EXECUTIVE SUMMARY:
Sec. 201 of H.R. 7327 suspends the 50% penalty for failure to take a required minimum distribution, for 2009, for distributions from defined contribution plans. Normally, if any individual passed his required beginning date, or any plan beneficiary, fails to take a required distribution during any year, the penalty is 50% of the amount that should have been taken, and was not.
For 2009, this penalty will not apply. This effectively means that there is no required distribution for 2009.
COMMENT:
While the stated purpose of this provision is to protect retirement accounts of seniors, it did not solve the immediate issue of individuals who needed to take a 2008 distribution from their retirement accounts.
With the current economic downturn, many of the seniors were faced with having to take their 2008 distribution computed on the higher December 31, 2007 retirement plan value. However, they needed tofund that distribution with the depressed current value.
EXAMPLE:
An individual age 78 who had an account worth $1 million at the beginning of 2008 was required to take a distribution of $49,261. If the account had decreased by 30% during 2008, in order to take the 2008 minimum distribution, the individual will have had to distribute a little over 7% of the current account value, although the minimum was computed using a percentage of slightly under 5%. Taking the distribution further depleted the account to a balance of slightly higher than $650,000. At this balance, the 2009 minimum distribution would be approximately $33,000, which now will not have to be taken.
However, if Congress had suspended the 50% penalty for 2008, the account would have a higher base amount from which to hopefully grow in calendar year 2009. Admittedly, this would result in a slightly higher 2009 required minimum distribution. But overall the account would be in much better shape.
NO PROTECTION FOR DEFINED BENEFIT PLANS:
Section 201 only applies to defined contribution plans. So anyone required to take a minimum distribution from a defined benefit plan will still have to take that distribution in 2009.
NO PROTECTION FOR 2008 REQUIRED DISTRIBUTIONS:
Also, this provision provides no relief to individuals who attained age 70 1/2 in 2008 and elected to postpone their first distribution until the first quarter of 2009. They will still be required to take the 2008 distribution.
For individuals whose required beginning date will be April 1, 2010, this provision does not change that fact. So whether an individual dies before, or on or after, the required beginning date, will be determined without regard to this provision.
APPLIES TO BENEFICIARIES AND OWNERS:
This provision applies to beneficiaries as well as individual account owners. For beneficiaries who are operating under the five-year rule, 2009 “does not exist”.
EXAMPLE:
Suppose 2009 is the fifth year. The account does not have to be emptied until 2010.
If 2009 is an interim year, then the account does not have to be emptied until the end of the year containing the sixth anniversary of the death of the account holder.
OTHER IMPLICATIONS:
For individuals who receive what would otherwise be a required minimum distribution from an employer plan in 2009, this distribution will now be an eligible rollover distribution since it is no longer a required minimum distribution.
However, the employer will not be required to treat it as an eligible rollover distribution, to the extent the distribution would’ve been a required minimum distribution 2009 except for this provision. Therefore, there is no notice requirement and no mandatory 20% withholding if the employee takes the distribution. If the employee received this distribution, he or she can roll the distribution into another retirement plan within 60 days to avoid current taxation.
