2009 Required Minimum Distributions (RMDs)

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Fri, Oct 23, 2009
Find me on:

As a result of the economic downturn that occurred in the second half of 2008, a provision was included in the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) to provide a waiver of the requirement to take RMDs in 2009. IRS Notice 2009-09 – Required Minimum Distributions for 2009 provided some initial guidance. Now that we are into the last quarter of 2009 and the 2009 RMD deadlines of 12/31/09 and 4/1/10 are coming closer, you may be dealing with questions such as:

  • Can I still pay a required minimum distribution if the participant would like to take it?
  • Do participants have to opt out or do they opt in?
  • Are 2009 RMD amounts eligible for a rollover?
  • What about the plan document?

IRS Notice 2009-82 – Guidance on 2009 Required Minimum Distributions provides some additional guidance:

  • The plan document generally must be amended to account for how you are treating 2009 RMDs. However, the amendment is generally not required to be adopted until the last day of plan year beginning in 2011.

  • The Notice provides two sample amendments that can be used or modified to meet your particular RMD procedures. The two sample amendments provide that participants can 1) "default to continue 2009 RMDs" or 2) "default to discontinue 2009 RMDs".

  • You will need to choose whether participants have to elect to receive a 2009 RMD or whether they will need to elect NOT to receive one.
  • You will need to choose one of the following options about whether or not 2009 RMDs are eligible for rollover:

  • If a participant has already received a 2009 RMD, the Notice provides that the participants have until the later of November 30, 2009 or 60 days after the date the distribution was received to roll it over.

  • 2009 distributions are considered to first consist of prior unpaid RMDs and then 2009 RMDs.

Here is some background information on RMDs:

What are Required Minimum Distributions?

IRC Section 401(a)(9) - Qualified pension, profit-sharing, and stock bonus plans - Required distributions provides statutory guidance on RMDs. An IRS Retirement Plans FAQs regarding the Required Minimum Distributions also provides a definition:

Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired.

Retirement plan participants and IRA owners are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs.

When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner's benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner's death, or (2) over the life of the beneficiary starting no later than one year following the owner's death. See Publication 590 - Individual Retirement Arrangements (IRAs) for complete details on when beneficiaries must start receiving RMDs.

The IRS RMD information page also answers the following questions

  1. What types of retirement plans require minimum distributions?
  2. When is the deadline for receiving a RMD from an IRA?
  3. How is the amount of the RMD calculated?
  4. Can an account owner just take a RMD from one account instead of separately from each account?
  5. Who calculates the amount of the RMD?
  6. Can an account owner withdraw more than the RMD?
  7. What happens if a person does not take a RMD by the required deadline?
  8. Can the penalty for not taking the full RMD be waived?
  9. Can a distribution in excess of the RMD for one year be applied to the RMD for a future year?
  10. How are RMDs taxed?
  11. Can RMD amounts be rolled over into another tax-deferred account?
  12. Is an account owner who turned 70½ in 2008 and had planned to take his or her first RMD by the April 1, 2009 deadline still required to take that 2008 RMD?
  13. How does the 2009 RMD waiver affect an account owner who may turn 70½ in 2009?
  14. If an account owner does receive a 2009 RMD, can he or she roll it over into an IRA?
  15. Does the 2009 RMD waiver also apply to defined benefit plans?

Required Beginning Date

Generally, all participants must receive their first RMD by the April 1 of the year following the year they meet both of the following requirements: attain age 70½ and terminate employment. This date is referred to as the participant's required beginning date.

Here is an example of a participant that met both requirements in 2007:

  • Required Beginning Date – Since the participant met both requirements in 2008, the required beginning date is April 1, 2009.
  • RMD #1 - The participant must receive their first RMD by April 1, 2009. This RMD is the participant's 2008 RMD and is calculated using the 2007 balance.
  • RMD #2 - The participant must receive their second RMD by December 31, 2009. This RMD is the participant's 2009 RMD and is calculated using the 2008 balance. As discussed above, the 2009 RMD has been waived and is subject to special rules.
  • Each subsequent RMD - Each subsequent RMD will be due on each subsequent December 31 (calculated using the prior year's balance).

Some plans provide eligible participants with the option to take their first RMD in the year they satisfy both requirements. Using the example, the participant would take their first RMD in 2008.

Another option is for the participant to take both their first and second RMDs before April 1 of the year the RMDs are due. Using the example, the first two RMDs would be taken in 2009 by April 1, 2009.

RMD Calculators

Here are two online RMD calculators you may find useful.

  1. Required Minimum Distribution Calculator – This calculator requires you to enter the age as of December 31, 2008, and the balance as of December 31, 2007.
  2. Financial Calculators – Required Minimum Distribution (RMD) – This calculator has more factors to input and is able to handle the beneficiary scenario discussed above. The calculator will also estimate future RMDs and account balances based on the future estimated rate of return. It appears that this is now a premium feature of the site.
  3. Calculate Your Minimum Required Distribution calculator – This is a basic calculator that only requires your age at the end of this year and the balance.

I previously tested some of the calculators using this Uniform Lifetime Table and my calculation agreed with the online calculators. Most RMD calculators will not be able to handle the scenario of a spouse beneficiary that is more than ten years younger than the participant, as this scenario requires the usage of the Joint Expectancy tables.

Do you have enough cash in the ESOP to pay RMDs?

Another factor to consider for RMDs is that the plan may not have enough cash to pay to the participant(s) to satisfy the RMD requirements. If this is the case, the plan will most likely have three options:

  • The stock will be repurchased (recycled) in the plan to other participants - cash will need to be contributed to the plan.
  • The stock will be sold and the proceeds used to pay the participants – a stock appraisal on the date of the sale will need to be obtained.
  • The stock will be distributed and put back to the company (or the ESOP). It is important to note that as it gets closer to December 31, it becomes more likely that the stock value may be "stale" (see above discussion) and not an accurate reflection of the actual stock value.

This situation can be avoided if you have identified RMDs ahead of time and have a well-planned distribution policy.

What value should be used to determine the number of shares to distribute?

The value of the distribution is calculated using the fair market value of the stock as of the date of the distribution, and the value of the distribution must be at least equal to the amount required to be distributed to satisfy the RMD requirements. RMDs – How many shares to distribute? discusses an example.

Topics: Compliance, rules and regulations, ESOP, employee stock ownership plan

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

Keep Your ESOP On Track and On Time
12 Benefits of Incorporating an ESOP in your Business Exit Strategy

Recent Posts