Pension Relief Bill Signed Into Law
January 19, 2009
On December 23, 2008, President Bush signed into law the "Worker, Retiree, and Employer Recovery Act of 2008." The Act is a legislative response to the economic crisis and modifies pension distribution requirements and pension funding rules to protect employees and employers from the falling values of pension investments. The Act amends the Pension Protection Act of 2006 (PPA), as well as the Employee Retirement Income Security Act and the Internal Revenue Code (Code).
Underscoring its importance, the Act gained the unanimous approval of the House of Representatives and the Senate in two days. The Act is Congress' first-step in protecting employees' retirement security from the effects of current market conditions.
The following are the Act's most significant provisions:
I. New Employer Pension Funding Requirements
The Act eases pension funding requirements for employers whose retirement plans have suffered losses due to the economic crisis and creates a number of technical amendments to the PPA. The more important amendments are as follows.
- Single Employer Plans
- Smoothing of Assets. The PPA allows plans to spread or smooth unexpected gains and losses over a period of 24 months. This provision of the PPA allows for more gradual recognition of the recent depreciation of the value of plan assets, and could result in a more favorable funding status for plans. The Act amends the PPA by stating that any averaging of the fair market value of plan assets must be adjusted for expected earnings. The Act further provides that expected earnings must be determined by the plan's actuary on the basis of an assumed earnings rate specified by the actuary, not in excess of the applicable third segment rate.
- PPA Transition Rule. Plans that became underfunded due to the poor performance of their investments and fall below the PPA's phased-in target funding percentage for a particular year (e.g., 92% for 2008) will have one more year to comply. Plans that fall short of the funding target for a year need only fund up to that specified target, instead of the previously required 100%.
- Multi-Employer Plans
- Retain Plan Status. Multi-employer pension plans are now allowed to retain their funding status for the preceding year so that funds that have dropped in value due to the decline in the financial markets can avoid being classified as in "endangered" or "critical" status. This provision applies to the first plan year beginning between October 1, 2008 and September 30, 2009. The Secretary of the Treasury will determine the notice requirements for plans that elect to keep their funding status.
- Extension of Correction Periods. Funding improvement or rehabilitation periods may be extended for 3 additional years. Plans in "endangered" or "critical" status for a plan year beginning in 2008 or 2009 may elect a 3-year extension to execute their funding improvement or rehabilitation plans in 13 years instead of 10. "Seriously endangered" plans could elect an improvement period of 18 years rather than 15. Elections to extend these periods must be made within the time frame and in the manner prescribed by the IRS. Such extensions would help offset 2008 equity losses.
II. Taxpayer Relief and Worker Protection
- Required Minimum Distributions Relief for 70½ Year Old Participants. The Act provides a one year suspension of required minimum distributions (RMDs) for participants 70 ½ and older, who would have normally been required to withdraw certain amounts of money in 2009 from their 401(k), 403(b) and 457(b) plans and IRA accounts or face financial penalties. The suspension also applies to beneficiaries. Therefore, 2009 RMDs are not required to be made, and the next RMD will be for calendar year 2010.
- Limitation on Benefit Accruals. For purposes of staving off restrictions on benefit accruals as a result of being less than 60 percent funded, plans can look back to the previous plan year for purposes of determining their funding status for purposes of benefit accrual limits. This provision applies to plan years beginning on or after October 1, 2008 and before September 30, 2009.
III. Other Changes
- Lump sums distributions of $5,000 or less (cashed out without the consent of the participant) may still be paid, even if the plan is underfunded and otherwise prohibited from making full lump sum payments to participants.
- Rollovers from a Roth 401(k) plan to a Roth IRA are not subject to the $100,000 income limitation that normally applies.