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Finding Hidden Treasures In The New Pension Law

Responding to the severe economic downtown, Congress passed an emergency package of pension law changes late in 2008. The Worker, Retiree and Employer Recovery Act of 2008 (WRERA) temporarily suspended the rule requiring annual distributions from qualified retirement plans and IRAs. But the law also did much more. Dig a little deeper and you’ll find additional breaks for individuals and employers, as well as important clarifications of the Pension Protection Act of 2006 (PPA). Consider the following key provisions of the legislation.

One-time break on required minimum distributions (RMDs). This is the part of the law that grabbed most of the headlines. Normally, you’re required to begin distributions from IRAs and qualified retirement plans such as 401(k)s or 403(b)s by April 1 of the year following the year you turn age 70½. And the penalty for not taking the full RMD is severe—50% of the required amount you failed to pull out of the account. Normally, the only exception to this requirement applies to participants in employer-sponsored qualified plans who are still working and own less than 5% of the company.

If you have a large account balance, mandatory withdrawals may be substantial, and they may come at an inopportune time. To alleviate the strain on retirees who were affected by the stock market decline of 2008, Congress waived the distribution requirement for defined contribution plans and IRAs (not defined benefit plans), but only for the 2009 tax year. If you turned age 70½ in 2008, you still had to take that tax year’s distribution by April 1, 2009. Yet, while you would ordinarily have to take a second mandatory withdrawal, for the 2009 tax year, by December 31, the new law lets you skip it. And what if you turned age 70½ in 2009? You’re not required to take the RMD for 2009 that normally would have been due April 1, 2010, though you’ll still be on the hook for the 2010 distribution, which you must receive by December 31, 2010.

The temporary suspension also applies to beneficiaries who have inherited retirement plan assets. The new law eliminates the required distribution for the 2009 tax year.

Clear rules on nonspouse rollovers. Prior to the PPA, only a surviving spouse was permitted to make a tax-free rollover from an inherited qualified plan to a traditional IRA. Nonspouse beneficiaries, such as a child or grandchild, didn’t qualify. But the PPA authorized tax-free rollovers for trustee-to-trustee distributions made after 2006.

Originally, the IRS said employers weren’t legally obligated to offer this option to beneficiaries of their qualified plans; then it flip-flopped on the issue. The new law settles the matter, establishing that for plan years after 2009, the rollover option for trustee-to-trustee transfers is mandatory.

Single-employer pension funding relief. One PPA goal was to shore up defined-benefit pension plans, requiring employer-sponsored plans to move quickly toward 100% funding of their obligations. Now, though, many companies in dire financial straits may have trouble meeting government targets, which called for 94% funding in 2009. Under the PPA, failure to meet the target triggers the so-called cliff rule, which calculates the plan’s shortfall by comparing funding to 100% rather than to the target percentage. So a plan that was 93% funded in 2009 would have a 7% deficit, not 1%. WRERA eliminates the cliff rule and gives plans that miss the target seven years to catch up. That helps employers whose obligations have soared as the value of pension fund investments has spiraled downward.

Extra time for multi-employer plans. The PPA created specific funding rules for multi-employer plans classified as “endangered” or “critical.” The new law eases some of those requirements. For example, a plan that has suffered losses may be able to freeze the prior year’s funding certification status. And whereas plans had 10 years to improve funding under the PPA, now some will have 13 years—and plans considered “seriously endangered” will get 18 years, not 15.

Finally, WRERA includes numerous corrections to the PPA and technical changes related to at-risk plans, hybrid plans, automatic enrollment plans, and other pension-related provisions of the tax code. We can work with you and your benefits professionals to sort through the changes and help you or your business navigate this difficult economic environment.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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