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Newsletter
December
2009 Volume
26 - Number 2
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This newsletter is addressed to our clients, their attorneys,
accountants and other professional advisors. Citations may be included for
those who want to refer directly to the source material. IN THIS ISSUE:
RETIREMENT PLAN LIMITS FOR 2010 - A summary
of the limits and thresholds for 2010 side by side with those for 2009.
However, most of the limits and thresholds remain unchanged from the 2009
amounts.
REMINDER OF SUSPENSION OF REQUIRED MINIMUM
DISTRIBUTIONS (RMD) FOR 2009 - A RMD for the 2009 calendar year is not
required to be made from Individual Retirement Accounts (IRA) or qualified
defined contribution plans. However, an RMD for calendar 2009 is required to
be made from defined benefit pension plans. CONSIDERATIONS
FOR HARDSHIP DISTRIBUTIONS - Requests for hardship distributions by
participants have increased. Certain defined contribution plans, including
401(k) plans, may provide for such distributions. The following is a summary
of the IRS guidelines pertaining to hardship distributions. |
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RETIREMENT
PLAN LIMITS FOR 2010
Most limits and thresholds
remain unchanged:
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REMINDER OF SUSPENSION OF REQUIRED MINIMUM
DISTRIBUTIONS (RMD) FOR 2009 In December 2008,
Congress passed the Economic Relief and Technical Corrections Bill of 2008
which suspended the requirement for minimum distributions made for the 2009
calendar year from Individual Retirement Plans (IRAs) and qualified defined
contribution plans. The suspension
applies to both lifetime distributions to employees and IRA owners as well as
to after death distributions to beneficiaries. In the case of an
individual who attains age 70 ½ in this calendar year (2009), the first
required minimum distribution would be for 2010 and must be made no later
than the last day of calendar 2010. THE SUSPENSION
DOES NOT APPLY TO REQUIRED MINIMUM DISTRIBUTIONS
FROM DEFINED BENEFIT PLANS. A
participant in a defined benefit plan who attains age 70 ½ during this
calendar year must take his or her first RMD no later than April 1, 2010. If,
however, such participant is not a 5% owner of the employer maintaining the
plan, the required minimum distribution date is delayed to April 1st
of the year following the year in which the individual retires. As stated in our prior newsletters, the
provisions of this bill do not apply to any required minimum distribution for
the 2008 calendar year that was permitted to be made in 2009. Those
distributions must have been made no later than 4/2/09. |
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CONSIDERATIONS FOR HARDSHIP DISTRIBUTIONS Due to the
downturn in the economy, a number of participants have expressed an interest
in taking a hardship distribution from his or her retirement plan. Defined
contribution plans, including 401(k) plans, may provide for such
distributions. The following is a summary of the IRS guidelines pertaining to
hardship distributions. A plan may only
make a hardship distribution if these conditions are met: ·
Hardship distributions must be permitted by the
plan document; ·
There must be an immediate and heavy financial
need of the employee, or in some cases of the employee’s spouse, dependent or
beneficiary; ·
The distribution must be in an amount that does
not exceed the immediate and heavy financial need. A distribution is considered to be for an
“immediate and heavy financial need” if it is for medical expenses, the
purchase of a principal residence, tuition and related education expenses,
the prevention of eviction or foreclosure, funeral expenses, and repairing
casualty damage to an employee’s house. The distribution must also meet the
plan document’s definition of “immediate and heavy financial need.” Internal
Revenue Service Regulations also require that a participant must first exhaust
all loans and distributions other than hardship distributions available under
all plans of the employer. The Pension
Protection Act of 2006 modified the hardship rules to treat a participant’s
beneficiary the same as a participant’s spouse and dependents for purposes of
qualifying for certain hardship distributions. Distributions for medical,
tuition and funeral expenses can now be made based on the need of a
grandchild or domestic partner if that individual is a designated beneficiary
under the plan. Please note that
hardship distributions are subject to ordinary income taxes and generally a
10% early withdrawal penalty for participants under age 59&½. Before making a
hardship distribution, the employer should review the plan provisions to
determine: 1.
Does the plan allow hardship distributions? 2.
What is the procedure for an employee to request
a hardship distribution? 3.
What is the plan’s definition of a hardship
distribution? 4.
Is there a limit on the amount and type of funds
that can be distributed from an employee’s accounts? The following
steps should then be taken: 1.
Obtain a statement verifying the employee’s
hardship. 2.
Determine the hardship qualifies under the plan’s
definition. 3.
Document the employee has exhausted any other
loans or distributions from any plan of the employer. 4.
If the plan states that a hardship distribution
is not necessary if the employee has other resources available, document the
lack of such resources. 5.
Determine that the amount of the distribution
does not exceed the amount needed to satisfy the financial need. However,
amounts needed to pay taxes or penalties because of the hardship distribution
may be included. 6.
Determine that the amount does not exceed any
limits under the plan and consists only of eligible amounts. For example, a
plan could limit hardship distributions to a specific dollar amount and could
require that it only be made from salary reduction contributions. 7.
If the plan document requires that the employee
is suspended from contributing to the plan and all other employer plans for
at least six months after receiving a hardship distribution, inform the
employee and enforce the provision. In order to
protect the qualified status of the plan, it is important that employers and
plan administrators follow both the plan document and all applicable legal
requirements when making a hardship distribution. |
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