The RMD Waiver for RMDs Already Distributed

“I read that the CARES Act waives all required minimum distributions (RMDs) for retirement plans such as our 403(b) plan for 2020. But what about participants who turned 70 ½ in 2019 and already took their required distribution prior to the CARES Act being issued? I know that their initial distribution could have been delayed until April 1, but all of our participants took theirs well before the deadline.”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

With the caveat that, as with many provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act—a massive piece of legislation that was enacted extremely quickly—it is probably going to take some clarifying guidance to provide a definitive answer in this regard, here is what the relevant section of the legislation says (boldface text reflects the Experts’ emphasis):

“(a) IN GENERAL.—Section 401(a)(9) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subparagraph:

(I) TEMPORARY WAIVER OF MINIMUM REQUIRED DISTRIBUTION.—

(i) IN GENERAL.—The requirements of this paragraph shall not apply for calendar year 2020 to—

(I) a defined contribution plan which is described in this subsection or in section 403(a) or 403(b),

(II) a defined contribution plan which is an eligible deferred compensation plan described in section 457(b) but only if such plan is maintained by an employer described in section 457(e)(1)(A), or

(III) an individual retirement plan.

(ii) SPECIAL RULE FOR REQUIRED BEGINNING DATES IN 2020.—Clause (i) shall apply to any distribution which is required to be made in calendar year 2020 by reason of—

(I) a required beginning date occurring in such calendar year, and

(II) such distribution not having been made before January 1, 2020.“

So, clause (ii) of this provision specifically addresses distributions with a required beginning date in 2020, such as the initial RMDs you described in your question that were due April 1. If the distribution had a required beginning date in 2020 and was not made before January 1, then the minimum distribution rules shall not apply for such distributions.

Unfortunately, this means that, for your participants who were particularly timely with their RMDs and took them prior to January 1, 2020, the new waiver does NOT apply to them, and they will be taxed on the RMD they took in 2019, though it was not technically due until April 1. For those participants who took their RMDs on or after January 1, however, it would appear that the waiver DOES apply to them, even if the distribution was taken prior to the enactment of the CARES Act.

However, the CARES Act is silent on the issue about how this RMD that is not actually an RMD anymore can be remedied, so we will need IRS guidance on the issue. The last time a waiver occurred, in 2009, the IRS allowed for rollover of the distribution, though it should be noted that the situation in 2008 is not quite the same as the current one. In 2009, 2008 RMDs with a required beginning date in 2009 were NOT waived. Rollovers of such distributions are generally limited to direct rollovers or an indirect rollover within a 60-day window. However, the IRS recently extended the indirect rollover deadline in separate guidance, for distributions received on or after February 1 of this year, such that rollovers of such amounts may be made anytime through July 15.

In addition, presumably, these distributions could be treated as COVID-19 distributions for those who are individuals qualified to receive such distributions under the CARES Act, which would mean that such individuals would have a full three years from the time of distribution to repay the former RMD back to the retirement plan from which it came, or roll over the distribution to another retirement plan or IRA.

At first glance, this particular provision of the CARES Act would seem to be a bit unfair to similarly situated participants (i.e., those who were more timely about taking their RMDs are facing taxation, whereas those who delayed benefitted). However, absent future guidance in this regard, this appears to be how the CARES Act applies to this situation.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.