November 30, 2009 Deadline Approaching For Important Decisions Regarding 2009 RMDs
A participant in a qualified retirement plan must begin taking distributions by the April 1st following the later of the end of the calendar year in which the participant retires or attains age 70½. A participant who is a 5% owner must begin taking distributions by the April 1st following the end of the calendar year in which the participant attains age 70½ (regardless of when the participant retires). These mandatory distributions are known as required minimum distributions (“RMDs”). The Worker, Retiree and Employer Recovery Act of 2008 (“WRERA”) included a temporary reprieve for 2009 RMDs. Under this reprieve, plans are permitted, but are not obligated, to waive RMDs required for 2009. Notice 2009-82, which clarifies WRERA’s RMD provisions, requires plan sponsors to make important decisions about how 2009 RMDs will be treated under their plans by November 30, 2009. Below is information to help plan sponsors prepare for the November 30, 2009 deadline.
What are 2009 RMDs?
Under WRERA, plans are permitted to waive RMDs required for 2009 as well one or more payments in a series of substantially equal distributions (that include the 2009 RMDs) made at least annually and expected to last for the life
(or life expectancy) of the participant, the joint lives (or joint life expectancy) of the participant and the participant's designated beneficiary, or for a period of at least 10 years. The waiver only applies to 2009
RMDs, which include RMDs for 2009 that must commence by April 1, 2010. The waiver does not apply to RMDs for 2008, even if those
RMDs are required to be paid in 2009 (for example, those that are required by April 1, 2009 for a participant who attained age 70½ in 2008).
What types of plans are affected by the waiver?
The waiver applies to qualified defined contribution plans (like 401(k) and profit sharing plans) and IRAs.
How will 2009 RMDs that have been distributed prior to December 1, 2009 be treated?
Generally, RMDs are not eligible rollover distributions. However, the Internal Revenue Service (the “IRS”) will permit distributions made during 2009 that would have been 2009 RMDs to be considered eligible rollover
distributions. To assist participants who already received 2009 RMDs, the IRS extended the normal 60-day rollover period (for indirect rollovers) until November 30, 2009 to permit participants who previously received 2009 RMDs
to roll them over to an IRA, qualified plan, 403(a) annuity plan, 403(b) annuity contract, a specific type of 457(b) plan and, subject to certain restrictions, a Roth IRA. 2009 RMDs made from a plan also can be rolled over
back into the plan from which they were distributed previously, provided the plan accepts rollovers. After November 30, 2009, participants can still rollover 2009 RMDs they receive provided they do so within the normal 60-day
rollover period.
The plan may (but is not required to) permit direct rollovers of 2009 RMDs. Even though 2009 RMDs may be eligible for direct rollover treatment, 2009 RMDs will not be subject to either the mandatory 20% withholding requirement for eligible rollover distributions or the automatic rollover requirements for small account balances (more than $1,000 but $5,000 or less). Additionally, plan sponsors are not required to provide Section 402(f) notices for 2009 RMDs.
What decisions must a plan make by November 30, 2009?
Because the relief under WRERA is optional, plan sponsors must decide now how they intend to treat 2009 RMDs. Plan sponsors have the following three options:
- Forego the optional waiver and continue with 2009 RMDs as normal.
- Waive 2009 RMDs, unless a participant elects a distribution of such amounts.
- Distribute 2009 RMDs, unless a participant elects to waive such amounts.
Additionally, plan sponsors must decide whether to allow direct rollovers of 2009 RMDs. Plan sponsors have the following three options:
- Disallow direct rollovers of 2009 RMDs.
- Permit direct rollovers of 2009 RMDs, but only if it is part of a distribution that would otherwise be an eligible rollover distribution.
- Permit direct rollovers of 2009 RMDs, including one or more payments in a series of substantially equal distributions (that include the 2009 RMDs) made at least annually and expected to last for the life (or life expectancy) of the participant, the joint lives (or joint life expectancy) of the participant and the participant's designated beneficiary, or for a period of at least 10 years.
Plan sponsors must make the above decisions by November 30, 2009 and begin operating their plans accordingly by December 1, 2009. Notice 2009-82 provides relief for plans that did not operate in accordance with the plan’s decisions prior to November 30, 2009.
When must a plan be amended to reflect its decisions regarding 2009 RMDs?
The IRS has provided sample amendments in Notice 2009-82. Amendments addressing the foregoing provisions must be adopted no later than the last day of the first plan year beginning on or after January 1, 2011 (January 1, 2012
for governmental plans).
If you need assistance with any of these upcoming deadlines, please contact a member of the Troutman Sanders Compensation and Employee Benefits Practice Group.