IRS Offers Guidance on Extended Rollover Relief, Mid-Year Safe Harbor Suspension During COVID-19

The Internal Revenue Service (IRS) has issued guidance to clarify the impact of Section 2203 of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) on the rules for required minimum distributions (RMDs) and mid-year reductions or suspensions of contributions to Safe Harbor § 401(k) and § 401(m) plans. The IRS guidance, which appears in Notice 2020-51 and Notice 2020-52, is expected to provide retirement plan sponsors with greater flexibility for suspending or reducing safe harbor matching contributions or safe harbor nonelective contributions and to assist taxpayers subject to RMDs to qualify for the tax relief intended by Congress under the CARES Act.

IRS Notice 2020-51: Required Minimum Distributions

Section 401(a)(9) of the Internal Revenue Code (the Code) requires a stock bonus, pension, profit-sharing plan or an annuity contract to make minimum distributions to participants starting by April 1 of the calendar year following the calendar year in which the individual attains age 72 (for distributions required to be made after Dec. 31, 2019), commonly called RMDs. The CARES Act provided a temporary waiver of RMDs for 2020 for participants in defined contribution plans who are not 5 percent owners but who would otherwise be required to take an RMD in 2020. IRS Notice 2020-51 clarifies that participants who took a 2020 RMD may return the distribution to the plan or roll it over into a qualified account until Aug. 31, 2020.

Prior to the changes implemented by the CARES Act and Notice 2020-51, a participant was permitted to roll over only one distribution in a 12-month period, and an RMD could not be rolled over into a qualified account. While RMDs are treated as ordinary income for tax purposes, a rollover distribution is not includible in gross income if the distribution is rolled over to an eligible retirement plan no later than the 60th day following the day of receipt. The new IRS guidance extends the 60-day deadline to complete a rollover or recontribution so that participants now have until Aug. 31, 2020, to rollover or recontribute all previously distributed 2020 RMDs. The notice further confirms that the rollover or repayment of RMDs will not be treated as a rollover for purposes of the limitation on one rollover per 12-month period rule and also allows for the rollover of nonspousal beneficiary RMDs, which are ordinarily not permitted.

IRS Notice 2020-51 includes a sample plan amendment for defined contribution plans that plan sponsors may adopt to provide participants a choice whether to receive 2020 RMDs. The sample plan amendment provides employers with options as to the default treatment of distributions if participants do not make affirmative elections. Some form of amendment regarding the treatment of 2020 RMDs is required and the amendment must state the effective date of the participant choice. Additional sample amendments are provided relating to direct rollovers of 2020 RMDs. Plan sponsors must amend the plan no later than the last day of the first plan year beginning on or after Jan. 1, 2022.

In IRS Notice 2020-51, the IRS also clarifies the interaction of the rules under the CARES Act and the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act) concerning the timing for when the RMD waiver will apply. The SECURE Act changed the required beginning date for taking RMDs from age 70½ to 72 effective on Jan. 1, 2020. Plan sponsors should carefully track the decisions regarding the treatment of RMDs in 2020 under the CARES Act and the effective dates of the application of the rules, taking into account the impact the SECURE Act may have had on RMD requirements under the plan terms. In addition, plan sponsors should apply the selected rules relating to RMD distributions and acceptance of recontributions in 2020 to all participants consistently and as of the same time.

IRS Notice 2020-52: Mid-Year Changes to Safe Harbor Plans

Under Code Section 401(a), contributions provided under a qualified defined contribution plan must not discriminate in favor of "highly compensated employees" (HCEs). Plan sponsors may rely on safe harbor provisions under the Code to be deemed to satisfy the nondiscrimination rules. Generally, a plan sponsor must adopt plan provisions satisfying the safe harbor rules before the first day of the plan year and such provisions must remain in effect for an entire plan year. A safe harbor plan generally may not be amended during the plan year to reduce or suspend future safe harbor matching contributions or safe harbor nonelective contributions (without losing safe harbor status), unless the employer is either operating at an economic loss or has provided a safe harbor notice that reserves the plan's ability to suspend or reduce the safe harbor contributions.

IRS Notice 2020-52 clarifies that a mid-year change that reduces only contributions made on behalf of HCEs is a permissible reduction or suspension of safe harbor contributions and will not impact safe harbor status, as long as the plan sponsor provides impacted HCEs with both an updated safe harbor notice and an opportunity to change elections prior to the suspension of contributions. The notice also allows the mid-year change to plan terms (that is, a mid-year reduction or suspension of safe harbor contributions) without losing safe harbor status as long as the plan amendment is adopted between March 13, 2020, and Aug. 31, 2020. For amendments made during this period of time, the condition that an employer provide an updated safe harbor notice or be operating at an economic loss is in effect suspended. IRS Notice 2020-52 does, however, require plan sponsors to provide notice of the reduction or suspension consistent with other terms of the safe harbor notices no later than Aug. 31, 2020, and so long as the plan amendment is not adopted later than the date the reduction or suspension of benefits is effective.

If you have any questions regarding the IRS guidelines for the 2020 RMD waiver or mid-year amendments to safe harbor plans, please contact the authors or another member of Holland & Knight's Employee Benefits and Executive Compensation Team, including Partners Bob Friedman, Ari Alvarez, Kelly Bley, Kerry Halpern, John Martini, David Pardys and Rachel Shim.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.