The Internal Revenue Code generally requires that plan participants begin to receive required minimum distributions no later than the April 1 following the later of their reaching age 70 1/2 or retiring.
This requirement is commonly referred to as the “required minimum distributions” or “minimum required distributions” rules. However, in an attempt to limit the impact of the significant decline in the equities markets over the past year, Congress enacted one-year of “relief” from this rule for defined contribution plans in December 2008. Notably, defined benefit plans are not subject to this relief.
Suspending rules
The one-year of relief provides that RMDs that would have otherwise been payable for the 2009 plan year are no longer required to be paid. There are a few scenarios in which this rule could apply:
• Participant Already Receiving Annual RMDs: If a participant was receiving RMDs prior to 2009 because he or she already retired or reached age 70 1/2, he or she is not required to receive a RMD in 2009.
• Participant Reaches Age 70 1/2 in 2009: If a participant reaches age 70 1/2 (or retires after reaching age 70 1/2) in 2009, he or she is not required to receive a RMD for the 2009 calendar year by April 1, 2010.
• Beneficiary Receiving RMDs after a Participant's Death: If a beneficiary was to receive a RMD payment in 2009, he or she is not generally required to receive a RMD in 2009.
Notably, if a participant reaches age 70 1/2 (or retires after reaching age 70 1/2) in 2008, he or she was still required to receive a RMD for the 2008 calendar year by April 1, 2009.
Hatching a plan
The relief is simple in that it basically provides that no RMDs are required to be paid from DC plans and individual retirement arrangements for the 2009 calendar year. There are, however, a number of questions that plan sponsors should work with their providers and advisors to address.
The IRS has indicated that it intends to provide further guidance on the relief in the future. However, until then, a number of issues remain to be considered, including the following:
• To Suspend or Not: While the DC plan RMD rules themselves have been suspended for the 2009 calendar year, some plan sponsors have made the election to continue making payments of amounts that would have been RMDs because of computer system-design and/or other reasons. Other plan sponsors have made payments of amounts that would have been RMDs optional for 2009. Sponsors may want to carefully consider the impact of the RMD relief on their various distribution options (such as installment payments) to ensure that they have operated their plans consistent with their decisions on how to implement the RMD relief.
• Rollover Rules: A plan is permitted, but not required, to allow participants to roll over amounts paid to participants that would have been RMDs. Sponsors may want to review their systems to ensure that they can operationally implement this change.
• Insurance Contracts: Some DC plan benefits are funded by insurance contracts. Sponsors should check with insurance contract vendors to ensure that they can administer the RMD relief as desired by the sponsor before they modify their plan documents and/or participant communications.
• Amendments: The legislation providing the 2009 RMD relief generally allows a calendar year plan to be amended to reflect the relief by Dec. 31, 2011. Future guidance will hopefully provide clarity as to whether any of the RMD relief options described above will need to be documented in a plan document. Until then, plan sponsors should keep a reminder that they may need to adopt any necessary amendments by the applicable deadline.
• Disclosure to Participants: Depending on the wording of existing summary plan descriptions, summaries of material modifications explaining the 2009 RMD relief may need to be provided in 2010.
The 2009 RMD relief can be beneficial to 401(k) plan participants and their beneficiaries. However, as noted above, there are a number of considerations that plan sponsors should take into account as they implement the relief.
David N. Levine can be reached at DLevine@groom.com.
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Devil is in the details of required minimum distribution suspension
