The Worker, Retiree, and Employer Recovery Act of 2008 includes technical corrections to the Pension Protection Act of 2006 and Section 201 suspends required minimum distributions for the 2009 year. This article will deal with the most frequent questions we have been receiving which are on required minimum distributions. Future articles will deal with other changes.
Rev. 01/16/09; E-mail Alert 2009-1

The market values of most retirement accounts declined considerably over the past year. With the 2009 RMD suspension, WRERA will help older Americans by letting them keep as much money as possible invested in their retirement accounts and avoid having to “sell low”, hopefully providing time for the market to recover. 

Although there was talk of relief for the 2008 RMD; WRERA did not suspend the 2008 RMD. (It was so late in the year that many individuals had already taken their 2008 by the time WRERA was enacted on December 23, 2008.)  Thus, those individuals attaining age 70½ in 2008 must take their first RMD by April 1, 2009. 

Guidance was issued by the IRS (Notice 2009-9) regarding the waiver of the 2009 RMD. Following are some examples to illustrate the operation of the 2009 RMD waiver.

First RMD year is 2008. John turns 70½ on August 5, 2008, he is retired and now must begin withdrawing annual RMDs.  He is still required to withdraw his 2008 RMD prior to April 1, 2009.  He can skip the RMD for 2009, but must take his next RMD for the 2010 year prior to December 31, 2010.

Mark is a non-5% owner who retires in 2009 at the age of 74. Mark's plan did not require him to begin RMDs until retireing after age 70½. If the RMD for 2009 had not been waived, Mark would have had to take his first RMD by April 1, 2010. Since it is waived, Mark can wait until December 31, 2010 to take an RMD which will be based on the balance on December 31, 2009. 

Participant is already receiving RMDs. Beth is 93, and has been receiving annual RMDs for many years.  She can skip the RMD for 2009, or take an amount equivalent to the RMD amount. She will be required to take an RMD again in the 2010 distribution calendar year (by December 31, 2010).

First RMD year is 2010. Joan turns 70½ on November 20, 2010.  She will have until April 1, 2011 to take her first RMD.

Five-year rule. If the beneficiary was under the five-year rule and the fifth year was 2009, then the beneficiary has until 2010 instead. Thus, a sixth year is added. To further clarify this waiver's extension of the five-year rule: if a participant died in 2006, the distribution under the five-year rule would normally have had to be made by December 31, 2011; however, due to the waiver of the 2009 RMD year, the date to end the five-year period would be extended to December 31, 2012.

Operational Considerations
This Act will also effect the way withdrawals are processed in 2009 for participants that normally fall into the category of needing to receive an RMD.  Employers will not be required to amend their plans in 2009, but they must establish operational procedures for processing withdrawal requests involving participants over the age of 70½ and the amounts being withdrawn that would have been the RMD amount.

The 2009 RMD is eligible to be rolled over but is not subject to certain eligible rollover distribution rules. Specifically, although the 2009 RMD amount is eligible to be rolled over, if the participant requests that the 2009 RMD amount be paid to him or herself, the 20% mandatory withholding does not apply. Further, the plan administrator is permitted, but not required to offer the direct rollover option on the 2009 RMD amount.  There is also no 402(f) notice requirement on the 2009 RMD amount.

Although RMD withdrawals are normally not eligible rollover distributions, the 2009 RMD amount can be rolled over. If a participant takes the 2009 RMD amount as a distribution, they have the 60-day period to roll it over.  Participants can waive the voluntary tax withholding, otherwise, a 10% federal tax withholding will generally apply.

Note that if the amount of the 2009 distribution is calculated based on a stream of payments, then it is not clear that it is eligible to be rolled over.  However, distributions based on the fractional rule and ad-hoc amounts should have no eligibility issues.

Example 1a. Tom is a 74 year old retiree whose RMD for 2009 would have been $10,000. He requests a $25,000 withdrawal, as a direct rollover to his IRA.  This direct rollover can be processed without any tax withholding.  If the plan administrator decides to not offer the direct rollover option on the RMD amount, then Tom may receive the $10,000; opt out of tax withholding, and roll over the $10,000 within 60 days to his IRA.  The $15,000 (non-RMD amount) would be processed as a direct rollover since it is considered an eligible rollover distribution.

Example 1b. Suppose that instead of a direct rollover, Tom requests the $25,000 as a distribution, in order to purchase a new car.  He has the option of opting out of the voluntary tax withholding on the first $10,000 of his distribution, the $15,000 above the 2009 RMD amount is eligible for rollover, and thus subject to the 20% mandatory withholding.

Plan amendment. The plan amendment for WRERA is to be made by the last day of the first plan year beginning on or after January 1, 2011. For governmental plans, substitute 2012 into the preceding sentence.

IRA Reporting (From Notice 2009-9)
"Issuers of the 2008 Form 5498, IRA Contribution Information, should not put a check in Box 11. However, in recognition of the short amount of time to make programming changes, if a financial institution issues a 2008 Form 5498 with a check in Box 11, the IRS will not consider such form issued incorrectly solely because of the check in Box 11, provided the IRA owner is notified by the financial institution no later than March 31, 2009, that no RMD is required for 2009.

In addition, the RMD information required under Notice 2002-27 need not be sent to IRA owners for 2009. If a financial institution sends a separate RMD statement to an IRA owner, either initially or in response to the owner’s request for the financial institution to calculate the RMD for 2009, the financial institution must show the RMD for 2009 as zero (0). Alternatively, the financial institution may send the IRA owner a statement showing the RMD that would have been required but for the waiver of RMDs for 2009, along with an explanation of the waiver for 2009. The IRS encourages all financial institutions to inform IRA owners who delayed taking their 2008 RMD until April 1, 2009, that they are still required to take that distribution. "

IRS Employee Plan News Special Edition on the waiver of the 2009 RMD.