RMD Rollover Extended to August 31, 2020

RMD Rollover Extended to August 31, 2020

Get Back, Get Back, Get Back to Where You Once Belonged…Get Back IRA…

IRS announces any individuals who took required minimum distributions (RMDs) from their IRAs or qualified plans in 2020 have until August 31 to roll the money back into their plan and not pay tax on the distribution in 2020.

A little background:

The CARES Act (PL 116-136) permits taxpayers with a required minimum distribution (RMD) due in 2020 from a pension plan or an IRA to skip those RMDs in 2020. This includes anyone who had turned age 70½ before the end of 2019 and elected to wait until April 1, 2020 to take their first RMD for 2019. The problem arose from the fact that the ability to skip the RMD didn’t become effective until the CARES Act was enacted on March 27.

What About Those People Who Took Their RMD Before March 27?

Originally these folks were left out of the RMD waiver relief. In other words, since they acted too early in 2020, the government was telling them they had no choice but to claim the income when they file their 2020 return.

Enter IRS Notice 2020-51 on June 23,2020.

In Notice 2020-51, the IRS provides relief for taxpayers who had already taken RMDs in 2020 before the CARES Act suspended the RMD requirement for 2020. Taxpayers who already took an RMD in 2020 from certain retirement accounts now have the opportunity to roll those funds back into a retirement account.

To give taxpayers time to take advantage of this change, the 60-day rollover period for any RMDs already taken this year has been extended to Aug. 31, 2020.

IRS Notice 2020-51 also has a question and answer section worth reviewing. I have highlighted with emphasis the questions and answers I believe would impact the greatest number of your clients.

Q–1. Do IRAs have to be amended for the waiver of required minimum distributions for 2020 pursuant to § 401(a)(9)(I)?
A–1. No, while the waiver of 2020 RMDs pursuant to § 401(a)(9)(I) applies to IRAs, an IRA does not have to be amended to reflect the waiver.

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. 

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. 

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?
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 8 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. 

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.

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.

Q–8. May distributions made from a plan be rolled over back into the same plan? 
A–8. Yes, distributions from a plan may be rolled over back into the same plan, provided the plan permits rollovers and the rollover satisfies the requirements of § 402(c), taking into account the relief provided in section III.B and C of this notice. 

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).

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). 

Q-11. Is an IRA trustee, issuer, or custodian required to notify IRA owners that no RMD is due for 2020? 
A-11. Yes, an IRA trustee, issuer, or custodian must notify an IRA owner that no RMD is due for 2020. This requirement is satisfied if a copy of the Form 5498 that is filed with the IRS is furnished to the IRA owner.

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.

Get Back Jo-Jo!

by Tom O’Saben, EA