U.S. Senate Legislation Would Help Retirement Plans

A news release from the Senate Finance Committee said the package introduced by Chairman Max Baucus (D-Montana) , Ranking Member Chuck Grassley (R-Iowa), Senate Health, Education, Labor and Pensions (HELP) Committee Chairman Edward Kennedy (D-Massachusetts), and Ranking Member Mike Enzi (R-Wyoming) includes modifications to pension distribution requirements for seniors and businesses, as well as provisions included in the Pension Protection Technical Correction Act of 2008, originally passed by the Senate in December 2007 and the House in March and July of this year.

The Worker, Retiree, and Employer Recovery Act of 2008 provides that the funding target under the Pension Protection Act of 2006 (PPA) is phased in over three years. Those plans that fall below the set target funding percentage for a particular year will be required to fund up to the specified funding percentage for that year, instead of 100%.

Under the proposed legislation, for plan years starting between October 1, 2008, and October 1, 2009, multiemployer plans may elect to freeze their current funding certification based on the previous year’s level. The bill also provides a three-year extension of the current funding improvement or rehabilitation period for multi-employer plans, from 10 to 13 years.

In addition, the news release said the Act would place a one-year moratorium on required minimum distributions from individual retirement accounts for 2009.

For purposes of staving off restrictions on benefit accruals as a result of plans being less than 60% funded, the legislation would allow plans to look back to the previous plan year for purposes of determining their funding status as it would apply to benefit accrual limits only. This provision would apply for plan years beginning on or after October 1, 2008, and before October 1, 2009.

PPA Technical Corrections

Provisions of the previously passed Pension Protection Technical Correction Act of 2008 included in the The Worker, Retiree, and Employer Recovery Act of 2008, include:

• The 2008 transition rule for determining at-risk status applies to both the 70% and 80% prongs.
• Lump sums of $5,000 or less can be paid, even if an underfunded plan is otherwise prohibited from paying lump sums.
• The combined plan deduction limit for defined benefit and defined contribution plans does not apply to the defined benefit plan if contributions to the defined contribution plan are no more than 6% of compensation. If these contributions are more than 6% of compensation, only contributions in excess of 6% count 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. To be excluded, the amounts must be distributed from a public safety officer’s former 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 Treasury is given authority to prescribe special rules for small defined benefit plans that have a valuation date other than the first day of the plan year for purposes of, among others, quarterly contributions and determining the application of the benefit restriction rules.
• Rollovers from a Roth 401(k) or 403(b) plan to a Roth IRA are not subject to the Roth IRA contribution AGI limits.

Also, for applicable defined benefit (hybrid) 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 plans do not apply to plan years beginning before the earlier of: (1) (a) the later of January 1, 2008, or (b) the termination of the collective bargaining agreement; or (2) January 1, 2010.
• The Finance Committee news release said the Senators’ package also extends for one year business tax relief that was included in the first economic stimulus package, and allows companies to write off a greater percentage of their investments in business assets to free up cash for payroll and other expenses.

Relief for Businesses

Business Stimulus provisions of The Worker, Retiree, and Employer Recovery Act of 2008, include:

• Extend bonus depreciation for one year by allowing a taxpayer to depreciate 50% of the cost of an asset in the year in which the asset was acquired (2009).
• Extend elective expensing (section 179) by one year, allowing small businesses to elect, in lieu of depreciation, to deduct up to $250,000 for property acquired and placed into service in 2009.

Other miscellaneous provisions included in the Act are:

• Airline workers whose defined benefit pension plan was terminated or frozen as a result of bankruptcy (filed after September 11, 2001, and prior to January 1, 2007) would be allowed to roll over bankruptcy payments intended to replace lost retirement income to a Roth individual retirement account.
• Small defined benefit plans would be required to determine the value of lump sum distributions not in excess of the Internal Revenue 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 would be 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 this favorable tax treatment merely because the plan provides for reimbursements of medical care expenses incurred by a deceased plan participant’s non-spouse/non-dependent beneficiary.
• The penalty that is in effect for the failure to file an S corporation tax return will be increased by $4.
• The penalty that is in effect for the failure to file a partnership tax return will be increased by $4.
• 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 third segment rate of the yield curve.
• For purposes of the Internal Revenue Code and ERISA, a governmental plan is defined as including a plan established or maintained for its employees by an Indian tribal government, subdivision or agency of an Indian tribal government, or an entity established under Federal, State or tribal law which is wholly owned or controlled by an Indian tribal government, subdivision, or agency of an Indian tribal government.