IRS Issues Guidance on the Waiver of Required Minimum Distributions
As we reported in the February 2009 issue of Trends & Developments, the Worker, Retiree and Employer Recovery Act of 2008 (“Act”) provides a one-year suspension of the required minimum distribution rules for 2009. The suspension applies to qualified plans, 403(b) plans, 457(b) plans, and IRAs. It does not apply to participants in defined benefit pension plans.
The relief under the Act is only for 2009 required distributions. Required minimum distributions for 2008 were still required to be made before December 31, 2008 (if 2008 is the first distribution year, then April 1, 2009 – see below).
On September 24, 2009, the IRS issued Notice 2009-82 providing guidance with respect to 2009 required minimum distributions made in 2009 due to the plan sponsor’s or custodian’s inability to timely modify their distribution procedures to accommodate those participants who wish to take advantage of the suspension of the required distributions. As a result, some plan participants received distributions they were not required to receive and were not sure they could roll over the amount received to an IRA or another qualified plan or they were provided information at the time of distribution stating that the distribution was not eligible for rollover. The IRS has now provided an extension of the 60-day rollover period to November 30, 2009 for these amounts to be rolled over in accordance with the guidance in the notice.
Required Minimum Distribution Overview
Under the required minimum distribution (RMD) rules, participants in qualified plans and individual retirement accounts (IRAs) are generally required to begin taking distributions no later than April 1 of the calendar year after the calendar year in which they attain age 70½ (with the exception of individuals covered by a qualified retirement plan who are still employed by the plan sponsor and own 5% or less of the employer). All subsequent RMDs must be taken by the end of each calendar year. The amount of the RMD each year is calculated by dividing the account balance as of the end of the prior year by a distribution factor from published IRS tables. If an individual dies after commencing the receipt of RMDs, the beneficiaries of the individual's retirement plans and IRAs are also required to continue taking distributions, which are calculated by dividing the account balance as of the end of the prior year by a distribution factor. The distribution period is generally equal to the remaining years of the beneficiary's life expectancy. If the individual dies prior to commencing the receipt of RMDs and the sole designated beneficiary is the individual's spouse, the spouse can either roll over the inherited IRA to his or her own IRA or treat the decedent’s IRA as his or her own and begin taking distributions when he or she attains age 70½. Alternatively, the spouse may choose to remain as beneficiary of the decedent’s IRA and begin taking RMDs for the year when the decedent would have reached age 70½. If the beneficiary or beneficiaries are someone other than the spouse, then the requirement to take distributions will be dependent upon numerous factors that are beyond the scope of this article.
Roth IRAs are not subject to the RMD rules during the IRA owner's lifetime. However, beneficiaries of Roth IRAs are subject to the post-death minimum distribution rules that apply to traditional IRAs.
Failure to make an RMD triggers an onerous 50 percent excise tax, payable by the individual or the individual’s beneficiary.
Relief Under IRS Notice 2009-82
Relief for Plan Sponsors
Due to the enactment of the Act late in 2008, many plan sponsors were unable to timely modify their plans’ procedures relating to 2009 RMDs to accommodate the new rules. Additionally, absent guidance from the IRS, plan sponsors were not sure of the options available to them with respect to RMDs that may have been made, but were not required. Under the new notice a qualified plan will not be treated as failing to be operated in accordance with its terms during the period beginning on January 1, 2009 and ending on November 30, 2009 as result of:
- Distributions that equal the 2009 RMDs or distributions that are part of a series of substantially equal distributions (that include the 2009 RMDs) that were or were not paid by the plan;
- Participants and beneficiaries not being given the option by the plan of receiving or not receiving distributions that include 2009 RMDs; or
- A direct rollover option that was or was not offered by the plan for 2009 RMDs or for other amounts that can be rolled over in accordance with the rollover relief provided under the notice and discussed below.
Additionally, the notice provides sample plan amendments for use by plan sponsors to bring their plan documents into compliance with this guidance (depending upon whether they did or did not make RMD payments). Plans must adopt these amendments by the last day of the first plan year beginning in 2011 (2012 for governmental plans).
Relief for Plan Participants
2009 RMD payments to a plan participant in 2009 will not be treated as ineligible for rollover. Accordingly, such payments can be rolled over provided the other rollover rules of the Internal Revenue Code are satisfied. To provide relief to plan participants who have already received a RMD in 2009, but who did not know whether the amount received could be rolled over, the IRS has extended the 60-day rollover period, for any 2009 RMD and for any additional payments that are part of a qualifying series of substantially equal payments, so that the period ends no earlier than November 30, 2009. Accordingly, the participant will have until November 30 to either 1) roll the RMD back into the plan (the plan document must allow for the acceptance of rollover contributions) or 2) roll the RMD over to an IRA.
Relief for IRA Owners
Under the notice, IRA owners who have already received 2009 RMDs in 2009 also have an extension of the 60-day rollover period for any such distribution so that it ends no earlier than November 30, 2009. However, it should be noted that, because the one-rollover-per-year rule was not changed by the Act, no more than one distribution from an IRA in 2009 will be eligible for this rollover relief.
Plan sponsors will want to review how they operated with respect to 2009 RMDs and, if they made RMDs to participants, communicate the rollover options to affected participants as soon as possible.
IRA owners should contact their respective custodians regarding their options for rolling 2009 RMDs back into their accounts.
For more information, please contact Peter Alwardt at 212.891.6022.
Any tax advice in this communication is not intended or written by Eisner LLP to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein. With this communication, Eisner LLP is not rendering any specific advice to the reader.
This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice, nor is it intended to convey a thorough treatment of the subject matter.