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A Closer Look: Suspension of Required Minimum Distributions

Return to Summary Table of COVID-19 Legislation for Employer-Based Retirement and Welfare Plans

Section 2203 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, waives required minimum distributions (RMDs) for defined contribution plans and IRAs for calendar year 2020. This provision recognizes that current participant account balances are generally significantly lower than the December 31, 2019 balances used in the RMD calculations. As a result, the 2020 RMDs are likely to be overstated, and require participants to take taxable distributions that lock in losses at a time when the value of their investments are low.

The waiver applies to:

any RMD required to be paid in 2020; and
2019 RMDs that are required to be made by April 1, 2020 (if not already made in 2019).

For purposes of determining RMDs after 2020, an individual's required beginning date is determined without regard to this 2020 waiver.

Types of Plans
This provision applies to:

Defined contribution 401(a) plans (including 401(k) plans);
403(b) plans;
Governmental 457(b) plans; and
IRAs.

It does not apply to qualified defined benefit plans or to 457(b) plans sponsored by tax-exempt employers.

Implementation Options
Plan sponsors that are subject to the RMD waiver may choose to:

Suspend payment of 2020 RMDs unless the participant elects to receive payment;
Continue payment of 2020 RMDs unless the participant elects to suspend payment; or
Take the first approach with respect to all participants except those who are receiving their RMD as part of scheduled installment payments, in which case take the second approach.

However, not all retirement plan vendors are giving plan sponsors a choice as to how to implement the RMD waiver. Rather, some vendors have made decisions as to when they will suspend and when they will continue RMD payments, and plan sponsors cannot deviate from those decisions. Accordingly, plans with multiple vendors may in actual operation be implementing the RMD waiver in different ways. Plans must be amended to reflect the RMD waiver rules that applied under the plan by the last day of the plan year beginning on or after January 1, 2022 (January 1, 2024 for governmental plans).

If a participant receives a withdrawal in 2020 that would otherwise be a RMD, he or she may be able to roll over the amount to an eligible retirement plan. The IRS permitted such rollovers and extended the 60 day rollover period in addressing a similar RMD suspension in 2009 under the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) in Notice 2009-82. The IRS may issue similar guidance under the CARES Act.

Taxation

If an eligible rollover distribution paid in 2020 would have been a RMD for 2020 but for the waiver, the distribution is not subject to the direct rollover rules, 20% mandatory withholding requirement, or the 402(f) notice. Accordingly, 10% withholding will apply, unless the participant elects out of withholding.

Death Beneficiaries

The CARES Act suspends the requirement to pay all RMDs that would otherwise be required to be paid in 2020 with respect to defined contribution plans. For beneficiaries, this means that no beneficiary who is receiving annual RMD payments from an eligible retirement plan is required to receive a 2020 RMD by December 31, 2020. Employers may choose to address 2020 RMD payments to beneficiaries in the same manner they have chosen to handle payments to participants, which may differ based on their withdrawal type.

Some beneficiaries are governed by the five-year rule and are not required to receive annual RMD payments under the life expectancy rule. This would apply to non-individual beneficiaries (such as a trust or charity) when the participant dies before his or her required beginning date. In this situation, the entire account balance is required to be paid out by December 31 of the fifth calendar year following the year of the participant's death (and no amount of the account is required to be paid before that time). The CARES Act provides that calendar year 2020 is disregarded for purposes of applying the five-year rule. Therefore, these beneficiaries have the option to not take a distribution of their account in 2020 if their five-year period would otherwise end in 2020, and/or to disregard calendar year 2020 when determining their five-year period.

Note that in all cases, a beneficiary is not required to receive a RMD in the year of death. So for plan participants who die in calendar year 2020, RMD requirements will not apply to their beneficiaries in 2020, and the earliest payment date would be 2021. The beneficiary RMDs due in 2021 that relate to 2020 deaths are not impacted by the CARES Act.

Any RMD payments made to beneficiaries in 2020 are subject to 10% tax withholding, unless the beneficiary elects out of withholding.

For more information about the employee benefit implications of the COVID-19 pandemic and how they might affect your employee benefit plans, please contact any one of Ice Miller's Employee Benefits attorneys. Please contact our COVID-19 Task Force if you have any questions about managing the risks of the coronavirus pandemic. Also see our Coronavirus (COVID-19) Resource Center for additional resources, which is updated daily.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.