On Thursday, December 11, the Senate passed the Worker, Retiree and Employer Recovery Act of 2008 (the "Act"), which had previously been passed by the House of Representatives in a similar form on Wednesday, December 10. Major provisions of the Act include important modifications to pension distribution requirements for businesses and individuals, and delayed imposition of certain pension plan funding requirements under the Pension Protection Act of 2006 (the "PPA"), as well as technical corrections to the PPA.
Highlights of the Act include:
Pension Recovery Provisions
- Moratorium on Required Minimum Distributions. Currently, owners of traditional individual retirement accounts ("IRAs") and defined contribution plan accounts (including 401(k) and 403(b) plan accounts) must begin receiving a minimum distribution from their accounts by April 1 of the year following the year in which they reach age 70 ½, or in the case of an employer-provided qualified retirement plan, until April 1 of the year following the year in which the individual retires, if later. Failure to make these minimum distributions can result in a 50% excise tax on the amount not distributed as required, in addition to income tax owed on the distribution; qualification issues can also arise. The Act places a one year moratorium on required minimum distributions from individual retirement accounts and defined contribution plans for 2009, which will allow account holders to wait to receive required distributions, should they prefer to wait out the existing market volatility.
- Extension of the PPA Funding Transition Rule. The PPA modified the minimum funding rules for single-employer defined benefit pension plans, making the minimum required contribution to such plans for a plan year generally dependent on a comparison of the value of the plan's assets with the plan's funding target attainment percentage and target normal cost. The "funding target attainment percentage" is defined as the ratio of the value of the plan's assets to the plan's funding target for the year. The plan's "funding target" is equal to the present value of all benefits accrued or earned as of the beginning of the plan year, and the "target normal cost" is the present value of all benefits which are expected to accrue under the plan during the plan year.
The PPA provided a transition rule so that sponsors of pension plans had three years over which to gradually increase the value of their plan's assets against the plan's funding target and the plan's target normal cost, which set the specified funding targets at 92% for 2008, 94% for 2009, and 96% for 2010, instead of 100%. However, under the PPA, the transition rule would not have been available for any plan year after 2008 for a pension plan whose funding target attainment percentage fell short of the funding target for 2008. The Act provides that all pension plans may determine their funding target attainment percentage for 2008, 2009, and 2010 using the PPA transition rule's funding targets instead of the 100% target, regardless of whether the plan is able to meet the 2008 funding target. In doing so, the Act seeks to give all single-employer defined benefit pension plans additional time to meet the PPA's stricter underfunding limits in light of the current downturn in the financial markets.
- Expansion of the Averaging Method. The PPA allowed pension plans to value their assets using an averaging method, looking at the fair market values of the plan's assets over the 24-month period preceding the month in which the plan's valuation date occurs (and ending on the valuation date), where the method meets certain other requirements. The Act allows the averaging of the value of the plan assets to be adjusted for expected earnings as specified by the Secretary of the Treasury, which will allow plans to "smooth" the value of their assets over 24 months. The proposed smoothing provision has been a high-profile item since shortly after the PPA's enactment. However, the calculation will still be subject to the Code's current requirement that the determination of the plan assets' average fair market value not be lower than 90% or greater than 110% of the fair market value as of the valuation date, which will limit the relief of the Act's provision.
- Funding Status "Lookback". The PPA required certain funding-based limits for single-employer defined benefit pension plans on benefits and benefit accruals, which were applicable to plan years beginning after December 31, 2007. Generally, where the plan's adjusted funding target attainment percentage is less than 60% for a plan year, all future benefit accruals must be frozen for plan participants. Under the Act, for the first plan year beginning during the period of October 1, 2008 through September 30, 2009, the future benefit accrual limitation rules for that plan year are applied by "looking back" to the plan's funding status for the previous plan year (if the plan's funding status was greater that year). By allowing pension plans to use the greater of the current or previous plan year's funding status, more single-employer defined benefit plans will be able to continue future benefit accruals, in spite of a lower funded status this year due to market conditions.
Pension Protection Act Technical Correction Provisions
- Certain Allowed Lump Sum Distributions. The PPA prohibited certain underfunded plans from making lump sum payments, which effectively constituted a prohibited form of distribution. The Act provides that where the present value of a participant's vested benefit is less than $5,000, the benefit may be immediately distributed, and will not be considered a prohibited payment under the PPA in spite of the plan's underfunded status.
- Extended Non-Spousal Rollover Provisions. The PPA permitted qualified plans and certain other types of plans to roll over a deceased participant's account balance to an inherited IRA of a non-spouse beneficiary (e.g., a domestic partner or a sibling). The Act requires plans to allow rollovers to non-spouse beneficiaries after December 31, 2009, generally on the same basis as other eligible rollovers.
The Worker, Retiree and Employer Recovery Act of 2008 may have a substantial impact on many types of qualified plans. As a result of this new Act, you should review your qualified plans to determine how the above changes will affect your plans.