RMD Suspension Issues

As we discussed in an article in E-mail Alert 2009-1, the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) provides for the suspension of required minimum distributions (RMDs) for the 2009 distribution calendar year.  While this seems to have been a well intentioned measure to provide some relief to older Americans whose retirement accounts have lost a considerable amount of value since January 1, 2008, it has created a great deal of operational confusion, and not just for qualified retirement plans.  This article explores some of the issues that many plan sponsors are dealing with and, hopefully, there will be IRS clarification of these complex issues.

Neither WRERA nor the IRS have addressed any of these issues. Thus, employers are on their own to review the terms of their plan and distribution authorization before deciding on a final process. Although WRERA does not include any participant notice requirements, employers really need to consider informing retirees of how the payment process will be administered this year. 

Why would an employer not permit the employee to directly rollover the amount? We are not sure (it could be system driven), but ithe option was provided to the employer in the law. Accordingly, a plan can choose to offer the participant a direct rollover option, or it may elect instead to require a participant distribution, leaving the participant 60 days to complete a participant or indirect rollover.  Whatever course of action is taken will have to ultimately be reflected in the plan amendment, which is not required until 2011. Once again the Congress has written a law with an amendment required in a later year. This in effect forces employers to operate their plans in accordance with the law and not the plan's terms.

Do plans need to be amended now in order to comply with the 2009 RMD relief?  According to WRERA the answer would be no. But nothing about this simple suspension for one year has been simple so far, why should this be? There have been some practitioners who feel it may be better to amend the plan now.  Again, without guidance, this is debatable and WRERA certainly does not support the need for an amendment.

1. What about individuals whose 2009 distribution is calculated based on a stream of payments, such as over 15 years. Suppose payments started a 15 year payout at age 67 and the individual is now 74. Clearly, this payment method would satisfy both the stream of payments and the RMD amount. However, an issue arises about whether the payment can be waived and if the payment is actually received it is not clear that it is eligible to be rolled over. 

2.  Substantially equal payments based on the RMD rules. Are these amount also suspended for 2009 if the individual is over age 70½? What about if the individual is under 70½?

3. Charitable donation IRA contributions were extended for 2008 and 2009 and may be used to satisfy the RMD amount. Since there is no RMD for 2009, there may be a decrease in these charitable donations. Should Congress or the IRS consider grandfathering the 2009 amount through 2010 for those who do not take an RMD in 2009 and thus did not make the donation to a charity because no RMD was due for 2009?

Section 411(d)(6) Issue?
Some practitioners are hesitant to suspend 2009 RMDs because an RMD is considered a Code Section 411(d)(6) protected benefit, and have requested that the IRS clarify that this will not be deemed an impermissible cutback. We agree that guidance would be great, however, WRERA is a federal law suspending a tax code for a year and as such, we do not see any cutback. Once again, this is another good reason for the participant to be contacted and given the option to choose – and to be permitted to take the RMD amount if desired.

Bill Grossman, QPA