The Worker, Retiree, and Employer Recovery Act of 2008 provides defined contribution plans with the opportunity to eliminate minimum required distributions for 2009. Plan sponsors will need to evaluate whether to implement this provision, particularly in light of the current economic crisis.
The minimum required distribution (MRD) rules generally require that a participant take annual minimum distributions after the participant reaches age 70½ (and usually only if the participant is no longer employed by the plan sponsor). Because many participants saw the account balances of their 401(k) and other defined contributions plans fall dramatically in 2008, the Act allows defined contribution plans to skip the MRD that would otherwise be required for 2009. The Congressional intent is to allow these participants to retain investments in their accounts and have a greater opportunity of recovering lost value on these investments.
In addition to IRAs, the law applies to most defined contribution plans. This includes all 401(k) plans, profit sharing plans and 403(b) plans. A 457(b) eligible deferred compensation plan is covered only if it is a governmental plan.
2009 MRD Only
The Act did not waive the requirements for an MRD for 2008, even if that MRD is not required to be made until April 1, 2009. The waiver is a one-year provision, so it also does not affect the MRD that will be required for 2010.
Effect of Skipping 2009 MRD
If the 2009 MRD is not made, the next MRD would occur for calendar year 2010. The MRD in 2010 would be calculated the same as if the 2009 MRD had not been waived. The account balance at the end of 2009 and the employee’s age in 2010 would be used for the calculation as under the existing rules.
Also, if the person’s first MRD would have been required for 2009 and been payable by April 1, 2010, that MRD can be waived. The MRD for 2010 would still be required by December 31, 2010. However, a person who was 70½ in 2008 and delayed the distribution until 2009 must still take the distribution by April 1, 2009.
If a beneficiary is using the five-year rule for determining the MRD for an individual who died before his required beginning date, then the five-year period under that rule is determined without regard to calendar year 2009. This allows no distribution to be made for 2009 and extends the five-year period for an additional year.
A MRD is not eligible for rollover. However, a plan can elect to treat any portion of a 2009 distribution that would have been a MRD without the 2009 waiver as an eligible rollover distribution for purposes of the direct rollover requirements.
Plan Must Decide
The waiver of the 2009 MRD is not automatic. Each plan must decide whether it will waive 2009 MRDs for all of its participants. If a plan determines to waive the 2009 MRDs, a plan amendment will be required. Under the Act, the amendment does not need to be adopted until the end of the first plan year beginning on or after January 1, 2011 (2012 for governmental plans). If the amendment is not made in 2009, however, the plan must be operated in compliance with the waiver provisions of the Act in 2009. Therefore, a plan must decide before making 2009 MRDs, which are usually made late in the year.
Considerations For Plans
The MRD waiver rules require a plan to make a single decision that applies to all participants. A plan that implements the waiver will need to communicate to the affected participants about the waiver.
For most plans, the majority of participants would prefer to not have a MRD for 2009 or any other year. However, some participants may be counting on the MRD for part of their retirement income in 2009.
If a plan implements the waiver, there are ways to address participants who may want a distribution in 2009. In most cases, the plan will already allow a participant to take a discretionary distribution, and the plan can simply inform participants about their alternatives under the plan. In other cases, the plan may not allow a partial distribution. In this case, the plan can either compel the participant to take a regular distribution (often a lump sum). The participant could then rollover the portion that is not needed in 2009. Alternatively, the plan could allow a partial distribution option only for 2009. However, adding a new distribution option that would be available only for a year is often expensive and administratively burdensome.