The House and Senate have recently passed the Worker, Retiree and Employer Recovery Act of 2008, which President Bush signed on December 23, 2008. This legislation, which was passed in record time as a reaction to the perceived effects of ongoing financial meltdown on participants and defined benefit plan sponsors, makes significant changes in funding requirements for both single-employer and multi-employer pension plans. The purpose of the funding aspects of the legislation is to ease the short-term financial burden on employers during this period of financial turmoil while ensuring the long-term viability of their pension plans. The legislation also provides a moratorium on participant required minimum distributions for 2009. We have set forth below a brief summary of the major provisions of the bill.
Required Minimum Distributions
Moratorium for 2009. The Act provides that participants in defined contribution (profit sharing or 401(k) plans or IRAs) need not take required distributions for calendar year 2009. As a general proposition, IRA owners and many defined contribution plan participants are required to take yearly distributions upon attaining age 70-1/2. It had been hoped that this moratorium would apply to calendar year 2008, but that change was not made, so any required distributions for 2008 that have not already been taken should be completed immediately to comply with the December 31, 2008 deadline.
Single-Employer Defined Benefit Plans
Pension plans are allowed to “smooth” out their unexpected asset losses. The new law permits employers to “smooth” the value of pension plan assets over 24 months instead of having to apply the mathematical average that Treasury previously required. This change will soften the impact of 2008 plan investment losses.
Adjust the transition to the new funding rules. Previous pension legislation provided for a phase-in of pension funding targets from 90% to 100% over 5 years (2008 – 92%, 2009 – 94%, 2010 – 96%, 2011 – 98%, 2012 – 100%). If a plan misses its target in a phase-in year, then the target automatically increases to 100%. The new law adjusts the “phase-in” rule to allow plans which miss their phase-in funding target to retain the same target and not jump to the 100% target. For example, for plans that are less than 92% funded in 2008, their shortfall would be estimated relative to 92%, not 100%.
Required benefit freeze. Plans that are less than 60% funded are required to freeze all participant benefit accruals. For plan years beginning between October 1, 2008 and October 1, 2009, the subject plan may base its funding status determination on the prior year’s situation. Thus, 2008 investment losses will be limited in causing this freeze requirement to be triggered.
Multi-Employer Defined Benefit Plans
Plans may elect to “freeze” their plans’ status for one year. For plan years commencing between October 1, 2008 and October 1, 2009, multi-employer plans may elect to freeze their current funding status based on the previous year’s level. This would freeze the terms of a funding improvement or rehabilitation plan adopted at any time during the previous plan year.
Plans may elect to extend rehabilitation period. Plans generally must bring their funded position up to statutory standards within a correction period (10 years or 15 years). This structure aims at enabling stakeholders in troubled plans to accommodate the higher increased contributions or benefit cuts over a period of time. Under the new law, plans may elect a 3-year extension of the current funding improvement or rehabilitation period, from 10 to 13 years and from 15 to 18 years. Election of this extended correction period is intended to partially offset 2008 investment losses.
Please contact any member of the Employee Benefits Practice Team to discuss these provisions in more detail.