Denise Appleby, CISP, CRC, CRPS, CRSP, APA.
H.R. 7327, the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) was signed into law on December 23, 2008. WRERA provides a waiver of the required minimum distributions (RMD) for 2009 and makes other changes that affect the funding and distribution rules for pension plans. This article focuses on the RMD waiver provision.
- Owners of accounts under defined contribution plans, 403(b) accounts ,and IRAs who would otherwise be required to take RMD amounts from their retirement accounts for 2009. This includes individuals who reached age 70 ½ before 2009, and those whose required beginning date (RBD) is April 1 2010. For more on this, see our FAQ: What is the required beginning date?
- Beneficiaries of retirement accounts who take distributions under the life-expectancy method and are required to take a beneficiary-RMD for 2009
- Individuals who are subject to the five year rule, and the five year period would have otherwise expired on December 31, 2009. Under the five year rule, an individual who inherited a retirement account in 2004 would have been required to distribute the entire account by December 31, 2009. For these individuals, the five year period is extended until December 31, 2010.
- The 20% withholding does not apply: Despite the fact that the amount will not be treated as an RMD in the traditional sense, the 20% federal tax withholding does not apply. As such, if an employee requests a distribution from his or her qualified plan, 403(b) or 457(b) governmental plan for 2009, and the amount represents what would have been an RMD amount had the RMD reprieve under WRERA not apply; the payer must not apply the 20 % federal tax withholding. However, if the employee fails to make a withholding election, the payer is required to withhold 10% for federal tax. For an explanation of the withholding rules, see our FAQ on Distribution-withholding.
- Written Explanation for Rollover-Eligible Amounts not Required: Sponsors of qualified plans, 403(b) and 457(b) accounts are usually required to provide employees with a written notice of the direct rollover requirement for rollover eligible amounts and the tax treatment that applies if the amount is not processed as a direct rollover. This written-explanation requirement is optional for amounts that would have been RMD amounts for 2009 had WRERA not apply.
- Amount is Rollover-Eligible: Sponsors of qualified plans, 403(b) and 457(b) accounts are usually required to offer employees the option of having a non-RMD amounts processed as a direct rollover to an eligible retirement plan, if the amount is otherwise rollover-eligible. Offering the direct rollover option is optional for amounts that receive an RMD waiver for 2009 under WRERA. However, if the amount is not processed as a direct rollover, the employee may rollover the amounts to an eligible retirement plan within 60-days of receipt.
- For individuals with an RBD of April 1, 2010, the RMD for 2010 must be taken by December 31, 2010. Recall that this applies to (i) IRA owners who attain age 70 ½ in 2009 and (ii) participants in qualified plans, 403(b) accounts and 457(b) governmental plans who reach age 70 ½ in 2009, or reach age 70 ½ before 2009 and retired in 2009 from an employer with a plan that permit employees to defer beginning RMDs until retirement.
- For beneficiaries: For individuals who inherit retirement accounts, from an account owner whose RBD is April 1, 2010, the retirement account owner is treated as dying before the RBD if he or she dies before April 1, 2010; and the account holder is treated as dying on or after the RBD if he or she dies on or after April 1, 2010. This will affect the options available to the beneficiary for distribution of the inherited assets. For more on beneficiary options, see the article Year-End Tips for Owners and Beneficiaries of Retirement Accounts, our Frequently Asked Questions on IRA Beneficiary Options and our IRA Beneficiary Options – Quick Reference