Denise Appleby, CISP, CRC, CRPS, CRSP, APA.
H.R. 7327, the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) was signed into law on December 23, 2008. WRERA provides a waiver of the required minimum distributions (RMD) for 2009 and makes other changes that affect the funding and distribution rules for pension plans. This article focuses on the RMD waiver provision.
First Things First- No RMD Relief for 2008
In anticipation of this provision being signed into law, many retirement account owners and beneficiaries have been playing a ‘wait and see’ game for their 2008 RMD, hoping that WRERA would provide RMD relief for 2008. However this relief applies only to RMDs for 2009. As such, retirement account owners and beneficiaries who are required to take an RMD for 2008 must do so by December 31, 2008. An exception applies to retirement account owners whose first RMD amounts are due for 2008, allowing these individuals to take their 2008 RMD amounts as late as April 1 of 2009; the 2009-waiver does not apply to these amounts even if they are taken in 2009, because they represent RMDs for 2008.
Background
Individuals with assets in IRAs generally must begin taking RMD amounts from their retirement accounts for the year they reach age 70 ½, and continue taking an RMD for each subsequent year. The first year’s RMD, while due for the year the individual reaches age 70 ½, can be deferred until April 1 of the following the year. For instance, if the individual reaches age 70 ½ in 2008, the RMD for 2008 can be deferred until April 1 2009. RMDs for all other years must be taken by December 31 of that year. Note: The RMD rules do not apply to Roth IRA owners, but they do apply to individuals who inherit Roth IRAs.
For individuals with assets in defined contribution type qualified plans, 403(b) plans and 457(b) governmental plans and who are still working for the plan sponsor, their RMDs can be deferred past age 70 ½ until retirement if the plan allows for the deferment. This option to defer does not apply to employees who own at least 5 % of the company (5-percent owner) that sponsors the plan. For more on RMDs, see the article Meet Your RMD Deadline or You Will Owe the IRS Penalties!
To Whom Does This Provision Apply?
This RMD waiver provision applies to the following individuals:
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Owners of accounts under defined contribution plans, 403(b) accounts ,and IRAs who would otherwise be required to take RMD amounts from their retirement accounts for 2009. This includes individuals who reached age 70 ½ before 2009, and those whose required beginning date (RBD) is April 1 2010. For more on this, see our FAQ: What is the required beginning date?
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Beneficiaries of retirement accounts who take distributions under the life-expectancy method and are required to take a beneficiary-RMD for 2009
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Individuals who are subject to the five year rule, and the five year period would have otherwise expired on December 31, 2009. Under the five year rule, an individual who inherited a retirement account in 2004 would have been required to distribute the entire account by December 31, 2009. For these individuals, the five year period is extended until December 31, 2010.
Extension of Five-Year Period for Beneficiaries
For beneficiaries who are subject to the five year rule, 2009 is not counted as part of the five year period. For instance, if the retirement account owner died in 2007 which would result in the 5-year period ending December 21, 2012, the deadline is extended until December 31, 2013 for these individuals.
2009 RMD Amounts Are Rollover-Eligible
Under the distribution and rollover rules, RMD amounts are usually not rollover-eligible. As such, for any year that an individual is required to take an RMD amount from a retirement account, the amount representing the RMD must be taken before any other distributions for the year and must be paid to the individual. These amounts must not be rolled over to an eligible retirement plan. In addition, RMD amounts are not subject to the 20% mandatory federal tax-withholding that applies to rollover-eligible distributions. Under WRERA, a distribution that would otherwise be an RMD for 2009 is rollover eligible, because technically it is not an RMD. However, the following exceptions apply:
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The 20% withholding does not apply: Despite the fact that the amount will not be treated as an RMD in the traditional sense, the 20% federal tax withholding does not apply. As such, if an employee requests a distribution from his or her qualified plan, 403(b) or 457(b) governmental plan for 2009, and the amount represents what would have been an RMD amount had the RMD reprieve under WRERA not apply; the payer must not apply the 20 % federal tax withholding. However, if the employee fails to make a withholding election, the payer is required to withhold 10% for federal tax. For an explanation of the withholding rules, see our FAQ on Distribution-withholding.
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Written Explanation for Rollover-Eligible Amounts not Required: Sponsors of qualified plans, 403(b) and 457(b) accounts are usually required to provide employees with a written notice of the direct rollover requirement for rollover eligible amounts and the tax treatment that applies if the amount is not processed as a direct rollover. This written-explanation requirement is optional for amounts that would have been RMD amounts for 2009 had WRERA not apply.
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Amount is Rollover-Eligible: Sponsors of qualified plans, 403(b) and 457(b) accounts are usually required to offer employees the option of having a non-RMD amounts processed as a direct rollover to an eligible retirement plan, if the amount is otherwise rollover-eligible. Offering the direct rollover option is optional for amounts that receive an RMD waiver for 2009 under WRERA. However, if the amount is not processed as a direct rollover, the employee may rollover the amounts to an eligible retirement plan within 60-days of receipt.
Required Beginning Date not Delayed
Despite the fact that RMDs are waived for 2009, individuals who reach age 70 ½ in 2009 still have a required beginning date (RBD) of April 1, 2010. As such, the following RBD related provisions apply:
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For individuals with an RBD of April 1, 2010, the RMD for 2010 must be taken by December 31, 2010. Recall that this applies to (i) IRA owners who attain age 70 ½ in 2009 and (ii) participants in qualified plans, 403(b) accounts and 457(b) governmental plans who reach age 70 ½ in 2009, or reach age 70 ½ before 2009 and retired in 2009 from an employer with a plan that permit employees to defer beginning RMDs until retirement.
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For beneficiaries: For individuals who inherit retirement accounts, from an account owner whose RBD is April 1, 2010, the retirement account owner is treated as dying before the RBD if he or she dies before April 1, 2010; and the account holder is treated as dying on or after the RBD if he or she dies on or after April 1, 2010. This will affect the options available to the beneficiary for distribution of the inherited assets. For more on beneficiary options, see the article Year-End Tips for Owners and Beneficiaries of Retirement Accounts, our Frequently Asked Questions on IRA Beneficiary Options and our IRA Beneficiary Options – Quick Reference
Conclusion
Retirement account owners who are of RMD age and beneficiaries who want to take distributions from their retirement accounts for 2009 may still do so. The key difference is that the distributions for 2009 are optional, as opposed to being required. For individuals who participate in qualified plans, the plan document, summary plan description and/or plan administrator should be consulted to determine if distributions are permitted while these individuals are still employed.
