The Standard

Winter 2009

Minimum Distribution Requirements
Waived for 2009

The Worker, Retiree and Employer Recovery Act of 2008 (the Act) waives the requirement for minimum distributions for 2009.

Plan participants age 70½ and older and certain beneficiaries will not be required to take minimum distributions from IRAs and from the following retirement plans:

401(k) and other 401(a) defined contribution plans
403(b) Tax Sheltered Annuities
457(b) Governmental Plans*

*457(b) plans of tax-exempt entities apparently will not get the minimum distribution waiver because they are not specifically mentioned in that section of the Act. It is unclear whether this omission was intended or was simply a drafting oversight. The Standard will watch for additional guidance.

What if a participant turns age 70½ in 2009 and elects to delay taking what normally would be the minimum distribution until the first quarter of 2010?

The waiver provision under the Act provides relief in this situation even though the minimum distribution for the calendar year 2009 will not take place until 2010. The Act does not grant relief from the minimum distribution for the 2010 calendar year.

What about minimum distributions that need to be taken for 2008?

The Act does not waive minimum distributions taken in 2008 (or those required to be taken with respect to 2008 in the case of an individual who turned age 70½ in 2008 and elected to delay such distribution until the first quarter of 2009). The Internal Revenue Service and Treasury have indicated that they do not intend to provide any relief for 2008 minimum distributions.

What if a participant wants to roll over what otherwise would be minimum distributions received in 2009?

Distributions made for 2009 that would otherwise be required minimum distributions, but are not required to be made because of this waiver, may generally be rolled over subject to the usual rules for eligible rollover distributions. However, the IRS has indicated plans will not be required to offer direct rollovers, provide the written notice, or apply 20 percent withholding to these distributions even if a participant elects to take an amount equal to what otherwise would be the minimum distributions for 2009. The participant may, subject to the rules, make an indirect rollover contribution of the 2009 distribution amount which otherwise would have been a minimum distribution.

What about minimum distributions for beneficiaries of deceased participants?

Generally if a participant dies before his/her required benefit date (usually before age 70½), then benefits must be paid out either:

in annual installments over the life expectancy of the designated beneficiary, or
by the end of the calendar year that contains the fifth anniversary of the participant’s date of death (five-year rule).

If the participant dies on or after his/her required beginning date (usually after age 70½), then benefits must be paid out over the life expectancy of the designated beneficiary or over the remaining life expectancy of the participant as of his or her birthday in the calendar year of death. The beneficiary is usually allowed to elect which method of payout is desired.

For individual beneficiaries of deceased participants who must take minimum distributions by the close of the fifth calendar year following the date of participant’s death (five-year rule), the 2009 year will not be considered. For example, if a participant died in 2008, the five year period will end in 2014 instead of 2013, effectively allowing six calendar years to complete all distributions to the beneficiary.

For ongoing life expectancy payouts to beneficiaries (regardless if a participant died before or after his/her required beginning date), the effect of the waiver of minimum distributions for 2009 is presumably that the beneficiary can just skip one year’s minimum distributions. However, further guidance is anticipated from the IRS in this area. The Standard will monitor future developments and provide guidance as we learn more.

How will distribution requests that would otherwise be for 2009 minimum distributions amounts be treated?

The Act does not force an individual who wants to continue to receive payments to stop doing so. Thus any distribution request will be processed in accordance with IRS guidance, the plan document, and the request of the plan participant. Federal income tax withholding will be at the rate of 10 percent unless a participant elects a different tax withholding amount, including zero withholding.

When will my plan be amended for this new provision?

Plans will be amended at a future point as required – perhaps in concert with other future required amendments that are part of the Pension Protection Act and/or the HEART Act. The 2009 minimum distributions waiver provision amendment must be made before the last day of the 2011 plan year (2012 plan year of a governmental plan).