2008 has been a busy year in the benefits world. To top it off, the House and the Senate approved H.R. 7327 – the Worker, Retiree and Employer Recovery Act of 2008 (the “Act”). The Act was designed to provide technical corrections to the Pension Protection Act of 2006 (“PPA”), while providing emergency funding relief for defined benefit plan sponsors struggling to meet the stringent pension funding requirements enacted by the PPA. Despite earlier opposition to such relief, the President signed the Act on December 23, 2008. The President also signed a technical correction to the Mental Health Parity Act.
Emergency Funding Relief For Defined Benefit Plans
The Act provides practical funding relief for defined benefit (“DB”) plan sponsors grappling with minimum funding requirements enacted by the PPA and offers DB plans the opportunity to smooth out unexpected asset losses arising from the current economic turmoil. On December 10, 2008, the Joint Committee on Taxation for the House issued a technical explanation of H.R. 7327, highlighting many of the Act’s emergency relief provisions and detailing technical correction to the PPA covered in the Act.
- Moratorium on Required Minimum Distributions For 2009
The Act provides for a one-year moratorium on required minimum distributions from IRAs and defined contribution (“DC”) plans for 2009. However, there was no relief for 2008 in the Act, and in a letter dated December 11, 2008, Treasury has confirmed that they are not providing relief for 2008.
- Phased Funding Targets
Currently, the PPA’s funding targets are phased over three years for DB plans. Under the Act, for those DB plans that fall below the set target funding percentage for any year, their “fund up” obligation is reduced to the incremental funding deficiency for that same year – rather than 100% of the deficiency. This provision is effective as if included in the PPA, and should provide significant relief to the large number of underfunded DB plans.
- Freeze of Current Funding Certification For Multi-Employer Plans
For plan years starting between October 1, 2008 and October 1, 2009, multi-employer plans may elect to freeze their current funding certification for up to one year based on the plan’s funding certification from the prior plan year.
- Extension of Funding and Rehab Periods
For multi-employer plans that have funding improvement and rehabilitation plans in place in 2008 and 2009, the current funding improvement or rehab period is extended by three years, from ten to thirteen years for completion.
- Protections for Single-Employer Pension Plans
Currently, single-employer DB plans that are less than 60% funded are required to freeze benefit accruals for plan participants. The Act amends current law by providing under-funded plans with the opportunity to “look back” to the plan’s funding status during the previous plan year (if that funding level was greater) for purposes of determining whether the restriction on benefit accruals would apply. Under the Act, this provision applies to plan years beginning on or after October 1, 2008 and before October 1, 2009. For plan years beginning on January 1, 2009, that means a “look back” to the January 1, 2008 conditions.
Technical Modifications to the PPA
In addition to the above, substantial technical modifications to the PPA were included in the Act:
- The 2008 transition rule for determining at-risk status for DB plans applies to both the 70% and 80% prongs.
- Lump-sum distributions of $5,000 or less can be paid, even if an underfunded DB plan is otherwise prohibited from paying lump sums under the PPA.
- For applicable hybrid DB plans: The new vesting rules for hybrid plans are effective on the basis of plan years and apply to participants with an hour of service after the applicable effective date for the plan. The new interest crediting rules for hybrid plans in existence on June 29, 2005 apply to years beginning after December 31, 2007 (unless the sponsor elects to apply the rules earlier). The vesting and interest crediting rules that apply to collectively-bargained DB plans do not apply to plan years beginning before the earlier of: The later of January 1, 2008 or the date of the termination of the collective bargaining agreement; or January 1, 2010.
- The new vesting rules for hybrid plans are effective on the basis of plan years and apply to participants with an hour of service after the applicable effective date for the plan.
- The new interest crediting rules for hybrid plans in existence on June 29, 2005 apply to years beginning after December 31, 2007 (unless the sponsor elects to apply the rules earlier).
- The vesting and interest crediting rules that apply to collectively-bargained DB plans do not apply to plan years beginning before the earlier of: The later of January 1, 2008 or the date of the termination of the collective bargaining agreement; or January 1, 2010.
- The later of January 1, 2008 or the date of the termination of the collective bargaining agreement; or
- January 1, 2010.
- So long as contributions to a DC plan are no more than 6% of compensation, the combined plan deduction limit for DB and DC plans does not apply. If DC contributions are more than 6%, only the excess of 6% counts toward the deduction limit.
- All plans must permit rollovers out of the plan for non-spousal beneficiaries.
- The exclusion for up to $3,000 of health insurance premiums for retired public safety officers applies to self-funded arrangements but only if the amounts are distributed from the retired public safety officer’s employer’s retirement plan.
- Plan expenses expected to be paid out of plan assets must be included in calculating the plan’s target normal cost.
- The Secretary of the Treasury is given authority to prescribe special rules for small DB plans that have a valuation date other than the first day of the plan year for purposes of quarterly contributions and determining application of the benefit restriction rules.
- Rollovers from a Roth 401(k) account or a Roth 403(b) account to a Roth individual retirement account (“IRA”) are not subject to compensation limitations on Roth IRA contributions.
- The types of retirement plans not otherwise subject to the Pension Benefit Guarantee Corporation (“PBGC”) that are eligible to participate in the PBGC missing participants program are now restricted to plans qualified under Internal Revenue Code (“Code”) Section 401(a), which includes 401(k) plans and DC plans. Additionally, plans that do not provide for employer contributions are now permitted to use the program.
Non-Technical Retirement Security Provisions
- Airline workers whose DB plan was terminated or frozen as a result of bankruptcy (filed after September 11, 2001, and prior to January 1, 2007) are permitted to roll-over bankruptcy payments intended to replace lost retirement income to a Roth IRA.
- Small DB plans are required to determine the value of lump-sum distributions not in excess of the Code Section 415 limit using a fixed 5.5% interest rate, instead of the greater of the 5.5% rate or 105% of the corporate bond yield curve rate.
- Governmental retirement plans that credit a plan participant’s account balance with a specified interest rate are permitted to use a rate that exceeded the “market rate of return” (as defined by the Treasury Department), provided the governmental plans’ interest rate was set by federal, state or local law.
- A plan established by a state or local government to reimburse certain medical care expenses incurred by state or local government employees on a tax-free basis will not lose its favorable tax status merely because the plan provides for reimbursements of medical care expenses incurred by a deceased plan participant’s non-spouse/non-dependent beneficiary.
- The value of a plan’s assets may be adjusted for contributions, distributions and expected earnings with a cap on expected earnings equal to the 3rd segment rate of the yield curve.
Mental Health Parity and Addiction Equity Act For Collectively Bargained Plans
The technical correction provides that the Mental Health Parity Act’s mental health parity requirements are effective for health plans pursuant to collective bargaining agreements no earlier than January 1, 2010 – which is no earlier than the effective date for individual plans.