5/16/2021 (updated 7/16/2021)
Candace J. Dixon
Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, enacted on March 27, 2020, provides for special distribution options and rollover rules for retirement plans and IRAs as well as expands permissible loans from certain retirement plans.
In addition, Section 209 of the CARES Act provides that a plan is not treated as having a partial termination during any plan year that includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by it on March 31, 2021 is at least 80% of the number covered on March 13, 2020.
Retirement plan account owners typically must take an annual RMD beginning the year they turn either 70 ½ or 72, depending on their birth date, and possibly the year they retire. Retirement plans requiring RMDs include: traditional, Simplified Employee Pension Plan (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) Individual Retirement Accounts; 401(k), 403(b), 457(b), profit sharing and other defined contribution plans.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the age that people have to start taking withdrawals from their retirement accounts. Someone who was born on or before June 30, 1949, was required to begin taking RMDs for the year they reached the age of 70½. Now, under the SECURE Act, if a person's 70th birthday is July 1, 2019, or later, they don't have to take their first RMD until the year they reach age 72.
The Coronavirus, Aid, Relief and Economic Security (CARES) Act waived RMDs during 2020, so seniors and retirees, including beneficiaries with inherited accounts, were not required to take money out of IRAs and workplace retirement plans. The waiver included RMDs for individuals who turned age 70½ in 2019 and took their first RMD in 2020.
If you reached age 70 ½ before 2020 and were still employed, but then terminated employment in 2020, you would normally have a 2020 RMD from your workplace retirement plan due by April 1, 2021. That RMD is also waived as part of the CARES Act relief. (Roth IRAs don't require withdrawals until after the death of the owner.)
2021 RMDs
If you turned 70 ½ in 2019 or earlier, you didn't have an RMD due in 2020, but you will have one due by December 31, 2021. If you didn't reach age 70 ½ in 2019 but will turn 72 in 2021, then your first RMD would be due by April 1, 2022, and your second RMD would be due by December 31, 2022.
You can make your first withdrawal by December 31, 2021 instead of waiting until April 1, 2022 to avoid having both amounts included in your income for the same year. After the first year, all RMDs must be made by December 31.
An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for them. Calculating the amount of the RMD depends on the type of IRA or if they are from multiple accounts. If you don't take a required minimum distribution or if you don't take enough, that could mean a 50% excise tax on the amount not distributed.
Some People Can Delay RMDs
While the April 1 deadline for taking the first RMD is mandatory for all owners of traditional IRAs, participants in workplace retirement plans who are still working can usually wait until April 1 of the year after they retire to start receiving distributions from these plans if their plan allows it.
People who reached age 70 ½ before 2020 and were still employed, but then terminated employment in 2020, would have a 2020 RMD due by April 1, 2021 from their workplace retirement plan. That RMD is also waived as part of the CARES Act relief. Employees of public schools or certain tax-exempt organizations should check with their employer, plan administrator or provider about how to treat these accruals.
Coronavirus-Related Distributions and Loans
The CARES Act relief made it easier for people affected by the coronavirus to access savings in IRAs and workplace retirement plans by providing favorable tax treatment for certain withdrawals from retirement plans and IRAs, including expanded loan options. Coronavirus-related distributions are not limited to amounts that correspond to an individual’s need for funds or any related financial consequences.
Distributions: A coronavirus-related distribution is a distribution made to qualified individuals from an eligible IRA or work retirement plan from January 1, 2020, through Dec. 30, 2020, up to a combined limit of $100,000 from all plans and IRAs, and would not be subject to the 10% additional tax on early distributions. While employers can choose whether or not to implement these coronavirus-related distribution and loan rules; you can still claim the tax benefits of the coronavirus-related distribution rules even if plan provisions aren't changed as long as you are a qualified individual. Plan administrators can rely on your certification and refer to IRS Notice 2020-50 - Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act.
Coronavirus-Related Distributions:
Are included in taxable income
Over a three-year period, one-third each year, or
If elected, in the year you take the distribution.
Are not subject to the 10% additional tax on early distributions (including the 25% additional tax on some SIMPLE IRA distributions) that usually applies before age 59 ½
Are not subject to mandatory tax withholding
May be repaid to an IRA or work retirement plan within three years beginning the day after the date you received the distribution. Repayments will be treated like eligible direct rollovers. Amounts repaid are not subject to any contribution or rollover limits. the distribution is treated as if you repaid it in a direct trustee-to-trustee transfer so you don’t owe federal income tax on the distribution; you can claim a refund for any income taxes paid on amounts previously included in income that were later repaid timely.
While hardship distributions are not normally an eligible rollover distribution, hardship contributions can be recontributed to an eligible retirement plan if it meets requirements to be a coronavirus-related distribution to a qualified individual,
Qualified Individuals: You are only considered to be a qualified individual for this relief if:
You, your spouse or dependent is diagnosed with COVID-19 after a CDC approved test;
You, your spouse, or a member of your household (meaning someone who shares your principal residence) experience adverse financial consequences as a result of:
Being quarantined, furloughed, laid off or having work hours reduced; being unable to work due to lack of childcare; having a reduction in income; or having a job offer rescinded or a start date delayed due to COVID-19; or
The closing or reducing hours of a business owned or operated by you, your spouse, or a member of your household, due to COVID-19.
RMDs: An IRA owner or beneficiary who received an RMD in 2020 had the option of returning it to their account or other qualified plan and avoid paying taxes on that distribution. RMDs in 2020 that were not rolled over or repaid may be eligible to be treated as coronavirus-related distributions if the individual is a qualified individual. A 2020 RMD that otherwise qualifies as a coronavirus-related distribution may be repaid over a 3-year period or have the taxes due on the distribution spread over three years.
A withdrawal from an inherited IRA to a qualified individual may also be a coronavirus-related distribution. Income from the withdrawal may be spread over three years for income inclusion; but the withdrawal may not be repaid to the inherited IRA.
Notice 2020-51 - Guidance on Waiver of 2020 Required Minimum Distributions provided that the one rollover per 12-month period limitation and the restriction on rollovers to inherited IRAs did not apply to repayments made by August 31, 2020. The RMD suspension did not apply to qualified defined benefit plans.
The CARES Act included special rules for plan loans made to qualified individuals. While plans could suspend loan repayments for up to one year, repayments typically resumed in January 2021, effectively giving six years instead of five to repay a plan loan.
You can refer to the IRS' Coronavirus-related relief for retirement plans and IRAs FAQs for additional information and updates.
Resources:
Coronavirus-related relief for retirement plans and IRAs FAQs
Publication 590-B, Distribution from Individual Retirement Arrangements (IRAs)
Notice 2020-50 - Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act
Notice 2020-51 - Guidance on Waiver of 2020 Required Minimum Distributions