December 15, 2008
'Tis the season for giving and if you're a senior age 70½ or older, a tax exempt organization with a 403(b) retirement plan, or a company with an employer-sponsored pension plan, you just received an unexpected gift.
Congress recently passed the Worker, Retiree, and Employer Recovery Act of 2008 that provides a one-year moratorium on required minimum distributions from IRAs, 401(k)s and other defined contribution plans during 2009. The Act also includes important provisions to ease funding requirements for single-employer and multi-employer plans. The President is expected to sign the bill shortly.
On December 11, the IRS announced a one-year extension of the deadline to adopt new, written 403(b) plans or to amend existing plans, with certain requirements imposed.
These legislative and regulatory changes for pension and retirement plans are designed to provide retirees and plan sponsors with a measure of relief in these challenging times.
IRAs and Other Defined Contribution Plans
Many seniors have seen their retirement savings shrink dramatically during the last year. A key provision in the recently passed Worker, Retiree and Employer Recovery Act of 2008 is designed to provide much needed financial flexibility as seniors struggle to manage their finances during this difficult economic time.
If you're a senior age 70½ or older with an IRA or other form of defined contribution plan―including a 401(k), 403(b), or 457(b) plan―the new law suspends your required minimum distribution from the account in 2009. The suspension allows you to keep the money in your account if you choose, and possibly recover some of your losses. Note that the required minimum distribution was not suspended for 2008.
403(b) Plans
403(b) plan sponsors have been granted a one-year extension to adopt new, written plans or amend existing plans. According to the IRS, it is taking this action "because of difficulties expressed by numerous plan administrators in meeting the current deadline of January 1, 2009. This extension will give plan sponsors additional time to put their plan documents in place."
Not surprisingly, there are a few requirements you'll have to meet:
You must adopt a written 403(b) plan that is intended to satisfy the requirements of 403(b) and the regulations by December 31, 2009.
During 2009, you must operate the plan in accordance with a reasonable interpretation of 403(b) and the related regulations.
By the end of 2009, you must make your best effort to retroactively correct any operational failure that occurred during the 2009 calendar year to conform to the written plan.
Single-Employer and Multi-Employer Defined Benefit Pension Plans
The Worker, Retiree and Employer Recovery Act of 2008 also includes important provisions that ease funding requirements for employer-sponsored defined benefit pension plans. Absent the new legislation, these plans would have been forced to make significantly increased contributions during the current financial crunch when they are very short on cash.
Single-Employer Plans The new law permits employers to smooth the value of pension plan assets over 24 months instead of applying the mathematical average that Treasury generally requires. This change softens the accounting of 2008 plan losses.
The new law adjusts the normal phase-in rule by allowing plans that miss their phase-in funding target to retain the same target without jumping 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%. With a sizable number of plans below 92% funded next year, the adjustment of this phase-in rule could provide significant relief.
Multi-Employer Plans For plans starting 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 freezes the terms of the funding improvement or rehabilitation plan adopted at any time during the previous plan year.
These plans may also elect to extend their 10-year or 15-year correction periods. Under the new law, plans may elect a 3-year extension of the current funding improvement or rehabilitation period―from 10 years to 13 years and from 15 years to 18 years. The extended correction period helps offset 2008 equity losses.
