Mandatory Retirement Plan Distributions Suspended for 2009

Overview

On December 10 and 11, both the U.S. House and Senate passed H.R. 7327, the “Worker, Retiree, and Employer Recovery Act of 2008.”  The Act makes technical corrections to the Pension Protection Act of 2006 (PPA), and includes a relief measure that waives the requirement for taxpayers age 70 and ½ and older to take a required minimum distribution in 2009.  President Bush is signed the Act into law on December 23, 2008.

H.R. 7327, Pub. Law No. 110-458

The Act eases funding requirements for employer-sponsored pension plans that, absent legislation, would have been forced to make significantly higher contributions in the near future.  Accordingly, the Act includes temporary funding relief for multi-employer plans that have been negatively impacted in recent months.  The Act also includes changes to for underfunded plans, hybrid plans and the combined plan deduction limit.  In addition, the Act modifies the PPA’s treatment of non-spouse beneficiaries of qualified plan participants.  Under an IRS interpretation of the PPA, effective for distributions after 2006, non-spouse beneficiaries of an inherited qualified plan account may (but are not required to) make a trustee-to-trustee transfer of part (or all) of the deceased employee’s account balance in a qualified plan (or a 403(a), 403(b) or 457 plan) to an IRA (or individual retirement annuity).  The transfer is treated as an eligible rollover distribution, and the receiving IRA is treated as an inherited IRA.  Under the Act, however, effective for plan years beginning after 2009, qualified plans would have to permit rollovers by non-spouse beneficiaries.  

The Act also increases the penalty for failure to file a partnership or S corporation return to $89/month per partner (or shareholder) for returns required to be filed after 2008.

Suspension of Required Minimum Distributions

IRA’s and other pension plans permit taxpayer to defer tax on contributed amounts and account earnings until the time of distribution.  But, the deferral timeframe ends when the required minimum distribution (RMD) rules take effect.  Under those rules, taxpayers must take certain minimum distributions each year after reaching age 70 and ½ or face a 50 percent excise tax on the amount that should have been distributed under the RMD rules.  The amount that must be distributed is determined by multiplying a required distribution table percentage against the value of the account at the end of the preceding year.

Given the decline across practically all investment markets in recent months, many retirees have seen their IRA and pension accounts lose a significant amount of value.  For retirees that do not necessarily need to take a distribution from their plan, the RMD rules still require that a distribution be taken.  That not only draws the account value down, but also causes account holders to sell investments at lower values to be able to meet the RMD requirement.  As a result, the Act waives the RMD requirement for calendar year 2009.  The provision applies to IRAs and many (but not all) pension plans.  Individuals withdrawing under the five-year method may also take advantage of the provision (i.e., the distribution can be waived for 2009 which effectively allows the distributions to be taken over six years rather than five).  Also, for withdrawals made in 2009 (that are not an RMD for 2008), the withdrawn amounts can be rolled over into other eligible retirement plans with any untaxed portion of the withdrawal that is not rolled-over reported into gross income.  
 

Note: Persons turning 70 and ½ during 2008 have until April 1, 2009 to take the required distribution. While the RMD for 2009 is waived, the waiver does not apply to the distributions that can be taken by April 1 for taxpayers reaching age 70 and ½ during 2008.  However, the waiver rule applies to individuals who may be eligible to postpone taking their 2009 RMD until April 1, 2010.  That will apply generally to retired employees and IRA owners who attain age 70 and ½ in 2009. 

Reporting Issues

Parties that issue the 2008 Form 5498 should not check Box 11.  But, IRS has indicated that if Box 11 is checked, IRS will not consider the form to have been issued incorrectly if the IRA owner is notified by the financial institution not later than March 31, 2009, that no RMD is required for 2009.  Also, the standard RMD information that IRS requires doesn’t have to be sent to IRA owners in 2009.  IRS has stated in Notice 2009-9, 2009-5 IRB 1, that if a financial institution sends a separate RMD statement to an IRA owner, either initially or in response to the owner’s request for the financial institution to calculate the RMD for 2009, the financial institution must show the RMD for 2009 as zero.  Or, the financial institution may send the IRA owner a statement showing the RMD that would have been required but for the waiver of RMD’s for 2009, along with an explanation of the waiver for 2009. 

Summary

The Act makes important changes to the PPA, and the RMD rules for 2009.  Unfortunately, the RMD provision does not apply to 2008 RMDs.  Those still must be made in full.  Of course, the provision is of no benefit to retirees that need to take full RMD distributions for living and other necessary expenses (i.e., lower income retirees).  Here’s betting the Congress hadn’t figured that one out.  Why not just waive the penalty tax for 2009?  That way everyone could benefit.