Saturday, January 17, 2009

IRS Notice 2009-09 – Required Minimum Distributions for 2009

Part III --- Administrative, Miscellaneous, and Procedural

IRS Notice 2009-09 – Required Minimum Distributions for 2009

Notice 2009-09 provides guidance to financial institutions on the reporting rules applicable to required minimum distributions ("RMDs") for 2009 in light of the enactment of the Worker, Retiree, and Employer Recovery Act of 2008, P.L. 110-458 (the Act). Section 201 of the Act waives any RMDs for 2009 from individual retirement arrangements (IRAs) and retirement plans that hold participant benefits in individual accounts. This notice modifies the reporting requirements applicable to RMDs from IRAs to reflect the waiver of the RMD rules for 2009.

Retirement News for Employers - Special Edition, January 2009 and Employee Plans News - Special Edition, January 2009 provide more analysis:

Rapid Fire Required Minimum Distribution Guidance for 2008 and 2009

provides further analysis and notes the date to adopt an amendment to adopt the RMD waiver:

The date to adopt an amendment to reflect this RMD waiver for 2009 is on or before the last day of the first plan year beginning on or after January 1, 2011 as provided for in Section 201(c)(2)(B) of WRERA. For governmental plans, the date to adopt an amendment is on or before the last day of the first plan year beginning on or after January 1, 2012.

Q&A: 2009 Required Minimum Distribution Rule Changes answers the following questions:

  1. What is the new law change affecting RMDs for 2009?
  2. To what types of plans does the WRERA 2009 RMD waiver apply?
  3. What is the purpose of the new law?
  4. How do RMDs affect eligible rollover distributions (ERDs) in general?
  5. If a plan makes a 2009-ERD, must the plan apply the rules that apply to an ERD?
  6. If an individual receives a 2009 distribution from a plan that has been distributing RMDs to the individual, may the individual roll over the distribution?
  7. If an individual receives a 2009-ERD, and decides to roll over the distribution, how long does the individual have to complete the rollover?
  8. If a plan suspends a participant’s RMD for 2009, does the suspension affect the way the plan calculates the participant’s 2010 RMD?
  9. Must a plan that is making RMDs to an individual notify the individual, in advance of the distribution, of the 2009 waiver provision, and give the individual an opportunity to elect not to take a 2009 distribution that, but for WRERA, would be an RMD?
  10. How should a plan, during 2009, treat distributions that are affected by the RMD
    i. Make distributions in accordance with previous elections, notwithstanding the RMD waiver.
    ii. Suspend all RMDs for 2009.
    iii. Let the participant choose whether to take a distribution of the 2009 RMD amount.
  11. Must a financial institution that is an IRA trustee send to IRA owners subject to the RMD requirements the annual notice due by January 31 regarding RMDs?
  12. Does the 2009 waiver apply to a death beneficiary who is receiving distributions from the account of a deceased participant?
  13. If an individual (whether an IRA owner or a participant who has separated from employment with the employer maintaining the plan) attained age 70½ in 2008, and did not take his/her first RMD in 2008, does the RMD waiver permit the individual not to take the first RMD in 2009?
  14. With respect to an individual who attains age 70½ during 2009, and has his or her initial RMD obligation for that year, must the individual still take his or her first RMD by April 1, 2010, since that date is after 2009, the year of the waiver?
  15. When must an employer amend its plan to add language reflecting the 2009 RMD waiver?

2009 RMD Rule Changes: A Follow-Up contains additions discussions about the 2009 RMD rules, including a problem created by the statutory change:

The statutory change seems to pave the way for (and apparently was intended by Congress to permit) the rollover of a 2009 RMD, thereby enabling the recipient to defer a taxable distribution in favor of letting the RMD amount continue to grow (and hopefully recover market losses) on a tax-deferred basis. The problem, as explained in Q&A-4, Example 3 of our RMD Tech-1, is that notwithstanding the 2009 RMD waiver, if a participant has elected (or the plan mandates) a series of substantially equal lifetime installments, the Code provides that the installments are not ERDs.(See IRC §402(c)(4)(A).) As a result, if the plan actually distributes the 2009 installment, the apparent ameliorative benefit of the WRERA law change is non-existent. The distribution is taxable and is not eligible for rollover. In contrast, if the same plan decides to suspend 2009 RMDs (or the participant, under the plan’s procedures, elects not to take the distribution), the participant avoids taxation and enjoys the relief that Congress intended. However, there does not seem to be any policy justification for this disparate treatment, which is beyond the control of the participant, and is dependent on how the plan sponsor chooses to comply with the new law. So the question arises whether it would be reasonable for a participant to treat a 2009 distribution, which is an installment payment of only RMD minimums (as in Example 3), as an ERD by reason of the WRERA 2009 waiver provision, even though the distribution technically appears not to be an ERD. In the absence of guidance from the IRS, a conservative answer would be no.

It also discusses an informal conversation with an IRS official, current guidance under IRS Notice 2009-9, 3 administrative approaches (continue to make distributions that would be RMDs, suspend distributions, give the participant the option), and provides a recommendation:

In absence of additional guidance, a conservative interpretation of the new law appears prudent. This means practitioners should assume that an RMD that is one of “substantially equal payments” for life, life expectancy, or for a period of 10 years or more is not an ERD, whether the plan makes the distribution pursuant to a participant’s election or pursuant to a plan provision. If the plan’s priority is to offer the most favorable options to participants, the plan should consider either suspending RMDs (subject to the participant’s option to elect to take the distribution), or offering participants a choice, subject to the plan’s “default” either to distribute or to suspend distributions.

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