In late December 2008, Congress passed and President Bush signed the Worker, Retiree, and Employer Recovery Act of 2008. Section 201 of this Act provides relief from the minimum distribution requirements for 2009. This means that taxpayers who can afford to skip a 2009 distribution will not have to sell retirement account assets whose value has become sharply depressed. Contact us for more information.

The Act provides a one-year suspension of all required minimum distributions (“RMDs”) for calendar year 2009 from qualified defined contribution plans (e.g., 401(k) and profit sharing plans), governmental 457 plans, 403(b) plans, 403(a) plans, and individual retirement accounts (“IRAs”), but not from defined benefit plans. There is no requirement to show that the retirement assets have fallen in value or are otherwise in trouble. This suspension applies to minimum required distributions required of living participants and to post-death distributions that beneficiaries must receive. Plans do not have to adopt any amendment related to this suspension until the last day of the 2011 plan year (2012 for governmental plans).

The Act also permits a plan to treat a distribution in 2009, that otherwise would have been an RMD, as an eligible rollover distribution. In other words, the plan is allowed, but not required, to offer the employee a direct rollover of the distribution amount. If the plan offers this treatment, the distribution would not be subject to mandatory 20% income tax withholding, and can be rolled over. If the participant does not roll the distribution over to another account, 10% withholding would apply.

To clarify aspects of this suspension, the IRS issued Notice 2009-9, which includes the information discussed above. The Notice also explains that the Act does not waive any 2008 RMDs, even for individuals who faced these requirements for the first time in 2008 and who may delay taking their RMDs until April 1, 2009. That RMD is considered applicable to 2008, so the Act does not affect that RMD.

The fact that the Act does not do anything about the minimum distribution requirement for 2008 is unfortunate, as relief for the 2008 plan year may have helped mitigate some market losses. While almost all 2008 RMDs were based on the participant’s account value on December 31, 2007, long before the massive meltdown of assets in the fall of 2008, any participant who delayed this distribution to the latter part of 2008 or by April 1, 2009 faced the need to liquidate assets whose value had fallen substantially since the account valuation at the end of 2007. Thus, participants who had to receive RMDs for 2008 face the double whammy of needing to make a distribution based on a high valuation by using heavily devalued assets. The relief in the Act did nothing for these participants.

This suspension also does not have any significant impact on participants who must withdraw plan or IRA assets from their accounts to meet living expenses in 2009. That distribution is still taxable, of course, unless it is rolled over to another account, which is an unlikely result for a person who needs funds to meet obligations. Participants who can afford to wait, however, now have the opportunity to let their diminished accounts recover value in 2009.

The Supreme Court has given plan administrators a useful tool to answer questions on what to do when former spouses under an old beneficiary form make claims for a participant’s death benefits. The case Kennedy v. DuPont Savings and Investment Plan involved a divorce decree with a spousal waiver of benefits that conflicted with the participant’s beneficiary designation. This spousal waiver had not been part of a qualified domestic relations order (QDRO). The participant’s beneficiary designation was not modified and named his ex-spouse. The Supreme Court ruled that a spouse’s waiver of a right to pension benefits in a divorce decree does not invalidate the participant’s beneficiary designation as long as it followed the terms of the plan document. Benefits are to be paid to the former spouse.

In ruling for the ex-spouse, the court based its decision on ERISA’s prohibition on participants assigning pension benefits unless those benefits are assigned to an alternate payee through a qualified domestic relations order (QDRO). There are many divorce decrees that include waivers of rights to pension or retirement benefits that do not become part of a QDRO. Lower courts have disagreed as to whether these waivers override a beneficiary designation made by the former spouse. The Supreme Court has now decided this issue in Kennedy v. DuPont Savings and Investment Plan.

The Kennedy decision underscores the need for plan officials to clearly spell out the beneficiary designation process under a plan. That information should communicate both the process and the consequences of failing to follow the plan’s beneficiary designation process.

In its continuing efforts to provide educational materials to the retirement plan community, the Employee Plans area of the IRS website includes several videos discussing topics relevant to qualified retirement plans and IRAs. Of the nine videos available, seven directly relate to qualified plan issues. Titles include "The Navigator - Navigating Employer Information on Retirement Plans, Maintaining Your Plan, Increasing Your Retirement Savings, and IRS Enforcement Priorities". Other available videos address self-correction of plan mistakes, fixing mistakes discovered during an IRS audit, and stopping retirement plan abuses. The following link will take you to a list of all nine videos: http://www.stayexempt.org/ep/stopping_abuses.html.

These videos can be used in combination with the related web page content at www.irs.gov/ep to provide employers and participants with useful information for meeting their retirement plan needs.

You might not have noticed that EBSA just made participating in the Delinquent Filer Voluntary Compliance Program (DFVCP) for late Form 5500 filings a little easier and more efficient. You can speed up the date when potential penalties no longer apply by filing the late forms and making payment on a new EBSA website. The date you pay electronically is the date when your liability for penalties stops. However, you still have to file the delinquent forms on paper at the appropriate DFVCP office.

Individuals at the EBSA involved with the new program asked us to remind plan administrators that the DFVCP filers do pay a fee but it is far less that the amount due if EBSA discovers the delinquency. They also pointed out that ERISA plans avoid any additional penalties from the Internal Revenue Service or Pension Benefit Guaranty Corporation for filings brought up to date through the DFVCP program.

We spoke to Scott C. Albert of the Office of the Chief Accountant, Division of Reporting Compliance on these new online tools. Per Albert, one of the best features of electronically participating in DFVCP is that the correct penalty amount is calculated for you. That, he said, will eliminate a common problem encountered with many DFVC filings: paying too much, or too little. When you pay too little, your submission is rejected. If you pay too much, both you and EBSA must prepare a lot of paperwork to process a refund.

This website based calculation occurs as you complete the site’s information for one or more late filings. It determines the amount you owe for each individual plan filing and then provides a final amount due for all the filings being submitted for that plan. When you provide credit card or electronic transfer information, you have paid for the submission. Though electronic payment offers no discount over penalties that otherwise apply to paper submissions under DFVC, employers will benefit from eliminating the cost associated with preparing paper submissions. But, hey, if you do pay by credit card, you could get some frequent flyer points.

Access instructions for the new electronic processing and payment at https://www.askebsa.dol.gov/dfvcepay/calculator. If you have questions you can contact Mr. Albert at the phone number above. But, note, you are still required to file the late Form 5500s as instructed in “Section 3: Where to File” of the Form 5500 Instructions.

This just facilitates the timing of the submission to avoid imposition of other penalties. You still can participate in the DFVCP by mailing a check and photocopy of your Form 5500 to the Charlotte, NC and Lawrence, KS addresses written in the instructions.

In those instructions, the DOL does caution filers that it is not responsible for any loss of calculations and data until you have actually made payment. That is, the Department does not monitor or save data entered into the DFVC calculator until the penalty is paid using the online payment function.

Albert pointed out that the electronic version of DFVC is available for late Form 5500s of welfare plans, pension, profit sharing, 401(k) plans, and the top hat notice for nonqualified deferred compensation plans.

We asked Mr. Albert if an employer with a late Form 5500EZ could file under DFVC in the paper version. He commented that those filers are not eligible for filing under the DFVC filing because those are filings made under an IRS program and not subject to EBSA regulation. They cannot be filed under the DFVC program. The program refunds payments it receives from EZ filers attempting to participate in the program. However, he did say that the IRS is currently considering whether to provide EZ filers with relief similar to that provided under the DFVCP.