On December 23, 2008, President Bush signed the Worker, Retiree, and Employer Recovery Act of 2008 (the Act, or WRERA) into law. One of the most significant provisions in the legislation is the temporary suspension of required minimum distributions (RMDs) for 2009. Also included in the Act are provisions relating to direct rollovers from employer plans to Roth IRAs, nonspouse beneficiary rollovers from inherited employer plans to IRAs, pension plan funding, and other technical corrections to the Pension Protection Act of 2006 (PPA).
Temporary suspension of required minimum distributions (RMDs)
The Worker, Retiree, and Employer Recovery Act of 2008 suspends RMDs for 2009. That is, no minimum distribution will be required from IRAs and employer-sponsored defined contribution retirement plans (e.g., qualified stock bonus plans, qualified profit-sharing plans, 401(k) plans, 457(b) plans, and 403(b) plans) for the 2009 calendar year. This applies to both RMDs during a plan participant’s or IRA owner’s lifetime as well as after-death RMDs to beneficiaries. (The Act does not suspend 2009 RMDs from defined benefit plans.)
An individual who reached age 70½ prior to 2009 would normally be required to take his or her 2009 RMD no later than December 31, 2009. As a result of this legislation, that RMD will not have to be made. An individual who reaches age 70½ in 2009 would normally be required to take his or her first RMD on or before April 1, 2010. As a result of this legislation, no distribution is required for 2009, and thus there is no requirement that a distribution be made by April 1, 2010. However, in both cases, the individual will still be responsible for taking an RMD for the 2010 calendar year on or by December 31, 2010. (Note: Employees who continue to work beyond age 70½ are not required to take RMDs until they separate from service, unless they are 5 percent owners of the employer.)
Caution: The legislation did not change 2008 RMD requirements. Normal RMD rules apply for 2008–for individuals who reached age 70½ prior to 2008, 2008 RMDs generally had to be be made no later than December 31, 2008. An individual who reached age 70½ in 2008 generally must take his or her 2008 RMD on or before April 1, 2009. The legislation does not affect this requirement.
Tip: For beneficiaries receiving RMDs from a decedent’s account under the “five year rule,” the five year period is determined without regard to calendar year 2009. For example, for an account with respect to an individual who died in 2007, under the provision, the five year period ends in 2013 instead of 2012.
Tip: Distributions made during 2009 that would have been considered RMDs but for this legislation will not be treated as eligible rollover distributions for purposes of an employer’s requirement to offer a direct rollover (and related notification obligations) and mandatory withholding requirements for non-direct rollovers. Therefore employers may, but do not have to, offer a direct rollover and provide related documentation, and the distribution isn’t subject to mandatory 20 percent withholding. Even if an employer does not offer a direct rollover, employees may roll over the distribution into another eligible plan within 60 days.
Direct rollovers from employer plans to Roth IRAs
Prior to the enactment of the Pension Protection Act of 2006 (PPA), taxpayers were allowed to roll over distributions from Roth 401(k) and Roth 403(b) plan accounts to Roth IRAs without limitation. The PPA allowed for additional direct rollovers from non-Roth qualified retirement plans, 403(b) plans, and governmental 457 plans, to Roth IRAs. Because these new rollovers were equivalent to a traditional IRA conversion, the PPA required that all rollovers of retirement plan funds to Roth IRAs were generally subject to the same income limits, filing status requirements, and other tax rules that applied to traditional IRA conversions. For example, no rollover would be allowed if the taxpayer’s adjusted gross income exceeded $100,000, or if the taxpayer’s federal tax filing status was married filing separately. (The $100,000 limit is the same whether the taxpayer is single, or married filing jointly.) The language in the Pension Protection Act led to some confusion as to whether a direct rollover from a Roth 401(k) or Roth 403(b) account to a Roth IRA would also be subject to an adjusted gross income limitation and a limitation based on filing status. A technical correction was expected.
The Worker, Retiree, and Employer Recovery Act of 2008 clarifies that a rollover from a Roth 401(k) or Roth 403(b) account to a Roth IRA is not subject to the adjusted gross income limitation, and is not subject to limitation based on filing status.
Rollovers by nonspouse beneficiaries
The PPA provided that the designated beneficiary of a deceased employee’s eligible retirement plan (including qualified retirement plans, governmental 457 plans, and 403(b) plans) could transfer distributions from the plan directly to an IRA without tax consequence. Previously, only surviving spouses had this option. Subsequent interpretation of the provision held that plans could, but were not required to offer this rollover option to nonspouse beneficiaries.
The Worker, Retiree, and Employer Recovery Act of 2008 provides that, for plan years beginning after December 31, 2009, plans must allow nonspouse beneficiaries to roll over funds to an IRA in a direct transfer, provided all requirements are met. Plans must also provide appropriate notice to nonspouse beneficiaries.
Caution: The IRA was, and still is, treated as an inherited IRA.
Tip: The IRS has also clarified that nonspouse beneficiaries (like spouse beneficiaries) can roll over both Roth and non-Roth employer plan distributions into Roth IRAs. In 2009, beneficiaries can roll over non-Roth distributions from employer plans to Roth IRAs only if the beneficiary meets the $100,000 income limit, and is not married filing separately. And, as noted above, in the case of nonspouse beneficiaries, a rollover is possible only if the plan permits, and only via a direct rollover.
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Posted by Michael Chapman at 12:00 PM UTC
