Waiver of 2009 Required Minimum Distributions from Individual-Account Plans

Background on Required Minimum Distributions

Under current IRS regulations, plan participants must start receiving RMDs every year, generally beginning with the year in which they reach age 70½ or retire, whichever is later. Generally, the RMD for a year must be distributed by December 31 of the year for which it must be made, but the first RMD, and only the first, can be distributed as late as April 1 of the next calendar year. So, for example, if a retiree who had not started to receive benefits from his or her §401(k) plan reached age 70½ in 2007, the retiree must receive the 2007 RMD no later than April 1, 2008, and then must receive the 2008 RMD by December 31, 2008. If the RMD for a year is not distributed by the applicable deadline, the failure could trigger tax penalties for both the plan and the participant.

The WRERA Waiver for 2009 RMDs

The IRS guidance clarifies the following points about the 2009 RMD waiver:

The 2008 RMD may not be waived even if the 2008 RMD is payable in 2009 (by April 1, 2009) because it is a participant's first RMD. As noted above, failure to distribute the 2008 RMD could trigger tax penalties both for the participant and the plan.
The 2009 RMD may be eligible for waiver even if the 2009 RMD is not paid until 2010 because it is the participant's first RMD.
Generally RMDs cannot be rolled over to an IRA or another plan; they must be included in income and taxed. This is because the point of the RMD rule is to prevent pensions from being sheltered from income tax indefinitely. Under WRERA, however, if the 2009 RMD is paid, it is not treated as an RMD and may be rolled over if it otherwise meets the rollover requirements.
If the 2009 RMD is paid, it is subject to withholding, but not at the 20 percent mandatory withholding rate.
Beneficiaries receiving distributions over a five-year period may waive the distribution for 2009 and thereby receive benefits over a six-year period.

Implications for Sponsors of DC Plans

Sponsors of affected DC plans must decide how to comply with the WRERA waiver provisions. To the extent plan sponsors have the information, one key issue what participants want and/or expect. Technical issues for consideration include how to coordinate the 2009 RMD, whether waived or paid, with distribution options that include amounts in excess of the RMD (e.g., lump-sum payments at retirement after age 70½), and how to communicate this complicated one-year change.

At this time, it appears plans may elect any of the following approaches:

Distribution with Election to Waive: Continue to make scheduled distributions of 2009 RMDs unless a participant elects to waive payment.
Waive with Election to Receive Distribution: Stop distribution of scheduled 2009 RMDs unless a participant elects a distribution.
Distribution with no Election to Waive: Continue to make scheduled distributions of 2009 RMDs and do not provide participants an election to waive payments.

Although WRERA does not require plans to notify participants of how 2009 RMDs will be handled, some explanation obviously will be needed no matter the approach, and particularly if a plan chooses not to make 2009 RMDs unless requested by participants.

Finally, the extent to which plan amendments are required will depend upon the existing plan terms (e.g., whether §401(a)(9) is incorporated by reference) and the approach adopted. Any plan amendments determined to be necessary may be delayed until the last day of the first plan year beginning on or after January 1, 2011 (2012 for governmental plans) provided the plan complies operationally during the period beginning on the effective date of the plan change and ending on December 31, 2009.

As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for authoritative advice on and the latest IRS information on required minimum distributions. Retirement Plan Concepts & Services, Inc. can be retained for assistance with updating plan documents and preparing determination letter submissions.

WRERA was signed into law on December 23, 2008 as Public Law 110-458. It is available online at: http://www.gpoaccess.gov/plaws/110publ.html.
IRS Notice 2009-9 is available on the following page of the IRS Web site: http://www.irs.gov/irb/2009-05_IRB/ar12.html. Other guidance includes special editions of Retirement News for Employers and Employee Plans News, available on the following pages of the IRS Web site: http://www.irs.gov/pub/irs-tege/rne_se0109.pdf and http://www.irs.gov/pub/irs-tege/se0109.pdf, respectively. In addition, the following page on the IRS Web site was updated to include frequently asked questions about 2009 required minimum distributions: http://www.irs.gov/retirement/article/0,,id=96989,00.html.
Some plans provide that participants must begin their RMDs in the year they reach age 70½ even if they have not retired.