In response to the coronavirus global pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. A more-than-$2-trillion-emergency fiscal stimulus package, the CARES Act was enacted to ease the effects of the economic damage caused by the COVID-19 pandemic by providing a wide range of relief efforts to help individuals, businesses, healthcare entities, and state and local governments meet short-term cashflow demands. Among the many provisions provided by the CARES Act was the suspension of Required Minimum Distributions (RMDs) during 2020. But since the CARES Act wasn’t passed until March 27, 2020, many individuals had already taken what they thought, at the time, were their 2020 RMDs!
Not surprisingly, many of those retirement account owners and beneficiaries wanted to ‘undo’ those distributions that were no longer RMDs and put them back into a retirement account. For some retirement account owners, that was possible by making a 60-day rollover. But for retirement account owners whose 60-day rollover window had already closed (including the extended window for distributions made on or after February 1, 2020 by IRS Notice 2020-23), or where such rollovers would have been a violation of the once-per-year rollover rule, or where distributions were made to non-spouse beneficiaries, there appeared to be no way to ‘unring’ the RMD ‘bell’.
Cue IRS Notice 2020-51…
On June 23rd, the IRS released “Guidance on Waiver of 2020 Required Minimum Distributions” (Notice 2020-51), which ultimately solved all the problems noted above, allowing anyone who took a distribution (that, but for the CARES Act, would have been a RMD) to rollover that amount until August 31, 2020 .
While the IRS released Notice 2020-23 in April 2020, which extended the 6o-day rollover rule for distributions taken on or after February 1, 2020 to the later of 60 days after receipt of the distribution or July 15, 2020, individuals who took distributions prior to February 1 were excluded from the opportunity and were still unable to rollover their unwanted distributions. Notice 2020-51 provides even further 60-day rollover relief, by extending the 60-day-rollover window for all unwanted 2020 RMD distributions to the later August 31, 2020 date or 60 days after receipt of the distribution).
Notice 2020-51 provides further relief by excluding rollovers of amounts, that if not for the CARES Act would have been 2020 RMDs, from being counted as a rollover for purposes of the once-per-year rollover rule. Finally, while beneficiaries are explicitly prohibited from completing 60-day rollovers under the law, Notice 2020-51 essentially allows beneficiaries to temporarily ignore this portion of the Internal Revenue Code and rollover their 2020 inherited ‘RMDs’ until as late as 8/31/2020.
Ultimately, the new guidance just released by the IRS provides a fair and favorable outcome for people who took their RMDs earlier this year, as those individuals should not be penalized for being proactive and complying with the RMD rules early during the year. However, this is an unprecedented and potentially troubling move by the IRS, given that they do not actually have the legal authority to make this change (it is technically the job of Congress to create and amend laws). The IRS’s action can arguably be interpreted as circumventing well-defined statutes prescribed by the Tax Code, Tax Court decisions, and its own long-standing guidance via Private Letter Rulings (PLRs). While it’s unlikely that anyone will take issue with the IRS’ attempt to be fair and equitable, there’s little question that they seriously stretched their legal authority when issuing this Notice, which may set a troubling precedent moving forward.