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Worker, Retiree and Employer Recovery Act of 2008
New Economic Relief Act Benefits Seniors and Employers
The economic downturn and mounting stock market losses are shrinking retirement accounts and impeding employers’ ability to meet pension funding requirements. The Worker, Retiree and Employer Recovery Act of 2008 (WRERA) is designed to help seniors recover some of the value their retirement accounts have lost this year and ease employer pension funding requirements that could have forced businesses to make large pension fund contributions at a time when cash is in short supply. In addition, the Act “corrects” several technical provisions of the Pension Protection Act of 2006 (PPA).
Excise Tax Affecting Seniors Suspended
Due to the steep drop in the stock market during the past several months, likely you have found that the value of your retirement plan has plummeted, too. Many seniors have been particularly hard hit because of rules stipulating that those age 70.5 or over generally must take required minimum distributions (RMDs) from their IRAs, 401(k)s or other tax-deferred retirement plans each year. Failure to withdraw the RMD in any year could result in a 50% excise tax on the shortfall. The RMD for a given year is the balance as of December 31 of the prior year divided by a factor based on age.
As a result, those having to take RMDs in 2008 have had to base their withdrawals on December 31, 2007, values — which in many cases were considerably higher than current ones. This requirement has caused them to take larger RMDs than they would have based on current values. These relatively larger withdrawals, combined with the drop in market value of the assets remaining in their accounts, have left many seniors with significantly reduced retirement funds.
WRERA temporarily suspends the RMD excise tax for 2009 for IRAs as well as all defined contribution plans, including 401(k), 403(b) and 457 plans. This gives seniors the option to keep remaining funds in their plans for another year without incurring a tax penalty — providing time for their investments to perhaps recoup recent losses. This provision applies to all individuals age 70.5 or older, regardless of their retirement plan’s account balance or whether the plan has incurred any losses.
Seniors, of course, still have the option of withdrawing funds from their plans if they need or want the money. But even before the recent stock market volatility, many have preferred to withdraw only the RMD to maximize continued tax-deferred growth. And now, thanks to WRERA, they can choose not to withdraw in 2009.
Employer Pension Funding Requirements Eased
The economic downturn has also greatly affected employers’ ability to fund pension plans. WRERA eases the pension funding requirements enacted in PPA. Here are some of the key changes for:
Single-Employer Plans
Under PPA, employers were required to increase funding for single-employer pension plans to 100%, from 90%, over a seven-year period. The target funding level is 92% in 2008 and 94% in 2009. The penalty, if employers didn’t reach those benchmarks had been that they must immediately fund the plan 100%. Under WRERA, employers who can’t meet these requirements must make subsequent contributions only up to the target for that year, rather than hit the 100% target.
Multi-Employer Plans
WRERA offers relief for multi-employer pension plans that are “endangered” or in “critical status.” PPA provided funding restrictions for these plan types, and the new law eases those restrictions. Specifically, the act allows plan sponsors to elect to temporarily freeze the status of certain
multi-employer plans at the funding
status held during the previous plan year. This covers plan years beginning on or after October 1, 2008, and before October 1, 2009. Also, if the plan was “endangered” or in “critical status” the preceding plan year, it isn’t required to revise its funding improvement plan or schedules until the following plan year.
WRERA makes it mandatory that, beginning after 2009, qualified retirement plans, 403(b) plans or 457 plans allow non-spouse beneficiaries of a deceased participant to roll over their balance directly to an “inherited IRA.” Previously this was permitted but not required.
Know How WRERA Affects You
Even though WRERA’s main provisions are relatively simple, knowing exactly how they affect you and what to do about them is a more complicated matter. To find out, please give us a call. We would be glad to answer any questions you have and help you take advantage of this legislation to mitigate the impacts of the current recession.
For more information, contact:
Sylvia Bell, JD, Tax Senior Manager of Employee Benefits Services Group, at 412.281.2501 or sbell@alpern.com.