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 to fund
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.
