2008 Legislation

2008 Legislation With Notice 2009-9 Update

In December 2008, H.R. 7327 passed both houses of Congress by a unanimous vote and was signed by the President on December 23. The Worker, Retiree and Employer Recovery Act of 2008 (PL 110-458, 12/23/2008) contains several provisions that impact distribution planning from Individual Retirement Plans (IRA’s), Qualified Retirement Plans (QRP’s) and Tax Sheltered Annuities (TSA’s) under §403(b). [See subparagraph (H) added to IRC §401(a)(9)] In some situations, the 2008 legislation has a profound impact on individual taxpayers. Therefore, please use the following commentary as an addendum to the remarks found in other locations on this web site.

2009 Temporary Waiver of Minimum Required Distributions

Lifetime Distributions: IRA owners and participants in defined contribution QRP’s, and §403(b) plans need not withdraw funds from those plans for 2009 in order to fulfill the required distribution rules of §401(a)(9)(A) for those age 70½ and older. For example, a retired participant who will attain age 77 on his/her birthday in 2009 need not take a minimum distribution from his/her plan for 2009. [§401(a)(9)(H)(i)] (Please see comments below dealing with participants that attained age 70½ in 2008 or 2009.)

Distributions to Beneficiaries:

1. Death On or After the RBD: Beneficiaries of deceased IRA owners or participants in defined contribution QRP’s and 403(b) plans need not withdraw funds from those plans for 2009 in order to fulfill the required distribution rules of §401(a)(9)(B). Therefore, no withdrawal need be made by a fifty-two year old beneficiary of a deceased participant that died on or after reaching his/her Required Beginning Date (RBD) – regardless of the method used by the beneficiary to compute what would otherwise be a required distribution for 2009. [§401(a)(9)(H)(i)]

2. Death Before the RBD: In the event an IRA owner or plan participant’s death took place in years 2004 through 2008, the legislation adds an extra year to the deadline under the 5-Year Rule of §401(a)(9)(B)(ii) for an individual that died before his/her Required Beginning Date. In effect, the 5-Year Rule became a 6-Year Rule for deaths that occurred during those years. Therefore, the beneficiary of an individual that died in 2006 that is withdrawing funds from the decedent’s account under the 5-Year Rule of §401(a)(9)(B)(ii) must complete those withdrawals by December 31, 2012 instead of 2011. [§401(a)(9)(H)(ii)(II)]

Person Reaching Age 70½ in 2008 or 2009: An individual that attains age 70½ is normally required to take a minimum distribution for the year in which he/she reaches that age threshold. Under longstanding rules, that first year’s required distribution may be delayed until April 1 of the following year – otherwise known as the Required Beginning Date (RBD). Regrettably, the 2009 distribution moratorium provided by the new legislation (WRERA 2008) is not altogether clear when it comes to individuals that reach age 70½ in 2008 or 2009. A literal reading of the IRC as amended by WRERA 2008 leads to some VERY strange results. In fact, the final legislation appears to be inconsistent with the Committee Reports. Fortunately, the Service issued clarification via Notice 2009-9 on January 9, 2009. In that notice, the IRS states that WRERA does not waive 2008 required distributions for IRA owners or retired participants in defined contribution QRP’s and §403(b) plans who attained age 70½ in 2008 but opted to delay taking the distribution until April 1, 2009. Therefore, April 1, 2009 is still the deadline for those individuals to withdraw their first minimum distribution. Furthermore, the notice confirms that the 2009 waiver under WRERA also applies to individuals who attain age 70½ in 2009 – even though these taxpayers are eligible to postpone taking their 2009 required distribution until April 1, 2010. These individuals have no required distribution for 2009. Instead, their first required distribution will be for year 2010. Presumably, the deadline for their 2010 required distribution will be December 31, 2010 because 2010 is NOT the year in which they attain age 70½. That is to say, their initial distribution cannot be delayed until April 1, 2011.

Participants Who Died In 2008: If an IRA owner or participant in a defined contribution QRP/§403(b) plan died in 2008, a beneficiary would normally need to take the first required distribution in 2009 in order to qualify for the General Exception to the 5-Year Rule under §401(a)(9)(B)(iii) for decedents that die before their RBD. Under the temporary waiver of the minimum required distribution rules, however, that initial distribution may be postponed until December 31, 2010.

Participants Who Died In 2009: What procedures should be followed in the case of an IRA owner or participant in a defined contribution QRP/§403(b) plan who attained age 70½ in 2008 and dies sometime during the period April 1 to December 31, 2009? Did he/she die after his/her Required Beginning Date? The language of subparagraph (H) that was added to §401(a)(9) by the 2008 legislation states that the MRD rules “… shall not apply for calendar year 2009 ….” That wording seems to suggest that a Required Beginning Date will not occur in 2009. Fortunately, §401(a)(9)(H)(ii)(I) spells out a special rule under which an individual’s RBD shall be determined without regard to the temporary waiver rules of the new legislation. Therefore, the 2010 minimum required distribution from the decedent’s account will be computed under the rules that apply for deaths on or after the RBD.

Postmortem Deadlines: Several important deadlines must be considered following the death of an IRA owner or participant in a defined contribution QRP/§403(b) plan. One case involves a beneficiary that existed on the participant’s date of death but no longer holds that status on the Beneficiary Designation Date – September 30 of the year following the year of death. Another example occurs when separate accounts need to be established for multiple beneficiaries by December 31 of the year following the year of death. When a trust is named as a beneficiary, a copy of the trust must be delivered to the plan administrator or IRA provider no later than October 31 of the year following the year of the participant’s death. I agree with other commentators who advise that notwithstanding the temporary waiver rules of the 2008 legislation, all of these deadlines should be met as if the new legislation had never become law. While the Service may issue guidelines that extend one or more of these deadlines, it seems prudent to assume that nothing will be forthcoming from the IRS.

2010 Rollovers for Non-Spouse Beneficiaries of QRP’s

Congress has finally provided some relief for non-spouse beneficiaries of Qualified Retirement Plans. For years, a surviving spouse of a deceased plan participant has been allowed to receive a lump sum distribution and roll it over into an account in his/her own name. Such an account is often referred to as a “spousal rollover IRA”. Unfortunately, non-spouse beneficiaries were not allowed to follow a similar path. In the Pension Protection Act of 2006, Congress created an option that allows surviving non-spouse beneficiaries to move funds directly from a QRP, such as a 401(k), to an inherited IRA in the name of the decedent with the same beneficiaries that were in place for the QRP. When the Service subsequently issued guidelines (Notice 2007-7) on the new option, it failed to require Qualified Retirement Plans to make the option available to beneficiaries. Without a requirement to do so, most QRP’s refused to amend their plans to allow non-spouse transfers to an inherited IRA following the death of a plan participant. This result thwarted the intent of Congress. With WRERA 2008, Congress mandated the availability of the option for non-spouse beneficiaries beginning in 2010.

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