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The Worker, Retiree, and Employer Recovery Act of 2008

- Signed into Law December 23, 2008

The Worker, Retiree, and Employer Recovery Act of 2008 was signed into law December 23, 2008.  Highlights of the Worker, Retiree, and Employer Recovery Act of 2008 include the following provisions:

Required Minimum Distributions are Waived for 2009

Under the required minimum distribution (RMD) rules, participants in qualified plans and individual retirement accounts and annuities are generally required to begin taking distributions no later than April 1 of the year after they attain age 70 1/2 (the required beginning date).  However, for an employer-provided qualified retirement plan, the required beginning date for an individual who is not a 5% owner of the employer maintaining the plan is delayed to April 1 of the year following the year in which the individual retires.

For IRAs and defined contributions plans, the RMD for each year generally is determined by dividing the account balance as of the end of the prior year by a distribution period, generally a number in the uniform lifetime table.  This table is based on joint life expectancies of the individual and a hypothetical beneficiary 10 years younger than the individual.  For an individual with a spouse as designated beneficiary who is more than 10 years younger (and thus the number of years in the couple's joint life expectancy is greater than the uniform life time table), the joint life expectancy of the couple is used.  There are special rules for annuity payments from an insurance contract.

If an individual dies on or after his required beginning date, the RMD is also determined by dividing the account balance as of the end of the prior year by a distribution period.  The distribution period is equal to the remaining years of the beneficiary's life expectancy or, if there is no designated beneficiary, a distribution period equal to the remaining years of the deceased individual's single life expectancy, using the age of the deceased individual in the year of death.

For an individual who dies before his required beginning date, there are two alternative methods for satisfying the after-death RMD rules: either (1) the life expectancy rule, or (2) the five year rule.

Under the life expectancy rule, annual RMDs must begin no later than Dec. 31 of the calendar year immediately following the calendar year in which the individual died.  This rule is only available if the designated beneficiary is an individual (e.g., not the individual's estate or a charity).  If the designated beneficiary is the individual's spouse, commencement of distributions can be delayed until Dec.31 of the calendar year in which the deceased individual would have attained age 70 1/2.  The RMD for each year is also determined by dividing the account balance as of the end of the prior year by a distribution period, which is determined by reference to the beneficiary's life expectancy.

Under the five-year rule, the individual's entire account must be distributed no later than Dec. 31 of the calendar year containing the fifth anniversary of the individual's death.  A special after-death rule applies for an IRA if the beneficiary of the IRA is the surviving spouse.  The surviving spouse is permitted to choose to  calculate RMDs while the spouse is alive, and after the spouse's death, as though the spouse is the IRA owner, rather than a beneficiary.

Roth IRAs are not subject to the RMD rules during the IRA owner's lifetime.  However, Roth IRAs are subject to the post-death minimum distribution rules that apply to traditional IRAs.  For Roth IRAs, the IRA owner is treated as having died before the individual's required  beginning date.  Thus, only the life expectancy rule and the five year rule apply.

Failure to make an RMD triggers a 50% excise tax, payable by the individual or the individual's beneficiary.  The tax is imposed during the tax year that begins with or within the  calendar year during which the distribution was required.

New Law. The 2008 Recovery Act provides a one year suspension of the RMD rules for 2009.  Specifically, no minimum distribution is required for calendar year 2009 from: (1) defined contribution plans; (2)Code Sec. 457(b) eligible deferred compensation plans and (3) individual retirement plans.

Thus, any annual minimum distribution for 2009 from these plans, as would have been required under pre-2008 Recovery Act law (otherwise determined by dividing the account balance by a distribution period), is not required to be made.  The next RMD will be for calendar year 2010.  This relief (referred to as the 2009 RMD waiver) applies to life-time distributions to employees and IRA owners and after-death distributions to beneficiaries.

For purposes of applying the RMD rules to calendar years after 2009, an individual's required beginning date will be determined without regard to the 2009 RMD waiver.

Illustration: IRA owner Jack Able attains age 70 1/2 in 2009 and thus his required beginning date is Apr. 1, 2010.  Under pre-2008 Recovery Act law, the first year for which Able would have to take an RMD from his IRA would be 2009.  Under the Act, no RMD is required for 2009, and, thus, no distribution will be required to be made by Apr. 1, 2010.  However, because the Act does not change the required beginning date for purposes of determining the RMD for calendar years after 2009, Able's RMD for 2010 must be made no later than the last day of calendar year 2010.  Should Able die on or after Apr. 1, 2010, the RMD for Able's beneficiary will be determined using the rules that apply where an IRA owner dies on or after the required beginning date.

The Committee Report says that the 2008 Recovery Act's relief provision would be of lesser help to a taxpayer who attained age 70 1/2 in 2008 but chose to wait until Apr. 1, 2009 to receive his first RMD (for 2008).  He would still have to make that first RMD by Apr. 1, 2009.  However, he would not have to make the otherwise-required RMD for 2009.

If the five-year rule is used for determining the RMD for an individual who dies before his required beginning date, then the five-year period under that rule is determined without regard to calendar year 2009.  Thus, for example, for an account with respect to an individual who died in 2007, the five-year period ends in 2013, instead of 2012.

The 2008 Recovery Act's suspension of RMDs for 2009 helps retired taxpayers who do not need to rely on their RMDs for living expenses.  By not making the RMD for 2009 (or withdrawing less than the RMD) from their qualified plan accounts and/or IRAs, they will wind up with less taxable income for 2009, and, possibly, avoid (or mitigate the effect of) AGI-based phase-outs of tax breaks.  They will also have more tax-sheltered amounts to leave to their beneficiaries.

The non-tax advantage to not making the 2009 RMD is that those taxpayers who have retirement funds invested in beaten down assets, and can afford to wait, will have an opportunity to (hopefully) watch their investments recover before having to sell assets in order to make withdrawals.

The Act's suspension of RMDs for 2009 means nothing to the many elderly taxpayers who must make regular withdrawals (sometimes in excess of the RMD) from their retirement plan accounts and IRAs in order to get by each month.  For the past year or so, those with a substantial portion of their retirement funds invested in stocks or mutual funds have been forced to take payouts from constantly dwindling account balances.  They are likely to continue along that difficult pattern in 2009, barring a dramatic market turnaround.

Relief for Single-Employer Plans

Pension plans are allowed to smooth out their unexpected asset losses.  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 Treasury requires.  This change will soften the accounting of 2008 plan losses.

Adjust the transition to the new funding rules.  Previous pension legislation phases in full pension funding targets from 90% to 100% over 5 years (2008-92%, 2009-94%, 2010-96%, 2011-98%, 2012-100%).  If a plan misses its target in a phase-in year, then the target automatically increases to 100%.  The new law adjusts the phase-in rule to allow plans which miss their phase-in funding target to retain the same target and not jump 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.

Relief for Multi-Employer Plans

Plans may elect to freeze their plans' status for one year.  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 would freeze the terms of the funding improvement or rehabilitation plan adopted at any time during the previous plan year.

Plans may elect to extend correction periods.  Plans generally must bring their funded position up to statutory standards within a correction period (10 years or 15 years).  This structure aims at enabling stakeholders in troubled plans to phase in the higher contributions or deeper benefit cuts over a period of time.  Under the new law, plans may elect a 3-year extension of the current funding improvement or rehabilitation period, from 10 to 13 years and from 15 to 18 years.  Election of this extended correction period would help offset 2008 equity losses.

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