RMD changes affected by SECURE and CARES Acts

The Required Minimum Distribution (RMD) rules for retirement plans have been greatly affected by the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief and Economic Security (CARES) Act. The changes are straightforward for Defined Contributions type plans (401(k)s) and Individual Retirement Accounts (IRAs), but a bit more complex for Defined Benefit plans. This may require clarification, and, most likely, a technical amendment of the Code.

The SECURE Act changed the starting age for RMD’s from age 70 ½ to age 72. Effective January 1, 2020, the Required Beginning Date (RBD) for RMD’s is as follows:

  • Those who turned 70 ½ in 2019 (born prior to July 1, 1949) have an RBD of April 1, 2020, or, if later, after separation from service.
  • Those who turned 70 ½ after December 31, 2019 (those born after June 30, 1949) will have an RBD of April 1, after the later of the year they reach age 72 or separation from service.
  • Keep in mind, a 5% owner and certain of their family members must begin minimum distributions at their required beginning date, regardless of separation from service.

CARES Act Eliminates RMD’s for 2020: Section 2203 of the CARES Act eliminated the RMD’s under Defined Contribution plans and IRAs to be made during 2020. The abrupt drop in the market since December 31, 2019, made it unfair to calculate and distribute an RMD based on the prior December 31 value. Thus, rather than distribute a disproportionate amount of the current value as an RMD, Congress has decided to waive RMD’s for 2020. This waiver does not affect Defined Benefit or Cash Balance Plans, whose RMDs are based on a benefit rather than an account balance.

For Defined Contribution (401(k)) plans and IRAs, those affected by the 2020 RMD waiver will include:

  • Anyone due to take an RMD during the 2020 calendar year
  • Anyone who was 70 ½ in 2019 and waited to take the first RMD during the grace period from January 1, 2020 to April 1, 2020. The CARES Act also included a provision that if the 2019 distribution was taken in early 2020, prior to enactment of the law, the distribution may be rolled back to the plan or an IRA and remain tax sheltered. We await guidance on whether the 60-day rule will be waived or this.
  • Five-year rule extended to six as follows. Based on how the IRS handled the RMD 2009 waiver; if 2020 is the fifth year after the year of a participant’s or IRA owner’s death, then the RMD requirement to take all the money out by the end of this (the fifth) year is waived and the money does not have to be distributed until the end of the following year. In addition, beneficiaries using the 5-year rule for a participant who died prior to 2019, add a year to the 5-year rule for the waiver of the 2020 RMD year.
  • Designated beneficiary 10-year rule. The additional year would seem to apply to the new 10-year rule if the participant died during 2020.

IRA Reporting Issue: IRA’s must notify IRA owners and the IRS that an RMD is due for the year. This notice was due to IRA owners by January 31, 2020. Since this law changed on December 20, 2019, institutions’ programs could not be timely changed to prevent this notice from going to individuals turning age 70 ½ in 2020. IRS Notice 2020-6 provided a grace period for institutions to notify these IRA owners that they are not required to take a distribution in 2020 (but rather in the year they turn 72) This had to be done by April 15, 2020. Further guidance is expected since the CARES Act eliminated RMD’s for everyone for 2020. Therefore, RMD Notifications made to everyone over 70 ½ also needs to be addressed.

The SECURE Act also included considerable changes to the beneficiary rules, eliminates the IRA rule that prohibits IRA contributions after age 70 ½ and made changes to the Qualified Charitable Distribution rules to coordinate with the post 70 ½ IRA contributions.

Post 70 ½ IRA Contributions: The restriction on the ability to make annual contributions to a traditional IRA as of the year age 70 ½ is attained, had been in place since IRA’s started in 1975. Section 107 of the SECURE Act repealed the maximum age for making a traditional IRA contribution (Roth IRA’s were never subject to this rule). Effective for tax years beginning on January 1, 2020, traditional IRA Contributions may continue to be made after age 70 ½ if an individual has earned income.

Qualified Charitable Donations: Generally, a Qualified Charitable Distribution (QCD) is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity. Although the age for RMDs has increased to 72, the age for QCDs remains 70 ½. With no RMD to be satisfied, the incentive to those who can wait until the age of 72 to take an RMD is expected to reduce the future QCD’s until RMD’s are due at age 72. Additionally, the elimination of RMD’s in general for 2020 has many charitable organizations concerned that QCD’s may drop dramatically for 2020. Section 107 of the SECURE Act also limits the amount of the IRA distribution that may be treated as a Qualified Charitable Distribution (QCD) based on the cumulative IRA deductible contributions made after age 70 ½.

Plan Administrative and Document Impact:  All plans must be amended to increase the Required Minimum Distribution age to 72, and defined contribution plans must be amended for the elimination of the 2020 RMD’s, although both Acts state that the due date for these amendments is the last day of the plan year beginning after December 31, 2021 (or the end of the 2022 Plan Year for calendar year plans). A plan termination amendment will need to include the changes until the actual plan document amendment deadline. Affected participants should be notified. EJReynolds sent a CARES Act election form to all clients and referral partners in April to document the Sponsor’s election of certain provisions and will continue to adjust, as necessary. Please contact your EJReynolds’ Plan Consultant with any questions.