Congress Passes Pension Amendments

On December 23, 2008, President Bush signed into law the Worker, Retiree, and Employer Recovery Act of 2008, P.L. 110-458. The act makes various technical corrections to provisions of the Pension Protection Act of 2006, P.L. 109-280 (PPA), as well as enacting pension provisions that relate to the current economic crisis.

Among the act's provisions is a measure that temporarily waives (for 2009 but not for 2008) the 50% excise tax on taxpayers aged 70½ or older who fail to take required minimum distributions from IRAs or defined contribution retirement plans (Sec. 401(a)(9)).

PPA Technical Corrections

Under current law, the funding target under the PPA is phased in over three years (Sec. 430). The act would require plans that fall below the set target funding percentage for a particular year to fund up to the specified funding percentage for that year, instead of 100%.

For plan years starting between October 1, 2008, and September 30, 2009, the act permits multiemployer plans to elect to freeze their current funding certification for one year based on the previous year's level. Multiemployer plans that have funding improvement and rehabilitation plans in place in 2008 and 2009 have their current funding improvement or rehabilitation period extended by three years, from 10 to 13 years (Sec. 432).

The act makes the 2008 transition rule for determining at-risk status apply to both the 70% and 80% prongs of the test (Sec. 430(i) (4)(B)). The IRS previously provided methods for estimating if a plan's funding target attainment percentage (using actuarial assumptions for at-risk plans) for the previous year was less than 70%. Under the act, the same estimation methods may be used to determine if the plan's funding target attainment percentage for the previous year was less than 80%.

The act also provides that plans can pay lump sums of $5,000 or less, even if an underfunded plan is otherwise prohibited from paying lump sums (Sec. 436(d)(5)).

All plans must permit rollovers out of the plan for nonspousal beneficiaries, starting for plan years beginning after December 31, 2009 (Sec. 402(f)(2)(A)). Rollovers from a Roth 401(k) or 403(b) plan to a Roth IRA are not subject to the Roth IRA contribution adjusted gross income limits and are tax free (Secs. 408A(c)(3)(B) and (d)(3)(B)).

Worker Protections

Under current law, a single-employer pension plan that is less than 60% funded must freeze all benefit accruals for plan participants. The act allows plans to look back to the plan's funding status during the previous plan year (if that level was greater) for purposes of determining whether the restriction on benefit accruals would apply (Sec. 436(e)(1)). This provision applies only to plan years beginning on or after October 1, 2008, and before October 1, 2009 (Act §203). For plan years beginning January 1, 2009, that means a lookback to January 1, 2008, conditions.

Nonpension Provisions

As a revenue raiser, the act increases both the penalty for failure to file an S corporation tax return and the penalty for failure to file a partnership return by $4. Thus, the partnership return penalty will be $89 per partner per month for returns required to be filed after December 31, 2008 (Sec. 6698(b)(1)). The S corporation penalty will be $89 per shareholder per month for returns required to be filed after December 31, 2008 (Sec. 6699(b)(1)).