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Guest Article

(From the October 5, 2009 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

2009 RMD Waivers: IRS Issues Clarification and Transitional Relief

In Notice 2009-82 the IRS provided much-needed clarification regarding the 2009 waiver of required minimum distributions (RMD). It also granted transitional relief to allow RMDs made earlier in 2009 to be rolled over by November 30, and issued sample amendments that individual plan sponsors and sponsors of pre-approved plans can use with reliance. IRS Notice 2009-82.

Clarification of Key Aspects

The Worker, Retiree, and Employer Recovery Act of 2008 added new provisions to IRC *#167; 401(a)(9) to exempt qualified defined contribution plans, § 403(b) plans, governmental § 457(b) plans, and individual retirement accounts and individual retirement annuities ("IRAs"), from the RMD requirements for 2009. For sponsors and administrators of these arrangements, recently-released Notice 2009-82 is "must reading." It provides fundamental clarification on the workings of the RMD "waiver" for 2009. Among various matters, the Notice explains:

2009 RMDs. The waiver applies to a participant or beneficiary who would have been required to receive a RMD for 2009 (the "2009 RMD") and who would have satisfied that requirement by receiving a distribution either:
- Equal to the 2009 RMD, or
- Under a series of substantially equal distributions (that include the 2009 RMD) made at least annually and expected to last for the life (or life expectancy) of the participant, the joint lives (or joint life expectancy) of the participant and the participant's designated beneficiary, or for a period of at least ten years (an "Extended 2009 RMD").
All other distributions -- including distributions that consist partly of a 2009 RMD -- fall outside the waiver and will continue to be made.
Permissive Direct Rollovers. Plans are permitted (but not required) to offer a direct rollover of a 2009 RMD distribution. The Notice clarifies that for this purpose the plan can elect to provide direct rollovers of the 2009 RMD and the Extended 2009 RMD. [Note: Like RMDs, substantially equal periodic payments made over the life or life expectancy of the participant (or the joint life or life expectancy of the participant and beneficiary), or over a period of at least ten years, would not otherwise be rollover eligible. Their rollover eligibility is a unique characteristic only for 2009, as a result of the RMD waiver and the guidance in Notice 2009-82. See IRC § 402(c)(4).]
Deadline for 401(a)(9) Elections. The deadline is extended until the end of 2010 for:
- Employees or beneficiaries who have until the end of 2009 to choose between receiving distribution under the "5-year" or the "life expectancy" rule under IRC § 401(a)(9)(B) (i.e., in electing the method for satisfying the required distribution where the employee dies before distributions have begun).
- Non-spouse beneficiaries who are permitted to directly roll over the account balance of a participant who died in 2008, under the "special rule" in Notice 2007-7 (i.e., in making the direct rollover and in using the life expectancy rule for satisfying the required distribution where the participant died before distributions have begun).
Spousal Consent. Spousal consent may be required to suspend RMDs for 2009. If no new "annuity starting date" is chosen (under the procedures described in Notice 97-75 Qamp;A-8), spousal consent is not required under most circumstances. However, if there is a new "annuity starting date," spousal consent may be required to suspend distributions for 2009 and to resume them in 2010, depending on the form of distribution.
Rollover to Same Plan. If the rollover requirements are met (and the plan document allows it), the Notice points out that the 2009 RMD can be "rolled back" to the distributing plan.
Substantially Equal Period Payments under IRC § 72(t). The Notice points out that the 2009 RMD waiver does not apply to payments that are being made as part of a "series of substantially equal periodic payments" to avoid the 10 percent early distribution tax under IRC § 72(t). If those payments are stopped in 2009 before age 59? or before 5 years from the date of the first payment, all the payments made under the series are subject to the recapture tax.

The Notice also provides clarification on other important matters, including the withholding requirements, and the ordering rule by which the 2009 RMD is identified amongst more than one distribution made in 2009.

Transition Relief through November 30

The Notice provides significant transition relief through November 30, 2009, with respect to the qualification requirement that the plan be operated in accordance with its terms, and to allow rollovers of previously made 2009 RMDs. Specifically:

Plan Compliance. Plans can be amended to reflect the 2009 RMD waiver as late as the last day of the 2011 plan year (or the 2012 plan year for governmental plans), provided that the plan operates as if the amendment were in effect from its effective date. Given the confusion surrounding the 2009 RMD waiver and its terms and administration, the IRS has granted a transition period. During the period January 1, 2009 through November 30, 2009, a plan will not be treated as failing to satisfy the requirement that it be operated in accordance with its terms merely because:
- 2009 RMDs or Extended 2009 RMDs were or were not paid,
- Participants and beneficiaries were not given the option of receiving or not receiving distributions that include 2009 RMDs, or
- A direct rollover option was or was not offered for 2009 RMDs or other amounts that can be rolled over under the Rollover Relief provided.
Rollover Relief. 2009 RMDs and Extended 2009 RMDs can be rolled over if the other rollover requirements are met (e.g., the 60-day deadline for rollover, among others). To assist participants, beneficiaries and IRA holders who previously received a distribution in 2009 and were unsure of the rollover eligibility of the distribution, the IRS extended the 60-day rollover period so that it will end no earlier than November 30. Individuals have until November 30, or 60 days from the date the distribution was received, whichever is later, to complete the rollover. (The Notice points out that no more than one distribution from an IRA in 2009 will be eligible for this rollover relief because of the statutory limitation under IRC § 408(d)(3), which permits only one rollover per year.)

Sample Amendments

The Notice did not extend the remedial amendment period; plans still need to be amended by the last day of the 2011 plan year (or, in the case of governmental plans, the 2012 plan year). (IRAs do not need to be amended, pending the issuance of further guidance.) The Notice does provide sample amendments which, if adopted (and modified as necessary to conform to the plan's terms), will not result in the loss of reliance on a favorable opinion, advisory or determination letter -- and will not affect the preapproved status of a master and prototype or volume submitter plan.

As adopted, the amendments must reflect the operation of the plan with respect to the 2009 RMD waiver (except for the period January 1 through November 30, as described above in the Transition Relief regarding Plan Compliance). The IRS provides two versions of a sample amendment: in one version the 2009 RMDs and Extended 2009 RMDs will be distributed unless the participant or beneficiary affirmatively elects otherwise, and in the other version the distributions will not be made unless the participant or beneficiary affirmatively elects otherwise. Direct rollovers of the 2009 RMDs and Extended 2009 RMDS are not offered under either -- although the sponsor can add provisions to provide a direct rollover of both, or only of the 2009 RMD.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.