The flow of legislation affecting the administration of
retirement plans can move rapidly, making remaining up-to-date and
in compliance a challenge. As author Mark Swanson explains, the
2008 Recovery Act provides welcome relief for plan participants and
Companies should be aware of the effects on retirement plans of
the Worker, Retiree and Employer Recovery Act of 2008 (the
Recovery Act), signed into law on Dec. 23, 2008. The Recovery Act
brought with it some welcome news about plan distributions and made
some technical corrections to the Pension Protection Act of
Required Minimum Distributions
Generally, most individuals attaining age 70½ must start
taking withdrawals from their retirement plans and individual
retirement accounts (IRAs). The minimum required distribution is
based on the value of the account and life expectancy factors
contained in tables issued by the IRS. Under the Recovery Act,
however, no distribution is required for 2009.
Those who turned 70½ in 2008 must exercise special care.
Their first distribution year was 2008, but the first year of
distribution includes a grace period that allows distributions
before April 1, 2009, to be treated as if made in 2008. The 2008
distribution, even if paid in 2009, is still required. The Recovery
Act, however, waives the first required distribution for
individuals who turn 70½ in 2009. The 2009 waiver does not
affect distributions required for 2010. Individuals who turn
70½ in 2009 will still be required to take their second
required distribution by Dec. 31, 2010.
Distributions made in 2009 that would otherwise be required
minimum distributions but are not required because of this relief
may be rolled over into other eligible retirement plans subject to
the usual rules for such rollovers. Plans may, but are not required
to, offer direct rollovers on these amounts. Finally, the amount of
a distribution that would have been a required minimum distribution
without this relief is not subject to the mandatory 20 percent
Changes to the PPA
The Recovery Act also made significant technical corrections to
some of the PPA provisions.
A 401(k) plan is permitted to allow participants to make
designated Roth contributions. A Roth contribution is made on an
after-tax basis, and earnings aren't taxed while they remain in
the plan. If the participant later takes a qualifying distribution,
the proceeds (including earnings) are tax-free. The PPA allowed
rollovers from designated Roth accounts to Roth IRAs –
provided that any earnings would become taxable and the
participant's adjusted gross income did not exceed certain
amounts. The Recovery Act removes these restrictions.
The new law also affects some rights of a non-spouse
beneficiary. Prior to the PPA, a distribution to a beneficiary who
was not the surviving spouse of the plan participant could not be
rolled over. The non-spouse beneficiary usually had to take the
distribution and pay the resulting taxes within a short time after
the participant's death. PPA changes permitted, but did not
require, a plan to allow a non-spouse beneficiary to roll over
proceeds to an inherited IRA, thus deferring the taxes until later
withdrawn from the inherited IRA. Beginning for plan years that
start after Dec. 31, 2009, the Recovery Act requires a plan to
allow a non-spouse beneficiary who follows certain steps to elect a
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guide to the subject matter. Specialist advice should be sought
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Specific Questions relating to this article should be addressed directly to the author.
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