Just one day after passing in the House, the bipartisan Worker, Retiree, and Employer Recovery Act of 2008, H.R. 7327 (the “Act”), passed in the Senate by unanimous consent, Dec. 11, 2008. The bill, now on its way to the President’s desk, would provide much-needed pension-funding relief to ease the financial strain on pension plan sponsors and retirees during the recent economic decline. This legislation has been aggressively supported both by business groups and employers, who fear that companies with substantial pension-funding requirements in the upcoming new year will have to freeze pension plans, reduce work force or even go bankrupt without relief. The Act is expected to be signed into law by President Bush relatively soon, and would mark an important first step in averting potential pension-related financial problems in 2009.
The Act makes numerous changes, the most significant of which are briefly described below:
Suspension of Minimum Required Distributions
- The Act suspends the required minimum distribution from retirement accounts in 2009, which is generally required every year by individuals with retirement accounts, based on the size of their account and the individual reaching age 70-1/2. This waiver, available to everyone regardless of their total retirement account balances, applies to all defined-contribution plans, including 401(k), 403(b), 457(b), and IRA accounts.
- By suspending the excise tax penalties for amounts that should have been withdrawn in 2009, this measure provides much-needed tax relief for retirees and allows them to avoid significant losses that would be incurred by withdrawing funds from depleted 401(k) plans and IRAs while the stock market is down.
- Allows single-employer pension plans to use a two-year “smoothing” process, in which the value of pension-plan assets to be used for purposes of minimum funding calculations are phased in, instead of having to apply the mathematical average that the Department of Treasury requires.
- Plan contribution requirements are adjusted to ease funding conditions previously mandated by the Pension Protection Act of 2006. Plans that miss their phase-in funding target are now permitted to retain the same target rates, and not be penalized by jumping to a 100 percent funding rate.
- Multi-employer pension plans are permitted to elect to freeze their current funding status for one year based on the previous year’s level, and extending the current amortization rules to compensate for losses in the current year.
- Currently, a pension plan’s status, such as “endangered” or “critical,” determines whether it must adopt a funding improvement or rehabilitation plan, whether additional contributions are required to be made by employers, and whether employers are relieved from the obligation to make general funding contributions. Under the Act, the election to freeze a plan’s status will postpone an employer’s need to respond to a lack of 2008 progress in its funding improvement/rehabilitation plan until the next year.
Technical Corrections to the Pension Protection Act of 2006
- For plan years beginning after 2009, qualified plans (including 401(k) plans), 403(b) plans, and governmental 457(b) plans will be required to offer to non-spouse beneficiaries named under the plan, the option of directly rolling over their distributions to an “inherited” IRA.
- The Act provides that distributions from a designated Roth account (such as a Roth 401(k) plan) can be rolled over to a Roth IRA without having to meet the income-level requirements otherwise applicable to a Roth IRA prior to their expiration in 2010.