The following is an in-depth review of the recent changes:
 
Waiver of RMDs for 2009
IRS rules generally require taxpayers who have reached age 70-1/2 to begin taking mandatory, annual distributions from IRAs and employer-sponsored retirement plans. To address the decline in value of assets held in retirement accounts in 2008, Congress passed the Worker, Retiree, and Employer Recovery Act of 2008, which waived the required minimum distributions (RMDs) for 2009.

Despite the waiver, some people received RMDs anyway. Although the unwanted RMDs could have been rolled back to an IRA or qualified plan within 60 days, many taxpayers did not recognize this opportunity until the 60 day window had expired.

Relief for Unwanted RMDs
On September 24, 2009, the IRS released Notice 2009-82, which gives IRA owners and participants in employer-sponsored qualified plans a limited window of opportunity to put unwanted RMDs back into IRAs or qualified plans. Specifically, the Notice generally extended the 60-day rollover deadline for unwanted RMDs taken in the 2009 calendar year until November 30, 2009. Taxpayers who properly complete a rollover to either an IRA or a qualified plan by the November 30 deadline can avoid paying taxes on distributions that did not have to be taken. It is not necessary for unwanted RMDs to go back to the same accounts they came from.

No Relief from the One-Rollover-Per-Year Rule for IRAs
IRS rules provide that taxpayers are permitted to make a tax-free rollover from an IRA only once during a 12-month period. Unfortunately, IRS Notice 2009-82 did not provide relief from this one-rollover-per-year rule. Consequently, for IRA owners who received RMDs during 2009 in the form of periodic payments, only one distribution is eligible for rollover. Therefore, such IRA owners generally will want to roll an amount equal to the highest single distribution back into an IRA.

Example:

Shirley has elected to receive her RMDs in the form of monthly payments. In January, 2009, Shirley starts receiving 2009 monthly RMDs of $10,000. In April, 2009, after Shirley had already received 4 monthly payments of $10,000, Shirley’s accountant informed her that she was not required to take RMDs for 2009.

Shirley can only roll $10,000 back to her IRA, not the full $40,000. If she deposits one check for $40,000, then $30,000 will become an excess IRA contribution (subject to a 6% penalty tax each year until the excess funds are withdrawn).

If you have received more than one payment that constitutes an unwanted RMD or if you have done a rollover in the prior 12-month period, please consult us regarding potential alternatives that may be available to you.

Special Considerations for Non-Spousal Beneficiaries
Although RMDs were suspended in 2009 for participants and beneficiaries, the relief under Notice 2009-82 is not available to non-spousal beneficiaries. This is because the IRS does not permit non-spousal beneficiaries to do a 60-day rollover (and therefore the extension of the 60-day period does not help them).

If you are a nonspousal beneficiary of an IRA or a qualified plan, please consult us potential alternatives that may be available to you.

Guidance for Retirement Plan Sponsors
Because the Act was enacted so late in 2008, many plan administrators were unable to modify their procedures relating to 2009 RMDs to accommodate the new rules. Also, before the issuance of the guidance, many plan sponsors were unsure of the options available to them.

Notice 2009-82 provides that the IRS won’t treat a plan as having an operational failure solely because for the period January 1, 2009 through November 30, 2009:

• Distributions that constituted 2009 RMDs were or were not paid;
• Participants and beneficiaries were not given the option of receiving (or not receiving) distributions that included 2009 RMDs; or
• A direct rollover option was (or was not) offered for 2009 RMDs.

To address the concerns of plan sponsors regarding 2009 RMD waivers, the IRS has issued two alternative sample plan amendments that plan sponsors can adopt. The sample plan amendment must be adopted no later December 31, 2011 for calendar year plans and must reflect the operation of the plan to either stop or continue distributions that include 2009 RMDs in the absence of a participant’s or beneficiary’s choice.

If you received a RMD in 2009 and are interested in rolling it back into a qualified plan or IRA, please contact Natalie Takacs at (216) 579-1040 or ntakacs@cohencpa.com.