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 sponsors.
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 2006 (PPA).
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 withholding.
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 rollover.
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