RMD suspension for 2020 | Ed Slott and Company, LLC

RMD suspension for 2020

It looks like my 401k plan isn't getting something right about the 2020 RMD suspension. This is a large plan for a major US company, with a big corporate recordkeeper, telling me the following:

- They will not force out an untaken RMD in December 2020 as is done in normal years. There are no notices about that, either on paper or on the website, but that is what they say on the phone.

- They will distribute the amount calculated for the 2020 RMD if requested, but they have advised that it is not eligible for rollover.

- They will not perform a direct rollover, payable to the receiving IRA, until the 2020 RMD amount is distributed first, payable to me.

I know that I can perform an indirect rollover but prefer to do it as a direct rollover, and without first taking the "RMD".

Are they correctly following the CARES Act?

It is surprising that a large plan would react in this manner, but the recordkeeper must adhere to the adopted plan procedures.   While they might not want to make system changes for one year, they could at least clarify on their site how they will handle this. Do they really want everyone to call in and talk to different reps and possibly receive conflicting guidance?  With respect to rollovers, any distribution in 2020 is eligible for rollover, but if they are treating  distributions as not eligible does that mean there is no 20% withholding? If you are going to request a distribution, you should be entitled to know whether they will withhold 20% or give you the option of declining withholding or changing the %.  However, the CARES Act only states that RMDs are waived, it does not mandate how employer plans must administer this. This plan is apparently doing a poor job of providing tranparency as well as making questionable administrative decisions but are not in violation of CARES.  GIven what you are saying, I would guess that this plan is not offering CRDs either.

  • To reply to your last point, yes, they do offer CRDs.  The participant website has some new screens with a certification that one or more of the qualifications has been met, along with a new screen for CRD distributions.  It also gives a choice for repayment options.
  • The screens for other distributions are unchanged from before the CARES act.  The first money of any distribution is still treated as being the RMD.  The payment detail screen shows the amount of the RMD as ineligible for rollover, and with no mandatory withholding, following RMD rules.  Any amount distributed over the RMD amount has a minimum 20% withholding as expected.  A direct rollover to an IRA custodian is only allowed in the online screens after satisfying the RMD.  The only change is that the call center agents have stated that any untaken portion of the RMD will not be forced out in December 2020.  Other than that, there seems to be no training for the agents, so they continue to say that the amount of the "2020 RMD" is not rollover eligible.
  • It seems to me that this is contrary to IRC 401(a)(31) and rule 1.401(a)(31)-1,Q&A-1.  Both of these refer to rollover eligible distributions.  Apparently the plan considers the first distributions to still be RMDs, since they are saying that they aren't eligible for rollover.  But that conflicts with the stated plan intention not to force out the RMD in December.  Why wouldn't this be a violation of CARES?
  • The demographics of the plan might explain why the plan is reluctant to perform a large software update solely for the year 2020.  According to the most recent form 5500 filed for the plan, there are some 30,000 active participants but fewer than 1,000 retirees or beneficiaries in payment status.
  • My concern is that, If I take the "2020 RMD", roll it over to an IRA and then convert to a Roth, will the plan reporting somehow flag my rollover as improper.  Does the plan report if any distribution is rollover eligible?
  • Is there anything that can be done about this apparent lack of compliance?  IRS?  Labor Department?

  • This is not a CARES violation. A plan can choose to ignore the RMD waiver and distribute amounts that would have been RMDs, but that does not make the distributions RMDs, it just means that the participant will have to use rollovers to at least partially offset unwanted taxable income. Congress included these provisions because it was already mid year 2020 and it takes more time for plans to be reprogammed to eliminate the RMD provisions. A similar issue occurred with the Secure Act, passed late December but immediately affected 2020 RMDs. I think that the plan will not push out RMDs in December because they can probably do that without a massive one time reprogramming expense. The agents have probably been trained in what the plan decided to do, which apparently was no more than required, and dismisses the benefits to participants of providing further support of the RMD waiver. Given the RMD situation, it is somewhat inconsistent that the plan has decided to support CRDs, but perhaps participant pressure pushed them into this.
  • Note that some plans also require RMDs for all employees at 72, while this is only required for >5% owners. These are known as "plan RMDs" and are not IRS statutory RMDs. As such these distribution can be rolled over to IRAs regardless of what the plan calls them.  This plan is treating the 2020 waiver in similar fashion as "plan RMDs" but they ARE rollover eligible, and there is no one rollover limit for distributions from non IRA plans.
  • If the plan is treating distributions as RMDs not eligible for rollover, then 20% withholding does not apply, which is good since you can then roll any amounts you wish over to your IRA or even directly to your Roth IRA if you wish. You do not have to run these distributions through your TIRA to convert them. Just be aware how the plan will report after tax contributions (basis) if you have made these contributions in the past. Any after tax amount will not be shown as taxable on your 1099R and can be rolled into a Roth tax free. However, when both taxable and non taxable amounts are distributed to you, any rollover you do is treated as coming from the taxable amount first. Therefore, for any distribution you are rolling to two different IRA types, you should roll the taxable amount to the TIRA before you roll the non taxable amount to the Roth. 
  • The plan is making a distribution and does not indicate in any way that it is rollover eligible or not. That is up to you. You would report the gross distribution on Form 1040 line 4c and only the taxable amount on 4d, while entering "rollover" next to 4d if you roll any portion over. You do not need Form 8606 if you roll directly to your Roth IRA, as the 8606 is only needed if you convert from a TIRA to Roth.
  • In summary, the plan is not in violation here, but you can salvage these distributions with rollovers to the extent you choose to.

  • Now I see the reason that there is no CARES violation for the plan to refuse to make a direct rollover before the RMD. It's due to section 2203(b) in the CARES Act. This section means that the excused RMD is not an eligible rollover distribution for purposes of IRC section 401(a)(31). It's not even a matter of plan discretion since a direct rollover needs to be with eligible rollover money. 
  • The CARES Act amends IRC section 402(c)(4) to read "If all or any portion of a distribution during 2020 is treated as an eligible rollover distribution but would not be so treated if the minimum distribution requirements under section 401(a)(9) had applied during 2020, such distribution shall not be treated as an eligible rollover distribution for purposes of section 401(a)(31) or...". They updated the language from 2009 when the RMD was also suspended. This is summarized in Notice 2020-51, page 3.
  • The customer service people at the plan were not trained about the reason, and only told to say that the RMD is still in effect but won't be forced out.

 

I don't think that that is an entirely correct interpretation of section 401(a)(31).  Section 401(a)(31) seems to identify circumstances where the plan is *required* to perform a direct rollover, not circumstances where the plan is *prohibited* from making a direct rollover.  In this case, it seems that the plan could provide a direct rollover, but is not required to do so.

Yes, I agree with your insight.  With that in mind it looks like the plan decided against allowing a direct rollover before the RMD equivalent amount is distributed because it is not required.  The expense of a software update solely for 2020 would be high, and it would benefit a very small portion of plan members. 

 

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