News + Events
Suspension of Required Minimum Distributions in 2009
March 23, 2009
The Worker, Retiree and Employer Recovery Act (the Act) provides relief to individuals receiving mandatory distributions. Current law requires certain individuals with retirement accounts to take annual distributions after age 70 ½. An individual who fails to take a required minimum distribution is subject to a 50% excise tax on amounts not distributed. The Act waives required minimum distributions for 2009 from retirement plans that hold each participant’s benefit in an individual account, such as 401(k), money purchase pension, profit sharing, 403(b) and certain 457(b) plans. The Act also waives any required minimum distributions for 2009 from an individual retirement account (IRA). The intent of the relief is to allow individuals to avoid further depleting their retirement savings at a time when its value may have been adversely affected by the economic downturn.
The Act does not waive any 2008 required minimum distributions, even for individuals who were eligible and chose to delay their 2008 distribution until April 1, 2009 (e.g., individuals who reached age 70 ½ in 2008). These individuals still are required to take their full 2008 required minimum distribution by April 1, 2009 or be subject to the 50% excise tax. The 2009 waiver, however, applies to individuals who reach age 70 ½ on or before December 31, 2008. They may be eligible to postpone taking their 2009 required minimum distribution (normally required to be distributed by December 31, 2009) until April 1, 2010. The waiver also applies to beneficiaries who are receiving required distributions over a five-year period. These beneficiaries now can waive the required 2009 distribution and take distributions over a six-year period rather than a five-year period. The Act does not waive any required minimum distributions for 2010.
If a participant or beneficiary makes a withdrawal in 2009 (that is not a required minimum distribution for 2008), the participant or beneficiary may be able to roll over the withdrawn amount into an IRA or other eligible retirement plan(s). Of course, the participant or beneficiary still must include in gross income any previously untaxed portion of the withdrawal that is not rolled over.
Although the Act permits plan amendments reflecting the required minimum distribution waiver to be adopted until the last day of the first plan year beginning on or after January 1, 2011 (January 1, 2012 in the case of governmental plans), plan sponsors may wish to amend their plans sooner to ensure that their practices match their plan documentation.
Suspension of Benefit Accruals Due to Underfunding
The Pension Protection Act (the PPA) placed restrictions on benefit accruals in underfunded single-employer defined benefit pension plans. If a plan’s adjusted funding target attainment percentage (AFTAP) is less than 60 percent, the plan must freeze all future benefit accruals as of the earlier of the date the plan’s enrolled actuary certifies that the AFTAP is less than 60 percent or the first day of the tenth month of the plan year if a new certification has not been done.
The plan administrator must provide notice to participants and beneficiaries within 30 days after the valuation date for the plan year for which the plan’s AFTAP is less than 60 percent (or, if earlier, the date the AFTAP is presumed to be less than 60 percent). This required notice of the plan amendment restricting future benefit accruals will satisfy the timing and content requirements for a 204(h) notice. The Department of Labor may assess a penalty of not more than $1,000 a day for each violation of the notice requirements.
The Worker Retiree and Employer Recover Act (WRERA) makes it clear that these restrictions apply not only to single employer plans but also to noncollectively bargained plans covering employees of unrelated entities (multiple employer plans). Multiemployer plans (collectively bargained plans covering employees of unrelated employers) remain exempt. To avoid restrictions on benefit accruals as a result of being less than 60 percent funded, however, WRERA provides that single-employer defined benefit plans subject to the limit on benefit accruals may substitute the plan’s AFTAP for the preceding plan year if it is greater than the AFTAP for the current year. This WRERA relief applies to the first plan year beginning during the period beginning on October 1, 2008, and ending on September 30, 2009. For plan years beginning January 1, 2009, this provision allows a look back to January 1, 2008 conditions.