SEPTEMBER 2009 Pension Plan tip of the month...

IRS Guidance on 2009 RMD Relief

The Worker, Retiree, and Employer Recovery Act of 2008 provided relief from 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 70½. The RMD waiver also applies to governmental 457 plans, 403(b) plans and individual retirement accounts (“IRAs”). Those participants who have taken RMDs in the past and those who have just attained 70 ½ are able to skip their 2009 RMD without a tax penalty being assessed.

Recently, the IRS issued Notice 2009-82 which provided retirement plan administrators guidance on how to implement the waiver of 2009 required minimum distributions. The notice provided details on the required plan amendments, transitional relief and tax withholding.

As part of the notice, the IRS has indicated that plan amendments are not required to be adopted until the end of the 2011 Plan Year. Two sample amendments were provided with both amendments allowing the participant/beneficiary to elect whether they would like to suspend or continue with RMD payments. The difference between the two sample amendments is what the default option would be if the participant/beneficiary does not make an election. The amendment will direct the plan administrator whether to pay or not to pay the RMD if no election is made.

Although the plan amendment is not required until later, the IRS does require the plan to be in operational compliance with the plan amendment from its effective date. The IRS Notice provides for transitional relief through November 30, 2009. This allows a plan to have until December 1st to review and finalize how they will handle the RMD relief so that they will follow their plan amendment.

The amount required to satisfy the RMD requirement is not eligible for rollover for withholding purposes so the mandatory 20% Federal Tax withholding does not apply. For this reason, RMD’s are subject to voluntary withholding. The IRS Notice provides that amounts taken that would qualify for 2009 RMD’s are able to be an Indirect or Direct Rollover into an IRA or qualified plan.

To assist with the compliance with the IRS Notice, by the end of October, Paragon will be reviewing your retirement plan to determine if anyone is eligible for a 2009 RMD. If we determine that a participant in your plan is eligible for an RMD distribution, we will provide you a participant election notice that you can provide to this participant. The notice will indicate that they have the option and are not required to take their 2009 RMD. Upon notice from the participant that they would like to take their RMD, please contact your Account Executive who will run the calculation to determine the RMD amount.

The plan amendment that Paragon will be providing will indicate that if no election is made by the participant that the plan will not pay the amount of the 2009 RMD. Paragon will assume that if we are not notified that a participant would like to take their 2009 RMD that they have either chosen not to take the distribution or have not responded to the letter that you have sent.