August 14, 2020
Here’s a question from a company about waiving the required minimum distribution (RMD) requirement for their 401(k) plan participants.
Q. Our company has decided to waive required minimum distributions for 2020 under our 401(k) plan due to COVID-19. Does the waiver require a plan amendment and, if so, when is the deadline?
A. The answer depends upon how your plan document addresses the required minimum distribution (RMD) rules. As background, RMDs to a participant ordinarily must begin by April 1 of the calendar year following the later of the calendar year in which the participant reaches a specified age or retires. (Retiring later doesn’t delay RMDs to more-than-5% owners.)
The specified age is 70-1/2 for those who attained it before 2020. For all others, the specified age is 72. Subsequent RMDs must be made at least annually (until the account is exhausted) by the end of the year for which the distribution is being made. RMDs for beneficiaries are subject to different (and more complicated) rules that vary depending on the beneficiary, when the participant died, and whether the participant died before RMDs began. Participants and beneficiaries who fail to take RMDs must pay a 50% excise tax on any shortfall between the RMD and the amount actually distributed for the year.
In response to the COVID-19 pandemic, Congress amended the law to waive the RMD rules for calendar year 2020 for both participants and beneficiaries. The waiver applies to distributions for 2020 (including those not due until April 2021) and to distributions for 2019 that were due by April 1, 2020, and not paid in 2019. The CARES Act’s waiver merely eliminates the obligation to make those RMDs under the Code’s tax-qualification rules; plans aren’t required to waive those distributions.
- Amendment Requirement.If your plan document incorporates by reference the rules as amended from time to time, a conforming plan amendment may not be required. But if your plan document requires that RMDs be distributed according to the pre-waiver rules (rather than incorporating the rules by reference), a conforming plan amendment is needed. A plan requiring distributions sooner than the Code requires would also need a conforming amendment to make changes to the plan’s distribution rules. Any amendments must be carefully drafted to avoid eliminating an optional form of benefit, as the IRS hasn’t exercised its authority to grant relief for such amendments.
- Amendment Deadline.The deadline for a waiver amendment is the end of the first plan year beginning on or after January 1, 2022 (2024 for governmental plans). Amendments that don’t simply waive 2020 RMDs may not qualify for that delayed amendment date and may need to be adopted by the end of the plan year in which they become effective.
- IRS Sample Amendment.The IRS has provided a sample plan amendment for 401(k) and other defined contribution plans that can be used to implement the RMD waiver and allow participants and beneficiaries to choose whether to receive RMDs waived by the CARES Act. The sample also addresses which distributions will be treated as eligible rollover distributions for purposes of the plan’s direct rollover provisions.
It is always advisable to coordinate plan changes with your plan’s service providers, and to have experienced benefits counsel review your plan’s amendment requirements.