Benefits & ERISA Law

Required Minimum Distribution Relief for 2009 Clarified

By Suzanne Wynn

The Dept. of Treasury has informed Congress that the IRS has determined that any further change to the required minimum distribution rules should not be undertaken. This surprising news was contained in a letter sent by the Assistant Secetary for Legislative Affairs Kevin Fromer to Congressman George Miller, Chairman of the Committee on Labor and Education on December 17, 2008. (hat tip to BenefitsLink.com)

This is noteworthy because a debate has been raging for a number of years that the required beginning date for required minimum distributions should be the April 1st of the calendar year following the later of the calendar year in which the employee attains age 75 or the calendar year in which the employee retires. Increasing the RMD age to 75 would add 4.5 years to the current rule contained in Code section 401(a)(9)(C)(i), which states that the required beginning date is the April 1st of the calendar year following the later of the calendar year in which the employee attains age 70.5 or the calendar year in which the employee retires.

One of the concepts behind the RMD rules was that retirement accounts should provide funds for retirement, not a way to transfer wealth to beneficiaries after death. The idea was that by forcing participants to start taking distributions by the April 1st of the calendar year following the later of the calendar year in which the employee attains age 70.5 or the calendar year in which the employee retires, money would flow out of retirement accounts and back into circulation during a participant’s lifetime.

What this concept missed was that age 70.5 is just not as old as it used to be, and that in a down economy, no participant should be forced to take distributions out of their account if doing so means selling at a loss. With recovery from the recent economic downturn expected to take several years, it seemed that changing the current RMD age from 70.5 to 75 would finally have some traction. Maybe the stock market will fully recover in the 12 months. Or maybe there will be another emergency bill headed through Congress next year with another new subparagraph 401(a)(9)(H) granting another one year extension.

The other news is that the letter clarifies the timing of the change to the required minimum distribution rules made by the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA ‘08). The letter states:

“Thus, all individuals who are subject to required minimum distributions for 2008 should take their distribution under the existing rules and, as a result of relief provided by Congress, they will be entitled to a complete waiver of the requirement to take any distributions for 2009.”

The change to Code section 401(a)(9) made by WRERA ‘08 added new subsection H, which states:

“(H) Temporary Waiver of Minimum Required Distribution -
(i) In General. The requirements of this paragraph shall not apply for calendar year 2009 to -
(I) a defined contribution plan which is described in this subsection or in section 403(a) or 403(b),
(II) a defined contribution plan which is an eligible deferred compensation plan described in section 457(b) but only if such plan is maintained by an employer described in section 457(e)(1)(A), or
(III) an individual retirement plan.

(ii) Special Rules Regarding Waiver Period. For purposes of this paragraph -

(I) the required beginning date with respect to any individual shall be determined without regard to this subparagraph for purposes of applying this paragraph for calendar years after 2009, and
(II) if clause (ii) of subparagraph (B) applies, the 5-year period described in such clause shall be determined without regard to calendar year 2009.

The effective date for this change applies to calendar years beginning after December 31, 2008.

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Full post as published by Pension Protection Act Blog on December 22, 2008 (boomark / email).