The Worker, Retiree, and Employer Recovery Act of 2008 (the “Act”) was signed by President Bush on December 23, 2008. It was enacted unanimously by the House of Representatives and the Senate earlier in December. The Act contains minimum required distribution relief for seniors, defined benefit plan funding relief, and technical corrections to the Pension Protection Act of 2006 (“PPA”). This Legal Alert summarizes the key provisions of the Act.

Suspension of Minimum Distribution Requirements

The Act suspends the minimum distribution requirements for 2009, so individuals age 70½ and older will not be required to take a minimum distribution from their 401(k), 403(b) or 457(b) plans or individual retirement arrangements this year. Distributions made in 2009 that would otherwise be minimum distributions, but are not required to be made due to the relief, may generally be rolled over subject to the usual rules for eligible rollover distributions. However, plans will not be required to offer direct rollovers, provide the written notice, or apply the 20% withholding to these amounts.

This provision does not apply to minimum distributions required to be taken in 2008 (or minimum distributions required to be taken with respect to 2008 in the case of an individual who turns 70½ in 2008), and the Internal Revenue Service and Treasury have indicated that they do not intend to provide any relief for 2008.

Pension Funding Changes

The Act contains the following funding relief for defined benefit plans:

  • “Smoothing” Permitted in Valuation of Plan Assets. Under the Act, plans are permitted to include expected earnings when calculating the value of plan assets using the averaging method. The averaging method permits a plan to determine the value of a plan’s assets by averaging the fair market value of the assets over 24 months so long as at all times during the averaging period the value varies no more than 10% from the current fair market value of the assets. Expected earnings are to be calculated by the plan’s actuary using an assumed earnings rate for the plan. This provision provides welcome clarification that pension plans are permitted to utilize asset smoothing in valuing their assets, as proposed Treasury regulations would essentially require a mark-to-market approach
  • Extension of Transition Rules. The Act eases the transition to the new funding rules set forth in the PPA by extending the transition rule for plans that, in the plan year beginning after 2008, are at and below the phased-in funding threshold. In determining a plan’s funding shortfall for the year, only the applicable percentage of the funding target (92 percent for 2008 and 94 percent for 2009) is taken into account.

Plans that fail to meet the target funding percentage for a particular year are required to fund up to the applicable percentage for that year, instead of 100 percent. For example, if a plan was funded at 91 percent for 2008, the funding shortfall for 2008 would be one percent and the plan would be able to use the transition rule in 2009. The plan would then need to fund 94 percent in 2009, rather than 100%.

  • Modification of Benefit Restrictions. In the case of the first plan year beginning during the period October 1, 2008, through September 30, 2009, the limitation on future benefit accruals is applied by using the plan’s preceding year’s funding target percentage. The future benefit accrual limitation is avoided for that plan year if the plan’s funding target percentage for the preceding year is 60 percent or greater.

This provision does not apply if the funding target percentage for the current plan year is greater than the preceding year’s percentage.

  • Relief for Multiemployer Plans. In the case of the plan year beginning during the period October 1, 2008, through September 30, 2009, a sponsor of a multiemployer plan may elect to freeze their current fund status at the same funding status as the preceding plan year. For example, a calendar year plan that is not in critical or endangered status for 2008 may elect to retain that status for 2009. For multiemployer plans that have established a funding improvement or rehabilitation plan in 2008 or 2009, the plan may elect to extend the current funding improvement or rehabilitation period from 10 years to 13 years.

Technical Corrections to Pension Protection Act

The legislation also contains several long-awaited technical corrections to the Pension Protection Act of 2006. Key corrections include:

  • Rollovers for Non-Spouse Beneficiaries. The legislation clarifies that all plans are required to permit rollovers out of the plan for non-spouse beneficiaries. This requirement is effective for plan years beginning after December 31, 2009, with such rollovers being permissive until then.
  • Clarification of Overall Deduction Limits for Combined Plans. The legislation provides clarification regarding overall deduction limits for employers maintaining both defined benefit and defined contribution plans. If contributions under an employer’s defined contribution plan are less than 6% of compensation, then the defined benefit plan is not subject to overall deduction limits. If defined contributions are more than 6% of compensation, then only the portion of contributions exceeding 6% of compensation counts toward the combined deduction limit.
  • Lump Sum Payments by Underfunded Plans. An underfunded plan is permitted to pay lump sums of $5,000 or less even if such payment would otherwise constitute a “prohibited payment” under the Pension Protection Act due to the plan’s funding status.
  • Rollovers From Roth 401(k) and 403(b) Plans to Roth IRA. The legislation clarifies that rollovers from Roth 401(k) and 403(b) plans to a Roth IRA are subject to neither gross income inclusion nor adjusted gross income contribution limits.
  • Extension of Amendment Date for 30-Year Treasury Rate Replacement. The legislation extends the required amendment date with respect to the use of the temporary interest rate for calculating the plan’s current liability under the Pension Funding Equity Act of 2004. Such date is extended to the last day of the first plan year beginning on or after January 1, 2009.