Retirement Plans: Nov. 30 is Deadline for Key Decisions

On Sept. 28, 2009, the Internal Revenue Service (IRS) provided new guidance on the minimum distribution rules governing retirement plans. As described in IRS Notice 2009-82, employers that sponsor defined contribution plans have until Nov. 30, 2009, to make certain key decisions, although any actual plan amendment may be delayed until the last day of the 2011 plan year (generally Dec. 31, 2011). The key decisions facing employers are:

  • Whether to give plan participants the option to waive required minimum distributions from a defined contribution plan for 2009
  • Whether the defined contribution retirement plan will accept rollovers of amounts that were previously distributed, under the required minimum distribution rules, but for which distribution could have been waived
  • Whether to inform participants who are first subject to the minimum required distribution rules in 2009 of their distribution options and rollover rights with respect to such distributions

In addition, the Notice contains a more lenient rule for certain rollovers. Participants who received required distributions in 2009, but before Oct. 1, 2009, have until Nov. 30, 2009, to roll over such distribution to an eligible retirement plan or IRA, even though the normal 60-day rollover rule has expired. (Required minimum distributions for 2009 that took place after Sept. 30, 2009, are subject to the normal 60-day rollover rule.)

If you take no action, distributions will be made in accordance with your plan document, which generally does not allow for a waiver, but the participant could roll over the distribution to an IRA. To assist in your decision making process, we suggest that you consider the options outlined below, but you may wish to contact your benefits attorney to discuss these and other available options:

  • Our retirement plans will give employees, upon request with no affirmative notification obligation by the employer, the option to waive the minimum distribution rules and will accept rollovers of distributed amounts that were subject to the waiver. However, the plan will not offer a direct rollover option for those that receive the minimum distributions, unless such distribution is part of a larger distribution that is subject to direct rollover. In the absence of an affirmative waiver by the employee, the minimum distribution and any scheduled distribution will be made.
  • Our retirement plans will not give employees the option to waive the minimum distribution rules and will not accept rollovers of such amounts.

The above-referenced options apply to all 401(a) defined contribution plans, 403(b), and 457(b) plans maintained by the employer. The options do not apply to any defined benefit plans maintained by the employer. Remember that if required 2009 minimum distributions are made, they are subject to federal income tax withholding at the 10 percent rate rather than the 20 percent rate.

Other options are available for handling such distributions, such as:

  • Suspending all minimum distributions
  • Suspending distributions unless a participant affirmatively elects to receive the distribution
  • Making the minimum distribution and allowing a direct rollover with respect to the amount distributed
  • Refusing to accept rollovers of amounts subject to the waiver rules
  • Allowing direct rollovers of only that portion of the distribution that could be rolled over prior to the legislation

When considering the above options, please keep in mind that the legislation, as currently enacted, applies only to 2009 minimum distributions (there are proposals to extend the waiver rules to 2010 distributions). Therefore, you may wish to keep your procedures and amendments simple.

As background for the above elections, the Worker, Retiree and Employer Recovery Act of 2008 (WRERA) permitted participants to waive the required minimum distributions from defined contribution plans. The reason for the legislation was that the economic downturn had already significantly reduced the value of many retirement accounts. The law permitted a waiver of the minimum distribution requirement to permit retirement accounts time to recover a portion of the loss.

WRERA and the minimum distribution requirements are more fully described in our March 9, 2009, advisory, Congress Provides Relief from Minimum Required Distribution from Retirement Plans and IRAs.