Pension Digest Alert
Special IRA Rollover Relief and Additional 2009 RMD Guidance for IRAs
November 6, 2009

The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) contained a law change (section 201) waiving required minimum distributions from IRAs and retirement plans that hold participant benefits in individual accounts for 2009. This IRS issued Notice 2009-9 on February 2, 2009 modifying the reporting requirements applicable to RMDs from IRAs to reflect the RMD waiver rule. The original reporting rules had been set forth in Notice 2002-27. In 2010, the original rules will again apply.

The IRS recently issued Notice 2009-82. It was set forth in Internal Revenue Bulletin 2009-41 dated October 13, 2009. This guidance was primarily written for employer sponsored pension plans. However, Notice 2009-82 also set forth guidance for IRAs.

The purpose of this article is to discuss the IRA guidance.

1. Special IRA Rollover Relief. The IRS has chosen to grant special rollover relief to IRA accountholders who were paid their 2009 RMD distributions during the period of January 1 to October 1, 2009. It does not matter if the individual knew or understood at the time the distribution was received that a last minute law change enacted in December of 2008 meant that all RMDs for 2009 had been waived. The IRS has granted the following special relief. If a person was paid his or her RMD during the period of January 1 to October 1, 2009, then he or she has until November 30, 2009, to roll over all or some portion of the distribution. This relief is obviously retroactive. A person who received a distribution in January of 2009 is able to do a rollover in November of 2009 even though this rollover is taking place long after the 60 day period has passed.
   
   Why is the IRS being "nice" and allowing such rollovers long after the 60 days have passed?
   
   There were some accountholders who did not know about the law change waiving RMDs for 2009 until later in the year. These individuals were paid their required distributions. Some would have elected to not be paid their required distribution if they would have been told that RMDs were waived for 2009.
   
   An IRA accountholder was eligible to rollover his or her distribution because it was not an RMD since all RMDs had been waived for 2009. Many of these individuals learned about the law change more than 60 days after they received the distribution. They were ineligible to roll over this distribution.
   
   This rollover relief also applies to an individual who voluntarily was paid an amount equal to what would have been his or her 2009 RMD. That is, the individual knew at the time that he or she did not have an RMD for 2009, but still elected to take a distribution. If this individual has changed his or her mind and now wishes to undo the distribution, he or she may do so by rolling over the funds by November 30, 2009.
   
   This rollover relief does not extend to any amount in excess of the individual's RMD for 2009. For example, an individual who had a required distribution of $2,000, but who withdrew $3,000 in February of 2009, is eligible to roll over $2,000 as long as he does so by November 30, 2009. He cannot rollover the $3,000.
   
   If a person was paid his or her distributions after October 1, 2009, the person will not need the special relief since he or she has 60 days in which to complete the rollover. For example, John Doe withdraws his 2009 RMD amount on October 2, 2009, his 60-day period will end on November 30, 2009. Or, he withdraws his 2009 RMD amount on October 5, 2009, then his 60-day period will end on December 3, 2009.
   
   Under existing tax law, the IRS has the authority to waive the 60-day period where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond the IRA accountholder's control. The IRS was late in furnishing needed guidance. The IRS concluded it was equitable to extend the 60-day rollover period until November 30, 2009. However, the IRS has not been given the authority to waive the one-rollover-per-year rule or other rules restricting rollovers. Therefore, if an IRA account holder received more than one distribution from his or her IRA in 2009, no more than one of these distributions (on a per plan agreement basis) will be eligible for this rollover relief.
   
   If a person in 2009 had an IRA with respect to which there were un-taken RMDs from prior years, the first distributions in 2009 are the RMDs from the prior years. These amounts are ineligible to be rolled over. Once those are distributed, the subsequent distributions would be the 2009 RMDs. The 2009 RMD could qualify to be rolled over into the same or a different IRA.
   
2. The IRS expressly states that this special rollover relief does NOT apply to non-spouse beneficiaries. Since 1983 a non-spouse beneficiary has had no legal right to rollover a distribution from a decedent's IRA or an inherited IRA to another inherited IRA or to their own IRA. Internal Revenue Code section 408(d)(3)(C) expressly denies rollover treatment for distributions from inherited IRAs. WRERA 2008 did not change this law and the IRS does not have the authority to create an exception.
   
   Apparently, there are some IRA consultants and IRA custodians within the IRA industry stating an IRA beneficiary who was paid his or her beneficiary RMD amount in 2009 has the right to rollover this distribution because of Notice 2009-82 or for some other reason. We at CWF disagree. The IRS makes the express statement - the restrictions on rollovers by non-spouse beneficiaries have not been waived. See page 493 of Internal Revenue Bulletin 2009-41. We suggest that any beneficiary be very cautious in deciding if he or she will follow advice that such a rollover is permissible. A person who makes an impermissible rollover contribution has made an excess contribution and the 6% excise tax will be owed for each and every year the excess amount remains in the inherited IRA. It is possible that an IRS official gave some IRA industry workers a preliminary opinion that this "rollover" relief would also be extended to distributions to inheriting beneficiaries. However, we believe the IRS looked at the law, and determined it had no authority to waive the express statutory law disallowing the rolling over of an inherited IRA distribution. We at CWF certainly could be wrong, because sometimes the IRS does adopt some strange tax positions. In this situation, however, we do not believe the IRS will be issuing additional guidance to allow non-spouse beneficiaries to rollover an RMD distribution.
   
   If there are IRA beneficiaries who thought they would have this rollover right and they made such a rollover, they now need to correct their erroneous rollover as an excess contribution.
   
   If your institution allowed them to make such rollovers, you will need to work with them to correct the situation.
   
3. A spouse beneficiary does qualify for the special rollover relief under Notice 2009-82 as discussed above under item #1. The surviving spouse must roll over the inherited IRA funds into his or her own "personal" IRA. The inherited IRA funds cannot be rolled over into an inherited IRA for the surviving spouse.
   
4. The IRS has indicated that IRA plan agreement forms do not presently need to be amended for the RMD waiver law change. The IRS has indicated it may furnish further guidance in the future covering the need to amend the IRA plan agreement for this RMD waiver reason and other reasons.
   
   CWF Note. CWF forms already contain a provision waiving the 2009 RMDs. We believed adding this provision was prudent. CWF IRA plan agreements do not yet contain the special rule allowing the rolling over of a 2009 RMD distribution occurring between January 1, 2009 toOctober 1, 2009 by November 30, 2009. We will be adding this provision in the very near future.
   
   The IRS has indicated it will be issuing revised traditional IRA plan agreement forms (Form5305, 5305-A) by January 11, 2010 and revised Roth IRA plan agreement forms (Form 5305-Rand 5305-RA) by April 30, 2010. CWF expects the IRS will provide additional guidance explaining when such new forms will be required to be used for new and existing IRA accountholders.
   
5. When an IRA accountholder dies, an inheriting IRA beneficiary must make certain elections by certain deadlines.
   
   If an IRA accountholder died during 2008, then under the life expectancy rule, the beneficiary is required to commence distributions by December 31 of the following year or December 31, 2009. Since RMDs are waived for 2009, this commencement deadline changes to December 31, 2010. For those accountholders who died prior to 2008, then under the life distribution rule, the beneficiary has no RMD for 2009. The beneficiary will need to take his or her 2010 RMD by December 31,2010 and each subsequent year's RMD by December 31 of such year.
   
6. Section 201 of WRERA provides a special rule when the 5-year rule applies for post-death distributions. The 5-year period is determined without regard to 2009. For example, if an IRA accountholder died during 2004, and the inheriting beneficiary had elected the 5-year rule, then the deadline for closing the IRA will change from December 31, 2009 to December 31, 2010. And, if an IRA accountholder died during 2005, then the deadline for closing the IRA will be December 31, 2011 since the 5-year period does not include 2009.
   
7. On or after January 1, 2007, an inheriting non-spouse beneficiary of an employer plan permitting direct rollovers to an inherited IRA, has the right to change from the 5-year rule to the life distribution rule if two rules are met. First, the non-spouse beneficiary of the inherited IRA must be the same beneficiary as under the plan. Secondly, the plan funds must be directly rolled over before the end of the year following the year of death. This means, a non-spouse beneficiary of a plan participant who died in 2008 and who had first elected the 5-year rule, would have had to make the change to the life distribution rule by December 31, 2009. With the RMD waiver for 2009, this deadline changes to December 31, 2010.
   
8. The rule waiving the 2009 RMD does NOT help the person who has set up a substantially equal periodic payment schedule pursuant to Code section 72(t) by using the RMD method as described in Notice 89-25 and Rev. Rul. 2002-62. Such a distribution is a substantially equal periodic payment distribution and is not an RMD distribution. Any person who fails to take his or her substantially equal periodic payment distribution because he or she believes the RMD waiver applies to this situation is mistaken. He or she will be subject to the tax penalties associated with failing to take or modifying a substantially equal periodic payment schedule.
   
9. The IRS makes clear that section 201 of WRERA and the special relief granted by Notice 2009-82 only provides relief from certain RMD deadlines and related rollover requirements. It does NOT change the following deadlines or other rules:
   • A. September 30th of the year following the accountholder’s death is used to determine who is a      designated beneficiary for RMD purposes;
     
   • B. October 31st of the year following the year of death is still the deadline for a trustee to furnish      certain information to see if the trust will qualify to use the life distribution rule;
     
   • C. The deadline for qualifying to use separate accounting is still the last-day-of-the-year;
     
   • D. The one-rollover-per-year rule is not changed in any way;
     
   • E. The rule not allowing non-spouse IRA beneficiaries to roll over funds into another or the same IRAs      not changed in any way; and
     
   • F. The rule restricting the ability to rollover after-tax amounts from an IRA to certain plans continues to     apply and is not changed by Notice 2009-82.
     
     

• Summary. There will be IRA accountholders who will wish to take advantage of this special IRA RMD relief. That is, they are allowed to do a rollover of their 2009 RMD amount even though they failed to comply with the 60-day rule. They will need to act quickly. The rollover must be completed by November 30, 2009. They must comply with the one-rollover-per-year rule. An IRA custodian will want to consider whether it sends a notice of this special rollover relief to all of your RMD accountholders or just to those who took a distri-bution earlier in the year. CWF has created a special Rollover Certification Form to handle this situation. If your financial institution subscribes to CWF’s IRA FormSystem, it will be sent to you by November 7. Other financial institutions may order this form by calling CWF at 1-800-346-3961 or online at www.pension-specialists.com. The cost of the form is $10.00.