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Worker, Retiree and Employer Recovery Act of 2008

On December 23, 2008, then President Bush signed into law the Worker, Retiree and Employer Recovery Act of 2008 (Act). The Act responds to the recent economic downturn and provides relief for certain participants and beneficiaries of employer-sponsored defined contribution plans and for companies that sponsor these plans. The Act also includes technical corrections to the Pension Protection Act of 2006 (PPA) and provides limited relief from the defined benefit pension plan funding rules enacted by the PPA.

Suspension of required minimum distributions for 2009

The Act’s main benefit to individuals is the suspension of required minimum distributions (RMDs) for the 2009 calendar year from an employer-sponsored defined contribution plan (e.g., a 401(k) plan, a profit sharing plan, a 403(b) plan, a 457(b) plan or an individual retirement account (IRA)). A participant in a defined contribution plan is required to start taking RMDs by the "required beginning date" of April 1 of the year following the later of (a) the calendar year during which the participant attains age 70½ or (b) if the participant is not a more than 5% owner of the employer, the year in which the participant retires. Additional RMDs must be taken no later than each December 31 thereafter, including a second RMD by December 31 of the calendar year in which a "required beginning date" of April 1 occurred. Similar RMD rules apply to an IRA.

Because of the drastic drop in the stock market in recent months, many participants’ retirement account balances have suffered. Although RMDs for the 2008 calendar year were not suspended, Congress provided relief for the 2009 calendar year, as described below and in Internal Revenue Service Notice 2009-9. At this point, RMDs are still mandated for the 2010 calendar year.

  • The relief only applies to RMDs for the 2009 calendar year. A retired participant who turned 70½ in 2008 and whose "required beginning date" is April 1, 2009 must still take an RMD (which is actually attributable to the 2008 calendar year) by April 1, 2009. The participant, however, will not have to take an additional RMD for the 2009 calendar year. If a retired participant turns 70½ in the 2009 calendar year, the participant does not have to take an RMD for the 2009 calendar year, but must take an RMD for the 2010 calendar year.
  • A participant who passes away before distribution of benefits occurs must also satisfy certain RMD rules. In many cases, the participant’s account balance must be totally distributed to the beneficiary within five years of the death of the participant. (There are different rules for distributions to a surviving spouse of a deceased participant and, under certain circumstances, when the account balance is distributed in periodic payments.) In applying the five-year rule, the Act allows a beneficiary to ignore the 2009 calendar year. Thus, if a participant passed away in 2006, the account balance normally should be fully distributed to the beneficiary by December 31, 2011. With the suspension of RMDs for the 2009 calendar year, the account balance now must be fully distributed to the beneficiary by December 31, 2012.
  • Distributions that would otherwise have been RMDs for the 2009 calendar year may be rolled over to another employer-sponsored plan that accepts rollovers or to an IRA. Other direct rollover rules, including direct rollover notices and the mandatory 20% income tax withholding requirement, do not apply to such distributions.

Non-spouse beneficiary rollovers

For plan years starting after December 31, 2010, the Act provides that an employer-sponsored plan must allow a non-spouse beneficiary the ability to elect a direct rollover of an eligible distribution from the plan to an "inherited" IRA.

Defined benefit pension plans

The Act also provides relief to employers who sponsor defined benefit pension plans. The Act helps by relieving some of the funding requirements found in the PPA.

  • Asset Smoothing. To help mitigate the impact of the declining stock market on plan assets, the Act provides that a defined benefit pension plan can "smooth out" these losses over 24 months in determining the plan’s funded status.
  • Transition Funding. The Act also amends the funding shortfall transition rule to allow a defined benefit pension plan that fails to meet the transition funding target percentage for a plan year (92% for 2008 and 94% for 2009) to use the transition rules (instead of a funding target percentage of 100%). For example, if a plan was 91% funded for the 2008 plan year, it had a funding shortfall of only 1% and thus will only have to fund a maximum of 94% for the 2009 plan year, instead of the full 100% as required previously.
  • At-Risk Plans. The PPA provided that when a defined benefit pension plan has a severe funding shortfall (ratio of the plan’s assets to the plan’s funding target for a plan year is less than 60%), the plan must freeze future benefit accruals. The Act provides that for the first plan year beginning on or after October 1, 2008 and not later than September 30, 2009, the ratio from the previous plan year (if it was greater than the current plan year’s ratio) may be used to determine whether benefit accruals must be frozen.

We recommend that you review your employer-sponsored plan and IRA to determine whether provisions of the Act could be helpful. Remember too, that amendments to reflect changes to an employer-sponsored plan will need to be timely adopted.

  • Partner

    Mary is partner with a focus on employee benefits. Her practice includes design and compliance of qualified retirement plans and employee welfare benefit plans, including COBRA, and nonqualified deferred compensation ...

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