H.R. 7327: Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) / Required Minimum Distributions (RMDs)

The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA)

H.R. 7327: Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) has been passed by both chambers of Congress and was signed yesterday by the President. The bill, with the purpose of making technical corrections related to the Pension Protection Act of 2006 (PPA), and for other purposes, will become law once administrative actions are complete. Congress Passes Emergency Pension Tax Relief/Technical Corrections highlights the major provisions:

• Relief for retirees from RMDs from qualified plans and IRAs
• Relief for employers from asset depreciation by clarifying permitted use of smoothing over 24 months for pension plan funding
• Relief from funding transition rules by eliminating 100-percent funding for failures
• Relief for multi-employer plans, by allowing sponsors to elect to temporarily freeze at funding status held in previous plan year
• Relief from mandatory accrual of pension benefits
• Increases in failure-to-file penalty fees for partnerships and S corps

WRERA Impact on 2009 RMDs

One of the major provisions of the WRERA is to provide a waiver of the requirement to take RMDs in 2009. Required Minimum Distribution Relief for 2009 Clarified provides additional analysis.

WRERA Impact on 2008 RMDs

While the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) will provide protection for 2009 RMDs, it appears that it will not provide protection for 2008 RMDs. BenefitsLink has obtained a copy of a letter, date stamped December 17, 2008, from Kevin I. Fromer, Assistant Secretary for Legislative Affairs, to Representative George Miller [D].

This letter follows up on our previous response to your letter regarding required minimum distributions from individual retirement arrangements (IRAs) and 401(k) plans in light of the recent financial downturn. In my letter, I noted that efforts had begun in Congress to provide temporary relief from the minimum distribution requirement and, at the same time, the Treasury Department and the Internal Revenue Service were considering ways this unanticipated situation could be ameliorated administratively. Since that time, Congress enacted the Worker, Retiree, and Employer Recovery Act of 2008 providing extensive relief to IRA holders and plan participants regarding required minimum distributions. The President is expected to sign this legislation in the near future.

After consulting with the Office of Tax Policy, I wanted to inform you that, because Congress has provided broad and direct relief with respect to this issue, the Treasury Department and the Internal Revenue Service have determined that any further change to the required minimum distribution rules should not be undertaken. The scope of Treasury's ability to make administrative changes has constraints. Thus, any steps Treasury could take would be substantially more limited than the relief enacted by Congress and could not be made available uniformly to all individuals subject to required minimum distributions. In addition, implementation of such changes would be complicated and confusing for individuals and plan sponsors. Thus, all individuals who are subject to required minimum distributions for 2008 should take their distribution under the existing rules and, as a result of relief provided by Congress, they will be entitled to a complete waiver of the requirement to take any distributions for 2009.

Thank you for your letter and concern about this important matter.

What are Required Minimum Distributions?

IRC Section 401(a)(9) - Qualified pension, profit-sharing, and stock bonus plans - Required distributions provides statutory guidance on RMDs. An IRS Retirement Plans FAQs regarding the Required Minimum Distributions also provides a definition:

Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired.

Retirement plan participants and IRA owners are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs.

When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner's benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner's death, or (2) over the life of the beneficiary starting no later than one year following the owner's death. See Publication 590 - Individual Retirement Arrangements (IRAs) for complete details on when beneficiaries must start receiving RMDs.

The IRS RMD information page also answers the following questions

1. What types of retirement plans require minimum distributions?
2. When is the deadline for receiving a RMD from an IRA?
3. How is the amount of the RMD calculated?
4. Can an account owner just take a RMD from one account instead of separately from each account?
5. Who calculates the amount of the RMD?
6. Can an account owner withdraw more than the RMD?
7. What happens if a person does not take a RMD by the required deadline?
8. Can the penalty for not taking the full RMD be waived?
9. Can a distribution in excess of the RMD for one year be applied to the RMD for a future year?
10. How are RMDs taxed?
11. Can RMD amounts be rolled over into another tax-deferred account?

Required Beginning Date

Generally, all participants must receive their first RMD by the April 1 of the year following the year they meet both of the following requirements: attain age 70½ and terminate employment. This date is referred to as the participant's required beginning date.

Here is an example of a participant that met both requirements in 2007:

• Required Beginning Date – Since the participant met both requirements in 2007, the required beginning date is April 1, 2008.
• RMD #1 - The participant must receive their first RMD by April 1, 2008. This RMD is the participant's 2007 RMD and is calculated using the 2006 balance.
• RMD #2 - The participant must receive their second RMD by December 31, 2008. This RMD is the participant's 2008 RMD and is calculated using the 2007 balance.
• Each subsequent RMD - Each subsequent RMD will be due on each subsequent December 31 (calculated using the prior year's balance).

Some plans provide eligible participants with the option to take their first RMD in the year they satisfy both requirements. Using the example, the participant would take their first RMD in 2007.

Another option is for the participant to take both their first and second RMDs before April 1 of the year the RMDs are due. Using the example, the first two RMDs would be taken in 2008 by April 1, 2008.

RMD Calculators

Here are two online RMD calculators you may find useful.

1. Required Minimum Distribution Calculator – This calculator requires you to enter the age as of December 31, 2008, and the balance as of December 31, 2007. This calculator will not handle the scenario of a spouse beneficiary that is more than ten years younger than the participant, as this scenario requires the usage of the Joint Expectancy tables.
   
2. Financial Calculators – Required Minimum Distribution (RMD) – This calculator has more factors to input and is able to handle the beneficiary scenario discussed above. The calculator will also estimate future RMDs and account balances based on the future estimated rate of return.

I previously tested the calculators using this Uniform Lifetime Table and my calculation agreed with the online calculators.

ESOP Cash

While we will be discussing distributions in an upcoming ESOP Planning 2008 installment, one relevant topic we will be discussing is if the ESOP will have enough cash to satisfy the RMD requirements:

Do you have enough cash in the ESOP to pay RMDs? Another factor to consider for RMDs is that the plan may not have enough cash to pay to the participant(s) to satisfy the RMD requirements. If this is the case, the plan will most likely have three options:

• The stock will be repurchased (recycled) in the plan to other participants - cash will need to be contributed to the plan.
  
• The stock will be sold and the proceeds used to pay the participants – a stock appraisal on the date of the sale will need to be obtained.
  
• The stock will be distributed and put back to the company (or the ESOP). It is important to note that as it gets closer to December 31, it becomes more likely that the stock value may be "stale" (see above discussion) and not an accurate reflection of the actual stock value.

This situation can be avoided if you have identified RMDs ahead of time and have a well-planned distribution policy.

What value should be used to determine the number of shares to distribute?

The value of the distribution is calculated using the fair market value of the stock as of the date of the distribution, and the value of the distribution must be at least equal to the amount required to be distributed to satisfy the RMD requirements. RMDs – How many shares to distribute? discusses an example.