Pension Act Signed Into Law

On December 23, 2008, the President signed into law the Worker, Retiree and Employer Recovery Act (the Pension Act).  The Pension Act includes many important tax changes including eased funding requirements for employer-sponsored pension plans, a waiver of the need to make qualified plan and IRA minimum distributions for 2009 and a number of technical corrections to the Pension Protection Act of 2006. Certain highlights of the Act include the following:

Required Minimum Distributions

The new law suspends required minimum distributions (RMD's) from qualified retirement accounts for 2009.  Normally, by April 1 of the calendar year in which an individual reaches age 70-1/2, the remaining balance in any tax-deferred retirement savings account (401(k) plan, 403(b) plan, IRA, etc.) must be distributed to the individual in full or the individual must begin to receive RMD's from the account.  The IRS imposes a 50% excise tax to the extent an RMD in the proper amount is not made. The new law waives the excise tax on all 2009 RMD underpayments.

Single Employer Plans

The Pension Protection Act of 2006 (PPA) phased in full pension funding targets from 90% to 100% over five years (2008 - 92%, 2009 - 94%, 2010 - 96%, 2011 - 98% and 2012 - 100%).  If a plan missed its target in a phase-in year, the target automatically increased to 100%.  Many businesses suddenly find that they cannot meet their new funding requirements.  Under this new law, plans that fall below the target funding percentage for a particular year (92% for 2008 and 94% for 2009) will be required to make subsequent contributions up to the specified funding percentage for that year instead of the 100% amount.

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 the IRS requires.  This change will soften the accounting of 2008 plan losses.

Worker Protection

For purposes of staving off restrictions on benefit accruals as a result of being less than 60% funded, plans will be able to look back to the previous plan year to determine their funded status as it would apply to workers' ability to accrue benefits.

Multi-Employer Plans

The new law allows multi-employer plans to elect to freeze their status as (or as not) "endangered" or "critical" for one plan year.  This election would delay the need to respond to any lack of progress under the terms of the funding improvement or rehabilitation plan until the following plan year.

The new law provides an election for sponsors of multi-employer plans in endangered or critical status in plan years beginning in 2008 or 2009, allowing a three-year extension of a funding improvement or rehabilitation plan.

S Corporation and Partnership Penalties

The law increases the failure-to-file penalties for S corporation and partnership returns from $85 to $89 per month per shareholder/partner for returns required to be filed after December 31, 2008.