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CCH® PENSION — 01/07/10

IRS clarifies withholding on 2009 RMDs paid between January and April 2010

In the Winter 2010 issue of Employee Plans News, the IRS clarified the circumstances under which a defined contribution plan will have to withhold federal income tax from a 2009 required minimum distribution (RMD) paid between January 1, 2010 and April 1, 2010.

A 2009 RMD paid from a defined contribution plan between January 1, 2010 and April 1, 2010 may be an "eligible rollover distribution" and, if so, subject to federal income tax withholding at a rate of 20% under Code Sec. 3405(c). The Worker, Retiree, and Employer Recovery Act of 2008 (P.L. 110-458;WRERA), waived 2009 RMDs from defined contribution plans (such as 401(k), profit-sharing, 403(b) and 457(b) governmental plans) and IRAs. However, the IRS noted, some defined contribution plans continue to pay them. If a 2009 RMD is distributed between January 1, 2010 and April 1, 2010 (for example, to a participant who turned 701/2 in 2009, but delayed taking his or her 2009 RMD until April 1, 2010), the mandatory 20% federal income tax withholding applies to that distribution unless it is not an eligible rollover distribution for some other reason.

Normally, RMDs are not eligible to be rolled over, because they are not eligible rollover distributions. Section 201(b) of WRERA amended Code Sec. 402(c)(4) to provide that 2009 RMDs would be treated as eligible rollover distributions (and therefore permitted to be rolled over) if the only reason they previously weren't considered an eligible rollover distribution was because they were an RMD. Any 2009 RMDs paid from a defined contribution plan on or before December 31, 2009, are subject to the optional withholding rules under Code Sec. 3405(a) or (b) and not the mandatory 20% federal income tax withholding that otherwise applies to eligible rollover distributions, the IRS noted. However, the Service cautioned, the 2009 RMDs paid from such a plan between January 1, 2010 and April 1, 2010, must have 20% federal income tax withheld from them if they otherwise qualify as eligible rollover distributions.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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