As a result of massive stock market losses, and to prevent retirees from being forced to liquidate 401(k) and IRA investments that had lost value, The Worker, Retiree and Employer Recovery Act of 2008 was passed in late 2008. among other provisions related to retirement plans (see related story), WRERA suspends for 2009 IRS rules that compelled retirees age 70 1/2 and older to take required minimum distributions from defined contribution retirement plans and IRAs.

Although the law's goal was reasonable and the solution simple, it leads to inevitable complexity.

The rules

In general, employees are required to begin taking required minimum distributions by April 1 of the calendar year immediately after an individual:

• Reaches age 70 ½ (for IRA participants).
• Reaches age 70 ½ (for small-business owners and individuals who own 5% or more of the company, whether or not the individual has retired.)

An understanding of the above rules is important. Since many individuals are working beyond age 70 ½, they can delay the required minimum distributions by continuing to work, as long as they are not self-employed or 5% owners in a business.

Therefore, individuals must be aware that if they turned age 70 ½ in 2008, the required minimum distributions still are mandatory for 2008 and are payable by April 1, 2009, despite the well-intentioned provisions of the law.

Penalties

The importance of these new rules lies in the penalties for noncompliance. If a required minimum distribution is not made in a timely manner, an individual is subject to income taxes, plus a 50% excise tax. The IRS can waive the excise tax if the penalty is due to a reasonable error and reasonable corrective actions are taken.

For example, assume an individual is required to receive a minimum distribution equal to $18,000 by April 1, 2009 and is in a 33% tax bracket. If this individual does not receive the distribution in a timely manner, the individual is subject to a 50% excise tax equal to $9,000, plus ordinary federal income taxes equal to $6,000. Thus, the total tax liability is $15,000 on an $18,000 required distribution.

The required minimum distribution rules are important to participants, but also have an impact on plan administration. In general, required minimum distributions are not eligible for rollovers. However, since certain required minimum distributions will not be mandatory in 2009, any distributions that are automatically scheduled to be made will be eligible for rollover treatment.

The law also specifically says that, for 2009 distributions that would have been required minimum distributions if the law had not passed, there is no need to issue a special tax notice as required under Section 402(f) of the tax code. There's also no need to withhold the mandatory 20% income tax withholding as required under Section 3405(c) of the tax code.

Therefore, plan administrators must determine if they wish to allow participants to have voluntary withholdings made from any distributions in 2009 and/or whether employers wish to issue a tax notification regarding the tax consequences of a distribution.

In addition, participants may elect a direct rollover of distributions that are not required minimum distributions.

Once again, employers must consider whether or not they wish to facilitate such rollovers. At a minimum, a participant can elect to rollover all or a part of a distribution made in 2009 to an IRA (except for the required minimum distribution by April 1, 2009 for individuals age 70 ½ in 2008).

It is advisable for employers to allow for voluntary federal income tax withholding and to issue the special tax notice (as modified for the 2009 special rules) to help participants achieve their individual objectives. Without such notice and information, it is doubtful participants will understand their alternatives.

Contributing Editor Frank Palmieri is an employee benefits attorney with Palmieri & Eisenberg in Princeton, N.J., and a fellow of the American College of Employee Benefits Counsel.