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In an effort to cushion the blow to retirement savings inflicted by the stock market crash, then-President Bush signed the Worker, Retiree and Employer Recovery Act (WRERA) on Dec. 23, 2008. Although the act provides some much-needed funding relief for sponsors of defined benefit pensions, its attempt to help retirees who remain participants in 401(k) or other defined contribution plans could leave the sponsors of those plans reaching for a bottle of aspirin.
Among other things, WRERA amends tax code Section 401(a)(9) to suspend temporarily the rule requiring that retirees who are at least 70½ years old take a "required minimum distribution" (RMD) each year from defined contribution plans in which they have funds, including employer-sponsored plans — e.g., 401(k), profit sharing and money purchase pension plans, along with 403(b), 403(a) and governmental 457 plans. The RMD relief also applies to individual retirement accounts (IRAs). Interestingly, the RMD rules, and thus the relief provided by WRERA, apply to Roth 401(k)s but not to individual Roth IRAs, which aren't subject to distribution requirements. (Eligible retirees can get around this by rolling their Roth 401(k) monies into an individual Roth IRA.)
RMDs from defined contribution plans must generally start to be taken by April 1 of the calendar year following the year in which the retiree reaches age 70½, and then continue to be made as of the end of that and each succeeding calendar year.
The problem posed by the precipitous decline in plan account balances during 2008 would have been compounded for retirees who were due to receive RMDs in 2009. Because RMDs are based on account balances as of the end of the prior year, such retirees would have been forced to lock in a portion of their 2008 losses by taking a distribution in 2009. Congress heard from many retirees who preferred to delay such distributions, allowing time for the market to recover.
Congress’s answer to this problem was simple enough to articulate: For 2009, RMDs need not be made. As is the case for most legislative solutions, however, the devil is in the details. For example, WRERA does not indicate whether the suspension of RMDs constitutes mandatory, or merely optional, relief. Nor does the act state whether individual retirees may choose whether to continue receiving RMDs in 2009 and, if so, when and how they must be notified of their options. Moreover, assuming that the act permits either employers or retirees to continue RMDs during 2009, it leaves the tax treatment of those distributions in doubt.
Although the IRS is likely to issue guidance on certain of these questions, it is unclear when that guidance might be forthcoming. In the meantime, employers should consider how WRERA might affect their plans and retirees.
Limited RMD Relief
The RMD relief enacted by WRERA disappointed many, as it does not apply to defined benefit plans. Instead, it covers only qualified defined contribution plans. Moreover, it relates only to 2009 distributions.
Individuals who turned 70½ before 2008 and were already receiving RMDs will have their 2009 distribution delayed until 2010. Such a delay will also apply to retirees who reach age 70½ during 2009. Their first RMD will be delayed from April 1, 2010, to the end of 2010.
RMDs that are being made to a deceased participant’s beneficiary will also be delayed for one year. Such distributions generally must be made within the five-year period following the participant’s death. Under WRERA, plans may simply ignore 2009 when calculating this five-year payout to the RMDs that are due by April 1, 2009.
WRERA does not apply, however, to RMDs that are due by April 1, 2009, to retirees who turned 70½ during 2008. This is because such a distribution relates to 2008, rather than 2009. The next distribution that such an individual would be required to take, which would normally be due by Dec. 31, 2009, is covered by the relief. That distribution may thus be delayed until the end of 2010.
The following table illustrates the application of WRERA’s RMD relief to various categories of retirees:
Year Attained Age 70½
Next DistributionUnder WRERA
Prior to 2008
Dec. 31, 2009
Dec. 31, 2010
April 1, 2009; then Dec. 31, 2009
April 1, 2009; then Dec. 31, 2010
April 1, 2010
Beginning in 2010, RMDs will be calculated just as they were prior to WRERA. Thus, plans will generally determine a retiree’s 2010 RMD by dividing the Dec. 31, 2009, account balance by the appropriate Uniform Life Table factor in the IRS regulations.
Is Suspension Optional or Mandatory?
One of the most basic questions about WRERA is whether the RMD relief is mandatory, or whether sponsors and/or retirees may elect whether to take advantage of it. The hastily drafted WRERA is ambiguous on this point. Most analysts believe that the relief is optional, but at least two industry groups have asked the IRS for reassurance on this point.
Assuming that suspension of the 2009 RMDs is not mandatory, employers have several options to consider. For instance, they could choose to:
Suspend all 2009 RMDs, regardless of the terms of their plan and any prior distribution elections made by participants. Ignore WRERA and continue making RMDs for 2009 (as explained below, such distributions might have to be treated as eligible for rollover, unlike most RMDs).Solicit individual elections from affected retirees.
Suspend all 2009 RMDs, regardless of the terms of their plan and any prior distribution elections made by participants.
Ignore WRERA and continue making RMDs for 2009 (as explained below, such distributions might have to be treated as eligible for rollover, unlike most RMDs).
Solicit individual elections from affected retirees.
Whichever option they choose, however, employers should carefully evaluate its consistency with the terms of their plan.
Notice Requirements and Rollover Options
It is also unclear whether individual retirees may have a say in this matter. Some retirees may want — or indeed need — to receive a distribution for 2009. Suspending such payments blindly pursuant to WRERA might be to their disadvantage. Absent further guidance, it is even possible that discontinuing RMDs without a retiree’s consent could amount to an impermissible cutback of benefits, violating Section 411(d)(6) of the tax code. Yet the RMD waiver provisions of WRERA do not include retiree notice requirements.
Despite the absence of formal guidance, employers should consider providing some kind of disclosure to their retirees. Depending on the manner in which plans implement the new rules, RMD recipients might have options with very different tax consequences.
----------------------------------------------------------------Despite the absence of formal guidance,employers should consider providingsome kind of disclosure to their retirees.----------------------------------------------------------------
For instance, RMDs are normally excluded from the tax code’s definition of an “eligible rollover distribution.” Thus, recipients are taxed immediately on those payments; they cannot roll them into another plan or IRA. Moreover, RMDs are subject to the voluntary 10 percent tax withholding, rather than the mandatory 20 percent withholding applicable to eligible rollover distributions that are not rolled over directly.
Under WRERA, however, 2009 distributions that would have been RMDs are not treated as RMDs. They may thus be eligible rollover distributions. This means that retirees may roll such distributions into an IRA or other employer plan, thereby avoiding immediate taxation on the distributions.
For administrative simplicity, the act does not require plans to treat 2009 RMDs as being eligible for direct rollover from the distributing plan to another plan or IRA, although they are permitted to do so. This means that plans:
Need not offer retirees the direct rollover option.Need not provide code Section 402(f) rollover notices.Need not withhold at the 20 percent rate if a retiree elects a cash distribution.
Need not offer retirees the direct rollover option.
Need not provide code Section 402(f) rollover notices.
Need not withhold at the 20 percent rate if a retiree elects a cash distribution.
If a retiree wishes to complete an indirect rollover of the distribution, he or she will have the normal 60-day period in which to do so. In any event, it seems that retirees should be notified of their ability to make such a rollover.
Timing of Plan Amendments
Another open issue is whether employers must amend their plan documents to reflect the treatment of 2009 RMDs. The answer will depend on how individual employers choose to treat such distributions, as well as the specific RMD language already in their plan documents. Although some plans do not have separate RMD forms of distribution, and might thus be largely unaffected by the act, many others — including a popular prototype document — do make such forms available. Only an analysis of the plan’s specific terms will determine whether employers must change their practices and/or plan documents in response to this RMD relief.
Some plans articulate the RMD rules by incorporating the provisions of code Section 401(a)(9) by reference. For those plans, the suspension of RMDs for 2009 might be required, because WRERA amends Section 401(a)(9) by providing that those rules “shall not apply” in 2009. Thus, in order to make 2009 RMDs despite WRERA, such plans would have to be amended.
Other plans recite the RMD rules without incorporating Section 401(a)(9) specifically. In those instances, it might be possible to continue applying the rules set forth in the plan — i.e., to continue making RMDs for 2009 — notwithstanding WRERA and without the need for a plan amendment. Unless the IRS issues subsequent guidance to the contrary, such plans would have to be amended (though not immediately) in order to suspend payment of 2009 RMDs. Otherwise, such a suspension would violate the plan’s terms.
WRERA gives employers until the beginning of the first plan year that begins on or after Jan. 1, 2011, to make required amendments. (For governmental plans, the deadline is the first plan year beginning on or after Jan. 1, 2012.) Because of the complexity of administering this aspect of the act, however, it might be to an employer’s advantage to adopt a good faith amendment — or at least administrative procedures documenting the employer’s decisions — well in advance of this deadline. This sort of documentation might make it easier to explain the new rules to participants and retirees.
Immediate Considerations for Plan Sponsors
Although further IRS guidance might answer some of the questions raised by the passage of WRERA, employers should begin now to address the implementation of these RMD changes. Among the issues to consider are:
Does the employer’s plan offer an RMD form of distribution? How many retirees are currently receiving RMDs?Will the employer suspend all 2009 RMDs, continue to make such distributions, or allow retirees to elect between these options? If the plan will not suspend all 2009 RMD payments, will it offer a direct rollover of such distributions — providing the required 402(f) notices and election forms? Must the plan document or election forms be modified to reflect the employer’s choices for 2009 RMDs? Can the plan’s service provider accommodate the employer’s choices?
Does the employer’s plan offer an RMD form of distribution?
How many retirees are currently receiving RMDs?
Will the employer suspend all 2009 RMDs, continue to make such distributions, or allow retirees to elect between these options?
If the plan will not suspend all 2009 RMD payments, will it offer a direct rollover of such distributions — providing the required 402(f) notices and election forms?
Must the plan document or election forms be modified to reflect the employer’s choices for 2009 RMDs?
Can the plan’s service provider accommodate the employer’s choices?
Close communication with the plan’s legal counsel and service providers will likely be required to sort through this maze of issues.
Gregory L. Ashis a partner in Spencer Fane's Overland Park, Kan., office, where he is a member of the firm’s Employee Benefits Group and chair of its ERISA Litigation Group. For over 15 years his practice has focused exclusively on ERISA and other laws governing employee benefits, including matters affecting pension, profit sharing, ESOP, 401(k), executive compensation and welfare plans. © 2009 Spencer Fane Britt & Browne LLP. All rights reserved. Republished with permission.
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