2009 Requirement Minimum Distributions

This isn’t the most glamorous topic, but is highly relevant to participants and sponsors:

Basic Idea:

President Bush signed the Workers Retirees and Employers Recovery Act of 2008 (WRERA) on December 23, 2008 in order to give relief to plan participants and sponsors due to the economic downturn. This law provides funding relief for employers sponsoring defined benefit plans and allows participants in defined contribution plans to waive their 2009 required minimum distributions (RMDs).

Background:

Current law requires participants to start taking taxable distributions of their retirement benefits starting the year they turn 70 ½ or, if later, the year they stop working. (5% or more owners must start distribution when they turn 70 ½ regardless of when they stop working.)

A participant’s first RMD must be distributed by the April 1st of the calendar year following the year they meet the above requirements (i.e. turn 70 ½ or, if later, stop working). Subsequent minimum distributions must be taken annually by each December 31.

The amount of the minimum distribution is based on the participant’s life expectancy, the idea being to spread out the participant’s benefits over his or her remaining life expectancy. (Note: in some instances the distributions are based on the participant and his or her spouse joint life expectancy.)

Details of WRERA:

Participants can waive their 2009 RMDs. This waiver applies to virtually all defined contributions plans subject to RMD rules:

- Qualified plans (e.g. 401(k))
- 403(b) plans
- Governmental 457(b) plans
- IRAs

The waiver does NOT apply to Defined benefit plans or Tax-exempt 457(b) plans.

A 2009 RMD includes amounts required to be distributed by April 1, 2010 for participants who turn 70 ½ (or sever employment) in 2009. However, 2009 RMDs do NOT include amounts required to be distributed by April 1, 2009 for participants who turn 70 ½ (or sever employment) in 2008.

Normally RMDs are not eligible rollover distributions. However, 2009 RMDs can be rolled over. For amounts distributed to participants earlier in 2009, the 60-day rollover period has been automatically extended to November 30, 2009. Meaning participants can deposit previously distributed 2009 RMDs to an IRA, or back into the distributing plan if permitted, up until Novermber 30th and still avoid tax consequences for 2009.

Even though 2009 RMDs can be rolled over, the plan is not required to apply mandatory 20% withholding, provide for direct rollovers of 2009 RMDs, or provide participants with the special tax notice. These items are all normally required for eligible rollover distributions.

In operation plans have three options to comply with these rules:

(1) Automatically suspend all 2009 RMDs
(2) Automatically distribute all 2009 RMDs
(3) Allow participants to elect whether to take 2009 RMDs

I would have recommended the first option. This option minimizes potential plan errors and is the most beneficial for participants. In most instances participants who depend on their RMDs for living expenses will still be able to take a non-RMD distribution in 2009 (e.g. an in-service-withdrawal or regular termination distribution).

However, IRS notice 2009-82 is not clear whether across the board suspension of 2009 RMDs is permissible. So I believe your safest bet is to give participant a choice, option 3. The election form used should clearly state a default option for non-responsive participants (e.g. unless otherwise elected the plan will not distribute 2009 RMDs).

Disclaimer: The above discussion is not legal or tax advice or even an exhaustive discussion of the RMD rules and/or WRERA. Each individual’s situation may vary. So be sure to check with a qualified consultant or financial advisor regarding your 2009 RMD options.