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Employee Benefits Law: 2008 Legislation Includes Required Minimum Distribution Relief, Funding Relief And Technical Corrections (2/09)

The Worker, Retiree, and Employer Recovery Act of 2008 ("WRERA"), signed in late 2008 by former President Bush, includes a number of provisions that may provide relief to retirement plan participants and to the sponsors of those plans. WRERA also includes several technical corrections to the Pension Protection Act of 2006.

Our March Action Memo will describe important changes to the health plan continuation coverage rules under COBRA made by the recently enacted economic stimulus package.

Required Minimum Distributions

For individual account plans, including Internal Revenue Code Section 401(k) plans and Internal Revenue Code Section 403(b) plans, WRERA includes a waiver of required minimum distributions for 2009. The waiver means that participants in such plans who would otherwise be compelled to withdraw a portion of their individual account during 2009, or by April 1, 2010, for first-time required minimum distributions, are not required to make any withdrawal for calendar year 2009. This includes a waiver of the 2009 distribution that might otherwise be postponed until April 1, 2010.

Also, a beneficiary who is receiving death benefit distributions from an individual account plan over the generally required five-year distribution period can waive the distribution for 2009. In the case of such a waiver, distributions will be made over a six-year period rather than a five-year period.

The waiver does not apply to:

Retired participants who attained age 70½ in 2008, but who did not take their first required withdrawal by December 31, 2008 (Those participants must still take the withdrawal required for 2008 by April 1, 2009.);

Participants who attained age 70½ earlier and retired in 2008, but who did not take their first required withdrawal by December 31, 2008 (Those participants must still take the withdrawal required for 2008 by April 1, 2009.); or

Distributions from non-account balance plans, including traditional defined benefit pension plans and cash balance pension plans.

If a participant elects to make a withdrawal in 2009 (other than a first-time withdrawal for 2008), the participant might be able to roll over the withdrawn amount into other eligible retirement plans. Plan sponsors, however, will not be obligated to provide rollover notices, or to withhold the standard 20 percent withholding for income taxes, with respect to amounts up to the (waived) required minimum distribution amount.

Sponsors of individual account plans should assess whether and, if so, how the waiver rules of WRERA will be implemented. Coordination with third party administrators, investment vendors and plan trustees/custodians will be required. Plan amendments also may be necessary to implement the desired approach. Whatever approach is pursued, timely communicating the selected approach to participants is essential.

Funding Relief

Under the Pension Protection Act ("PPA"), sponsors of single employer defined benefit pension plans generally are required to establish (and make sufficient contributions to meet) a funding target equal to at least 100 percent of the plan's benefit liabilities. For years 2008 through 2010, the PPA provided conditional transition relief that allowed the funding targets to be 92 percent, 94 percent and 96 percent in the those years, respectively. If a plan failed to meet the transitional target, the transitional targets could no longer be used and the 100 percent target became applicable immediately. WRERA provides that the transitional target percentages can still be applied, even if the plan fails to achieve the applicable target for 2008 and 2009.

WRERA also provides helpful rules that could eliminate certain benefit restrictions in underfunded plans and may reduce the increased contribution obligations that otherwise might have been required under PPA.

Sponsors of defined benefit pension plans are urged to contact the actuaries for the plans to assess the plans' funded status and how the changing funding rules will affect the sponsor's contribution obligations.

Technical Corrections

WRERA includes a number of technical corrections to earlier legislation. Among the changes are:

Non-Spouse Rollovers: For plan years that begin after December 31, 2009, plans will be required to permit non-spouse beneficiaries to roll eligible distributions over to individual retirement accounts. The Internal Revenue Service had previously interpreted the PPA as making such a rollover provision optional.

Vesting in Cash Balance Plans: The three-year vesting requirement that the PPA imposed on cash balance pension plans must be applied to any participant who is credited with a least one hour of service for any plan year that begins after 2007. The three-year vesting requirement may not be limited to accruals after 2007.

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Amendment Reminders

The Internal Revenue Service ("IRS") is currently accepting determination letter applications for individually-designed qualified retirement plans that are considered "Cycle D" filers under the determination letter application program maintained by the IRS. In general, an individually-designed qualified retirement plan is considered a Cycle D filer if the plan sponsor's federal employer identification number ends in a "4" or a "9" (although certain special rules apply for governmental plans, multiemployer plans, multiple employer plans, and plans maintained by multiple members of the same controlled group that may require or permit a different filing cycle). The deadline for submitting Cycle D plans to the IRS for a determination letter is not until January 31, 2010. However, plan sponsors should consider taking steps now to appropriately amend their individually-designed qualified retirement plans to reflect applicable legal requirements in preparation for the submission of their plans to the IRS for a determination letter.

Individually-designed qualified retirement plans that are submitted during Cycle D must be amended and restated to reflect the applicable required provisions set forth in the 2008 Cumulative List issued by the IRS in Notice 2008-108. (Each year, the IRS issues a new Cumulative List identifying the legal requirements that must be adopted by plans that are subject to the subsequent remedial amendment cycle.) The 2008 Cumulative List includes changes required by the Economic Growth Tax Relief Reconciliation Act of 2001 ("EGTRRA"), as well as various other pieces of legislation and Treasury guidance that have been issued in recent years.

All qualified retirement plan sponsors, regardless of their remedial amendment cycle, must continue to amend their plans timely to comply with IRS "interim" amendment requirements. For example, many plans will have to be amended by the due date for the plan sponsor's 2008 tax return to reflect applicable changes in the maximum benefit and maximum contribution limits under Internal Revenue Code Section 415. Also, amendments to reflect applicable provisions of the Pension Protection Act generally must be executed by the last day of the 2009 plan year.

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If you have any questions about this memorandum, please contact Steve Daley in our Syracuse office (315-218-8237, sdaley@bsk.com) or any of the other members of our Employee Benefits and Executive Compensation Practice Group listed below.

In Central New York, call 315-218-8000 or e-mail:

Susan L. Dahline	sdahline@bsk.com
Brian K. Haynes	bhaynes@bsk.com
Richard D. Hole	rhole@bsk.com
Ted Lewkowicz	tlewkowicz@bsk.com
Aaron M. Pierce	apierce@bsk.com