As noted in a recent Update, the Setting Every Community Up for Retirement Enhancement Act of 2019 and related legislation (the SECURE Act), signed into law in late 2019, increased the age at which required minimum distributions (RMDs) must commence under retirement plans and individual retirement accounts (IRAs) from age 70½ to age 72, effective for distributions made after, and with respect to individuals who attain age 70½ after 2019.
The Coronavirus Aid, Relief and Economic Security Act (the CARES Act) takes this even further and waives all RMDs otherwise payable in 2020. This RMD waiver is not limited to those who are affected by COVID-19 and applies to RMDs from 401(k) plans, 403(b) tax-sheltered annuity plans (sponsored by nonprofits or certain governmental entities), 457(b) governmental plans and IRAs. This waiver applies to (i) any account owner already taking RMDs on account of turning age 70½ in any year prior to 2020, (ii) any account owner who turned 70½ in 2019 and did not take his or her RMDs in 2019 and (iii) all beneficiaries of inherited IRAs for decedents who died prior to 2020. The RMD waiver does not apply to distributions from defined benefit pension plans. Nevertheless, in these uncertain times, Congress has thrown retirees a lifeline by delaying taxable distributions and giving retirement accounts a year to recover rather than requiring retirees to liquidate investments during a bear market.
The CARES Act is effective now, and plan sponsors must determine whether any immediate action is required. In this regard, the waiver by a plan of the payment of RMDs is not a mandatory change for plans, and therefore each plan sponsor must decide whether to implement this change to its plan. Whether or not a plan implements this change, it should be noted that any amounts distributed in 2020 that would have been RMDs, absent the waiver, can be rolled over to another employer plan that accepts rollovers or to an IRA. However, the following exceptions to the usual rollover rules apply: (i) The plan making the distribution doesn’t have to make a direct trustee-to-trustee transfer, (ii) the mandatory 20 percent withholding on eligible rollover distributions does not apply and (iii) the plan does not need to provide a 402(f) rollover notice.
Plan sponsors should also consider what changes will be necessary in order to implement the requirements of the SECURE Act starting in 2021. At such time, employees who turned age 70½ after December 31, 2019, will be approaching the new RMD age of 72. Because the new RMD age of 72 is not a mandatory change for plans, each plan sponsor must decide whether to adopt this change to its plan. Plan amendments for both the SECURE Act and the CARES Act must be made before the last day of the first plan year beginning on or after Jan. 1, 2022.
