The Worker, Retiree and Employer Recovery Act of 2008 (WRERA), signed by President Bush on December 23, 2008, includes a number of provisions relating to retirement plans. This article focuses on the changes for defined contribution plans.
Suspension of Minimum Required Distributions
Under current law, participants who are 70 ½ or older are required to take “minimum required distributions” from their defined contribution plan accounts. Minimum required distributions generally must begin by April 1 of the calendar year following the year in which the participant attains age 70 ½ and must continue to be made by the end of each year thereafter.
To provide additional time for participant account balances to recover from the recent stock market losses, WRERA permits the suspension of minimum required distributions from defined contribution plans for 2009. WRERA does not suspend the required minimum distribution rules for defined benefit plans.
WRERA does not, however, provide relief for participants who attained age 70 ½ in 2008 and elected to postpone their first minimum required distribution until April 1, 2009. For such a participant, the first minimum required distribution that is paid in 2009 is actually for 2008, and thus is not suspended under WRERA. The participant’s second required minimum distribution (i.e., the minimum required distribution due by December 31, 2009) is the 2009 distribution that would be suspended. Similarly, for a participant who attains age 70 ½ in 2009, the first minimum required distribution (for 2009), is suspended even though it could be paid as late as April 1, 2010.
Required minimum distributions being made to a deceased participant’s beneficiary may also be suspended for 2009. For example, if the account balance of the participant is being distributed to the beneficiary over the five years following the participant’s death, the five-year period will be calculated without including 2009. Accordingly, if a participant died in 2007, and the five-year payment period previously ran from 2008 through 2012, the five-year payment period now runs from 2008 through 2013 (without a payment in 2009).
Although the concept of suspending minimum required distributions for 2009 is relatively straightforward, implementing that suspension can be more complicated. For example, it will be important to review whether participants who have begun receiving minimum required distributions or installment payments can normally suspend them, and whether (assuming distributions are suspended) an affirmative election will be required by the participant to continue receiving payments or to restart future installment or minimum required distributions. In addition, if the plan sponsor elects to suspend distributions for 2009, the plan will need to be amended to refl ect this suspension, although the amendment will not be required to be made until the end of the first plan year beginning on or after January 1, 2011.
Regardless of whether a plan sponsor suspends distributions for 2009, any distributions that are made will not be considered required minimum distributions under Section 401(a)(9) of the Internal Revenue Code, and thus may be eligible to be rolled over to an IRA or another qualified plan. The fact that distributions may be eligible to be rolled over will need to be explained to participants, but the plan administrator is not obligated to allow for direct rollover.
Nonspouse Beneficiary Rollovers
The Pension Protection Act of 2006 (PPA) permitted plans to allow nonspouse beneficiaries of deceased participants to roll over their balances directly to an “inherited IRA,” but did not require plans to offer this option. WRERA makes nonspouse beneficiary rollovers mandatory for plan years beginning after December 31, 2009. This change applies to both defined contribution and defined benefit plans.
Elimination of Gap Period Income
WRERA removes the requirement that refunds of excess deferrals under defined contribution plans include “gap period” income. Excess deferrals are participant pre-tax deferrals above the Internal Revenue Code Section 402(g) limit (currently $16,500). Gap period income is the earnings on the refunded amounts from the end of the calendar year in which the deferrals were made through the date the refund is made. The change is effective for excess deferrals made in 2008 (and distributed in 2009) and subsequent years.