike the distribution and loan provisions of section 2202, there is no requirement that an individual be a qualified individual in order to receive this relief - it is available to everyone.
Note that RMDs from defined benefit plans (including cash balance plans) are not affected by this section.
For individuals whose first RMD was due on April 1, 2020, they now do not need to receive an RMD until 2021, whereas without this relief they would have needed to take 2 RMDs during the 2020 calendar year. If they already took their first RMD during calendar year 2019, there is no relief for that RMD, however they do still receive relief with regard to the RMD which would have been due by December 31, 2020.
Eligible for Rollover
For individuals who have already taken a 2020 RMD, that payment is now eligible for rollover. The amount withdrawn may be rolled over to a qualified plan or IRA within 60 days.
Plan Operations
Most qualified plans will contain language requiring that RMDs are made every year once participants reach their required beginning date. Although there is no longer a required distribution for 2020 under the CARES Act, a plan must always be operated in accordance with its written plan document. Therefore if a plan sponsor does not wish to make distributions to participants who are past their required beginning dates in 2020, they must adopt a plan amendment. The due date to adopt the amendment is December 31, 2022 for calendar year plans.
Please don’t hesitate to contact us if you have any questions about how the minimum distribution requirements will affect you or your plan participants in 2020.
Part IV of this series will discuss issues affecting defined benefit plans.