In late 2008, Congress enacted a waiver of required minimum distributions (RMDs) from defined contribution plans and IRAs that would otherwise be required in 2009, which is found in IRC § 401(a)(9)(H).  Without this waiver, plan participants and IRA owners who had attained age 70½ in prior years generally would have had to receive an RMD in 2009.  Congress enacted this waiver because of the substantial decline in investment assets that occurred in 2007 and 2008. 

This one-time waiver has caused various compliance difficulties for plans and investment providers.  To address these problems, the IRS has issued Notice 2009-82 [2009-41 IRB].  The Notice assists participants who took a 2009 RMD from the defined contribution plan in the mistaken belief that they had to receive an MRD.  Apparently, many plan administrators were unable to timely modify their procedures regarding 2009 RMDs to accommodate the new rules.  Accordingly, the Notice states that payments to participants will not be treated as ineligible for rollover if the payments equal the 2009 RMDs or are one or more payments in a series of substantially equal distributions that meet certain criteria (referred to as “Extended 2009 RMDs”).  Normally, a distribution that is eligible for rollover must be rolled over within 60 days.  The Notice extends this rollover period so that it ends no earlier than November 30, 2009.  There is a similar extension for one distribution from an IRA; the IRS cannot do anything about the rule in IRC § 408(d)(3) allowing only one rollover per year from an IRA.

The Notice also explains that the IRS will not rule that a plan has an operational failure merely because during the period from January 1, 2009 to November 30, 2009, the plan: (1) either did or did not make RMDs or Extended 2009 RMDs to participants; (2) did not give participants to option to receive or not receive 2009 RMDs; or (3) offered or did not offer a direct rollover option for 2009 RMDs or Extended 2009 RMDs.

Notice 2009-82 also discusses plan amendments regarding the waiver.  Some plans may include language regarding RMDs that does not directly reference section 401(a)(9), so that language is arguably not affected by the waiver provision.  Other plans may want to give participants a choice to receive a 2009 MRD but the plan language may not permit that choice.  To address these concerns, the Notice includes two alternative sample plan amendments.  One specifies that the plan will pay out distributions that include 2009 RMDs in the absence of the participant’s or beneficiary’s election.  The second states that the default is no distribution in the absence of an election.  Both samples provide direct rollover choices.  The plan sponsor must adopt one of these amendments no later than the last day of the plan year beginning on or after January 1, 2011.

Revenue Rulings 2009-31 and 2009-32 consider contribution of a participant’s unused paid time off to a 401(k) plan.  They discuss a paid time off (PTO) plan, which is described as a sick and vacation leave arrangement that allows an employee to take paid leave even if the employee is not sick or incapacitated.  One ruling considers an annual contribution to a 401(k) plan of the unused PTO amount or a cash-out of an employee’s unused PTO, determined as of the end of the plan year, and considers two situations.  The other ruling considers contribution of accumulated and unused PTO after severance of employment and considers four situations.  In general, the rulings provide that the contribution of unused PTO does not cause a failure of the plan to meet qualification requirements so long as the total contributions on behalf of the participant do not exceed applicable tax law limits, do not cause the contribution to be included in the participant’s gross income, and do not prevent treatment of the PTO as a bona fide sick and vacation leave plan for purposes of Code section 409A.  If the employee has the right to elect a cash-out of the dollar equivalent of the unused PTO, then contribution to the plan is treated as an elective contribution.  If not, then the contribution is treated as a nonelective employer contribution.

An employer can provide for the contribution of unused paid leave to a qualified plan, either on an annual basis or after termination of employment, if the arrangement meets certain requirements.

By Martin J. Burke, Esq.

Aside from Social Security, 401(k) Accounts are the sole form of retirement savings for a substantial number of Americans.  While some of the benefits of the 401(k) plan are that participants can withdraw their already contributed funds for various reasons, it follows that the “leakage” of this retirement money can have a very detrimental effect on a participants account balance at retirement.

Recently the General Accounting Office (GAO) released a report detailing leakage in the 401(k) environment including the types of leakage, the costs of leakage as well as policies that can affect how often leakage occurs in 401(k) plans. The GAO report found that some 15% of retirement plan participants experience some form of leakage whether it be from loans, hardship distributions, other in-service withdrawals, or not rolling over account balances after cash out at termination. 

The GAO found that certain provisions of the tax code reduced the amount and times leakage occurred.  The 10% tax penalty on in-service withdrawals as well as requiring participants to exhaust the loan requirements available in their plan are some of the ways in which the tax code discourages leakage. 

However, there are some changes that could be made to the tax code that would further reduce the instances of leakage in retirement plans.  For example, when participants currently take a hardship distribution, the participant is required to cease making contributions to their 401(k) account for a period of six months. It is not hard to imagine a participant running into some form of hardship that would only require a one time large payment which after it was made would not have a negative effect on the participant’s ability to contribute to the plan.  If the Congress were to repeal the 6-month suspension on contributions following a hardship distribution, participants who needed the one time large payment made possible by a hardship distribution could be allowed to mitigate the leakage of their 401(k) accounts immediately following their hardship distribution.

You can read the full text of the report at: http://www.gao.gov/new.items/d09715.pdf.

Martin J. Burke, Esq. is a consultant at Matthews Benefit Group, Inc. in St. Petersburg, FL. He can be reached at 727-577-7000 or at mburke@eERISA.com

The satirical publication, The Onion, has taken a slap at the recent flurry of 401(k) plan sponsors who have eliminated their matching contributions, The publication has pointed out that plan participants don’t seem to realize how valuable those matching contributions can be.  Styled as a letter to employees from the plan sponsor, Lowell’s Cleaning Services, it begins:  “For quite some time now, we've been hearing that many of you aren't happy with our retirement savings plan. That's why, beginning next week, we will heed the advice of those who absolutely could not stand our generous 401(k) matching program by permanently eliminating it.” 

The tongue-in-cheek letter goes on to explain that it seemed like a great idea to match employee salary deferrals when they set aside a portion of their pay for retirement, but the mythical employer says it turned out to be “just a horrible mistake from the get-go.”  As a result, the Lowells agreed with “all those employees who despise getting free money from the company they work for their whole lives” and decided to put “this silly, unnecessary, and, frankly, insulting 401(k) matching program to rest!"  Of course, ending the match doesn’t mean that the employees have to stop contributing to the plan.  “For a small fee, Lowell's will continue to administer your investments to make sure you have the opportunity to put your earnings in a place where we tell you it is safely accruing interest.”  You can see the entire satirical letter at http://www.theonion.com/content/opinion/weve_got_some_great_news_for