Pension Digest Alert
Congress has enacted and President Bush signed into law the
"Worker, Retiree, and Employer Recovery Act of 2008"
December 23, 2008

Congress has enacted and President Bush is expected to sign into law the "Worker, Retiree, and Employer Recovery Act of 2008." This last minute law for 2008 contains numerous technical corrections related to the Pension Protection Act of 2006 and a number of new tax laws relating to IRAs and pension plans.

Law Change #1 – Waiver of RMD's For 2009.
In order to partially alleviate the economic crisis, Congress has enacted a one year waiver for 2009 to the law mandating that IRA accountholders, inheriting IRA beneficiaries, retirement plan participants and inheriting beneficiaries of retirement plan participants must take a required distribution. There is no required distribution for 2009 and there will be no assessment of the 50% excise tax for missed required distributions. The RMD rules for 2008 still apply and such rules will again apply for 2010 and subsequent years unless a new tax law would be enacted modifying the one year waiver.

An individual who attains age 70½ in 2009 will not be required to take his or her RMD for 2009. He or she will need to take his or her RMD for 2010 by December 31, 2010. An individual may certainly take a distribution during 2009 even though it is not a required distribution.

An individual who attains age 70½ in 2008, but who was intending to take his or her RMD by April 1, 2009, will still be required to do so since that is the RMD deadline for 2008. There is no waiver of the 2008 RMD. He or she will not have a RMD for 2009. The next RMD will be for 2010 with a dead-line of December 31, 2010. Those individuals attaining age 70½ in 2010 will have April 1, 2011 as his or her required beginning date.

An inheriting IRA beneficiary will not be required to take a RMD for 2009. If an IRA accountholder died prior to 2009, the general rule is that the inheriting IRA beneficiary will be required to take a distribution using the life distribution rule unless the five year rule applied. If the life distribution rules applies, there is no RMD due with respect to 2009. The deadline for the next RMD would be December 31, 2010. If the five year rule applies because the beneficiary had elected it, the five year rule is now applied without considering 2009. For example, if an IRA accountholder had died in 2006, so the beneficiary would have been required to close the inherited IRA by December 31, 2011, he or she will now have until December 31, 2012 to close the inherited IRA. An inheriting IRA beneficiary may certainly take a distribution during 2009 even though it is not a required distribution.

As we all know, the law prohibits the rolling over of any required distribution. It does not matter if the RMD is coming from an employer plan or from an IRA. But the fact is that there is no RMD for 2009. Even so, the law has been written so that a plan administrator is not required to directly roll over this amount at the request of the participant and the plan administrator is not required to with-hold 20% of the amount not directly roIled over. The plan administrator may treat this amount as being an eligible rollover distribution if it so chooses. The plan administrator may choose to withhold 20% of the amount not directly rolled over if it so chooses. An individual who receives a distribution of such amount can rollover such amount within the 60 day period.

This law is temporarily suspended. It will be possible for an IRA accountholder to roll over anddirectly rollover an amount in 2009 which, but for the special rule, would have been ineligible to be rolled over since it was a RMD.

The waiver of the RMD rule for 2009 applies to required distributions for 2009.

Law Change #2 – Right of a Non-spouse Beneficiary To Directly Roll Over Inherited ERP Funds To an Inherited IRA.
It is highly questionable that this law change is even necessary. Code section 402(c)(11) had been added by Congress by the Pension Protection Act of 2006. However, Code section 402(f) (the section defining the contents of the notice to be given to a participant) had not been amended. Therefore, the IRS had adopted the position in Notice 2007-7 that a distributing plan was not required to do a direct rollover on behalf of the inheriting beneficiary and it was not required to withhold 20% of the distribution amount to the extent it was not directly rolled over. With respect to plan years beginning after December 31, 2009, an employer will be required to directly rollover an inheriting beneficiary's funds to an inherited IRA. Prior to that time, the IRS current position is that an employer may amend its plan to authorize such direct rollovers, but is not required to.

Law Change #3 – Special "Conversion" or Rollover of Certain Amounts to Roth IRAs Received by a Qualified Airline Employee With Respect to the Bankruptcy of Certain Airline Carriers.
Financial planners have figured out the great value of Roth IRAs; the fact that the income earned by a Roth IRA will never be taxed if certain rules are met. These planners are working hard to get funds into Roth IRAs. To the extent they can, they are lobbying Congress to change the definition of what funds qualify to be converted to a Roth IRA.

Originally, only funds within a traditional IRA could be converted to a Roth IRA. Then the law was changed to allow funds within certain employer retirement plans to be converted to a Roth IRA. In 2008, the Emergency Economic Stabilization Act of 2008 contained provisions authorizing certain plaintiffs of the Exxon Valdez Litigation to move litigation payments into either a traditional IRA (i.e. to prevent immediate taxation) or a Roth IRA (i.e. future tax free earnings).

The change made by this law is that a qualified airline employee is eligible to contribute any portion of an airline payment amount to a Roth IRA within 180 days of receipt of such amount (or, if later, within 180 days of the law's enactment). It does not matter if such payments occurred before, on or after such date.

An airline payment amount is the payment of any money or other property by a commercial passenger airline carrier to a qualified airline employee under the approval of an order of a Federal bankruptcy court in a case filed after September 11, 2001, and before January 1, 2007, and in respect of the employee's interest in a bankruptcy claim against the carrier, any note of the carrier, an amount paid in lieu of a note being issued, or any other fixed obligation of the carrier to pay a lump sum amount. The qualifying amount is the gross amount and it is not reduced by any requirement to deduct and withhold employment and social security taxes. However, any airline payment based on the carrier's future earnings or profits does not qualify.

A qualified airline employee is any employee or former employee of a commercial airline carrier who was a participant of a defined benefit plan maintained by the carrier which was qualified under Code section 401(a) and was terminated or became subject to the restrictions contained in paragraphs (2) and (3) of section 402(b) of the Pension Protection Act of 2006.

The commercial carrier will be required to report to the IRS the names of the payment recipients and to the IRS and the employees the years and the amounts of the payments. The IRS will create the necessary reporting forms.

Memo on Need for Revised RMD Notices for 2009