The Internal Revenue Service (IRS) recently released Notice 2009-82, which provides additional guidance relating to the waiver of 2009 required minimum distributions from defined contribution retirement plans. Congress amended the required minimum distribution requirements for defined contribution plans late last year to waive the required minimum distributions for the 2009 calendar year.
Notice 2009-82 clarifies the scope of waiver and provides transition relief through November 30, 2009 for plans that may not have been administered in accordance with their terms through November 30, 2009.
The notice also clarifies that required minimum distributions for 2009 that are paid to participants and beneficiaries are eligible for rollover treatment. Moreover, the IRS extended the normal 60-day period for making rollover contributions until November 30, 2009 because it was not clear until know that these distributions were eligible for rollover treatment.
Required Minimum Distributions - Background
Participants in qualified retirement plans, 403(b) annuities and governmental 457(b) plans are generally required to begin receiving distributions (called "required minimum distributions" or "RMDs") by April 1 of the calendar year following the later of the calendar year in which the participant attains age 70-1/2 or retires. Earlier commencement is required for 5% owners of the plan sponsor. Similar RMD requirements apply to IRAs.
RMDs generally may not be rolled over to an IRA or other eligible retirement plan. In addition, RMDs are not subject to the 20% mandatory income tax withholding rules.
Congress Amended the RMD Requirements to Waive RMDs for 2009
To address participant concerns that the RMD requirements would force participants to withdraw money from their defined contribution accounts in a declining market, the Worker, Retiree and Employer Recovery Act of 2008 ("WRERA"), which was signed into law by former President Bush on December 23, 2008, waived the RMD requirements for calendar year 2009 for all defined contribution plans. As a result of the waiver:
- If a participant started receiving RMDs prior to 2009, the RMD for the 2009 calendar year that would normally be distributed to the participant by December 31, 2009 is not required to be distributed.
- If a participant's initial RMD is for the 2009 calendar year, the participant's initial RMD that would normally be distributed by April 1, 2010 is not required to be distributed.
- If the participant's initial RMD is for 2008 calendar year, the RMD that would normally have been required to be distributed by April 1, 2009 is still required to have been distributed no later than than April 1, 2009.
WRERA also modified the rollover rules to provide that the 2009 RMDs that are actually distributed will not be treated as eligible rollover distributions. This change meant that:
- Employer plans are not required to allow the participants to make direct rollovers with respect to distributions of 2009 RMDs,
- Employer plans are not required to provide a direct rollover notice (sometimes referred as the "special tax notice") with respect to the distribution of 2009 RMDs, and
- The mandatory 20% income tax withholding for eligible rollover distributions does not apply to distributions of 2009 RMDs.
The amendment to the rollover rules to exclude distributions of 2009 RMDs from the definition of eligible rollover distribution lead many people to believe that these distributions were not eligible for rollover treatment.
New IRS Guidance -- IRS Notice 2009-82
Notice 2009-82 provides the following important guidance:
- Certain Installment Distributions are Covered by the 2009 RMD Waiver. Notice 2009-82 clarifies that if a plan participant is receiving distributions in substantially equal periodic distributions payable at least annually over the participant's life expectancy (or the joint life expectancy of the participant and his beneficiary) or over a period of at least 10 years, the periodic distributions made for 2009 will be treated as 2009 RMDs that may be waived pursuant to the 2009 RMD waiver.
- Plan Amendments. Plan sponsors may, but are not required to, implement the WRERA 2009 RMD waiver for their defined contribution plans. In general, defined contribution plans may follow one of the following three courses of action:
- Distribute 2009 RMDs without regard to the 2009 RMD waiver and without giving participants or beneficiaries the right to elect to leave their 2009 RMDs in the plan.
- Distribute 2009 RMDs unless the participant or beneficiary affirmatively elects not to receive the 2009 RMD.
- Cease distributions of 2009 RMDs unless the participant or beneficiary affirmatively elects to receive the 2009 RMD.
Plan documents must be amended to reflect the plan sponsor's decision by the last day of the first plan year beginning on or after January 1, 2011 (or January 1, 2012 for governmental plans). Notice 2009-82 includes two alternative sample amendments that may be used by plan sponsors to amend their plans to allow participants and beneficiaries to decide whether to receive their 2009 RMDs or leave the amounts in the plan.
Although the notice does not provide a sample amendment for plans that will be making the 2009 RMDs without giving participants and beneficiaries the right to leave their 2009 RMDs in the plan, a plan amendment to reflect this decision may still be necessary. The terms of the plan should be carefully reviewed to make sure that the plan does not automatically provide for the 2009 RMD waiver by incorporating the statutory RMD provisions by reference.
- Plan Operational Relief. Notice 2009-82 provides that a plan will not be treated as failing to be operated in accordance with its terms merely because, during the period from January 1, 2009 through November 30, 2009, the plan either made or failed to make 2009 RMDs to participants and beneficiaries. This temporary operational relief also applies to the plan's failure to give (or not give) participants an election to waive distribution of the 2009 RMDs.
- Direct Rollovers. Although WRERA modified the rollover requirements to prevent distributions of 2009 RMDs from being classified as eligible rollover distributions, Notice 2009-82 clarifies that a plan may nevertheless allow direct rollovers of such distributions into an IRA or other eligible retirement plan. The sample amendments attached to Notice 2009-82 include alternative provisions that either authorize or prohibit direct rollovers with respect to distributions of the 2009 RMDs.
- Rollover Transition Relief. To assist participants and beneficiaries who have previously received 2009 RMDs but did not know that these distributions could be rolled over into an IRA or other eligible retirement plan, Notice 2009-82 has extended the period following the distribution of 2009 RMDs during which such distribution may be rolled over into an IRA or other eligible retirement plan. In general, rollover contributions must be made within 60 days after the participant receives the distribution of the amount being rolled over. Notice 2009-82 provides that distributions of 2009 RMDs may be rolled over to an IRA or other eligible retirement plan at any time on or before November 30, 2009 (or, if later, within 60 days after the 2009 RMD is distributed). Although neither WRERA nor the notice imposes any specific notice requirement with respect to this rollover right, plan sponsors may want to notify participants and beneficiaries who have previously received 2009 RMDs that these distributions may be rolled over into an IRA or eligible retirement plan by November 30, 2009.
Plan sponsors should review their procedures regarding the payment of 2009 RMDs in light of this guidance. Sponsors may also want to consider whether to notify participants and beneficiaries who have previously received 2009 RMDs of the extended rollover rights. Finally, sponsors should carefully review the terms of their defined contribution plans to ensure that their plans accurately reflect the manner in which 2009 RMDs and direct rollovers are being administered.