JANUARY 2009 Pension Plan tip of the month...

Required Minimum Distributions Waived for 2009 Calendar Year

Retirement plans are subject to rules known as the required minimum distribution rules.  Put simply, these rules require that participants begin receiving minimum distributions from a plan upon termination of employment and attainment of age 70 ½ (5% owners must take this minimum amount regardless of employment status once they attain age 70 ½).

In response to the current economic crisis, in December of 2008, the Worker, Retiree, and Employer Recovery Act of 2008 (the “Act”) was signed into law by the President in order to provide plan participants and sponsoring employers relief from these rules. The Act waives the requirement to take a Required Minimum Distribution (“RMD”) for the 2009 calendar year for those participants in 401(k) and profit sharing plans who have attained age 70 ½. The RMD waiver also applies to governmental 457 plans, 403(b) plans and individual retirement accounts (“IRAs”). RMDs will not be required until December 31, 2010 or April 1, 2011 for those participants in their first year of receiving distributions.

The Act will allow those participants who have taken RMDs in the past and those who have just attained 70 ½ to skip their 2009 RMD without a tax penalty being assessed. Normally, a 50% excise tax would be required if a participant failed to take a minimum distribution.

If a distribution is processed during 2009 that would normally have been considered an RMD, under certain circumstances, the plan is permitted but not required to allow the participant a direct rollover of the amount that would have been attributed to the 2009 minimum distribution. Also, the participant would be able to take this amount as a cash distribution which would not be subject to the 20% mandatory withholding. Because RMDs are normally not eligible for rollover, they are subject to 10% withholding unless the participant opts out. No official guidance has been provided to indicate that this provision would be different for RMD’s received for 2009.

For beneficiaries of deceased participants who were not already receiving RMDs, if the beneficiaries are receiving distributions under the 5 year rule, this period is extended by an additional year. As an example, a 5 year period which began on 1/1/2008 would be extended to 12/31/2013, skipping the 2009 year.

Please note that the Treasury Department stated there would be no RMD relief for the 2008 calendar year. This means that those participants who attained 70 ½ during the 2008 calendar year will still need to have their first RMD processed by April 1, 2009. Only 5% owners and terminated employees who are 70 ½ or older are required to take these minimum distributions.

The deadline for updating the plan document to provide for the 2009 RMD waiver provisions is the last day of the 2011 plan year. Paragon will keep your plan in compliance by reviewing any upcoming developments and by updating the plan document with the language by the required date.

For any questions regarding 2009 RMDs, please contact your Account Executive.