IRS Finally Speaks with Respect to Minimum Required Distributions

As we indicated earlier this year, Congress waived the 2009 required minimum distribution requirement for defined contribution retirement plans (like 401(k) plans) and IRAs as a result of the financial market meltdown.  Our March 6, 2009 Client Alert also advised our clients to hold off on making any required minimum distributions for 2009 (2009 RMDs), and to wait before taking any affirmative action with respect to this waiver until the IRS issued further guidance and answered several important questions. These questions are:

• Whether the waiver of 2009 RMDs is required or optional;
• Whether all distributions made in 2009 are now eligible rollover distributions (which are subject to mandatory federal income tax withholding); and
• When plans must be amended to comply with the law.

The IRS recently answered these questions in Notice 2009-82, which may require plan sponsors to act by November 30, 2009.

Required minimum distributions generally must be made when a participant attains age 70½ or dies, and has not received (or a beneficiary has not received) a distribution of his or her entire account in the plan. Therefore, if none of the participants in your defined contribution plan attains age 70½ before December 31, 2009, and no participant has died prior to January 1, 2009 with an account balance in the plan that has not been distributed, you do not need to take any action with respect to this issue. You do not need to read any further.

If you do have participants or beneficiaries who would be required to receive a 2009 RMD if not for the waiver, the IRS answers are important to you and are discussed below.

First, the IRS has indicated that the waiver is optional, so you may continue to make 2009 RMDs. In this situation, your plan will not need to be amended to reflect any change. This is the easiest way to deal with 2009 RMDs. Alternatively, you can allow participants or beneficiaries to waive 2009 RMDs, in which case a plan amendment will be necessary.

Second, because the IRS has confirmed that all distributions made in 2009 are generally eligible rollover distributions, you should notify your participants or beneficiaries of their rollover rights if any 2009 RMDs were paid. A special transition rule allows participants and beneficiaries who received a 2009 RMD before the IRS guidance to roll over their distribution to another qualified plan or IRA (or back into the plan if the plan allows it) by November 30, 2009 (even if it is more than 60 days since the distribution was made). You should notify these participants and beneficiaries of this special rule as soon as possible. You must also decide whether to allow any 2009 RMDs made for the rest of 2009 (and as late as April 1, 2010 for participants who attain age 70½ in 2009) to be rolled directly to an IRA. An employer is not required to offer a direct rollover of the 2009 RMDs. But, if a direct rollover is not permitted, the employee may still roll over the distribution within 60 days after receipt.

If a participant receives a distribution of a 2009 RMD, the employer should withhold taxes on any distributions that would have been required if not for the waiver as if the distribution is not an eligible rollover distribution. This means that the 10% optional income tax withholding rules apply, instead of the 20% mandatory income tax withholding rules.

Third, employers that allow their participants or beneficiaries to waive 2009 RMDs must decide which of two model amendments issued by the IRS to adopt. One provides that 2009 RMDs will still be made if no election is made by the participant, and the other provides that no distribution will be made if no election is made. Both amendments also allow a choice whether to include 2009 installment distributions made as part of a series of payments in the distributions eligible for direct roll over in 2009. This amendment must be adopted by the last day of the plan year beginning in 2011. This amendment must reflect how the plan was actually operated.

The guidance also clarifies that the waiver of 2009 RMDs does not apply to non-governmental 457(b) plans or defined benefit plans.