Congress Approves Emergency Pension Relief Bill:
A First Step in Shoring Up Retirement Plans

On December 11, 2008, Congress passed an emergency package of pension-related provisions and pension-related technical corrections in response to two pressing economic concerns: 1) the inability of many pension plans to meet new funding obligations and 2) the hardship incurred on retirees if forced to take required minimum distributions. The Worker, Retiree, and Employer Recovery Act of 2008 provides pension plan funding relief; includes long-awaited corrections to the Pension Protection Act of 2006 (PPA); and suspends required minimum distributions (RMDs) for 401(k) plans, IRAs, and similar retirement accounts for 2009.

Advocacy groups for employers with traditional pension plans had alerted legislators that the recent drop in value of their assets has made it increasingly difficult to maintain the funding levels set by the PPA. They warned that a failure to relax the rules could lead to frozen plans and business cutbacks.

Relief for Pension Plans

Under the new law, defined benefit retirement plans that fall below the targeted funding percentages set up by the PPA (92% for 2008, 94% for 2009, and 96% for 2010) will be required to make subsequent contributions up to the specified funding percentage for that year, but they will not be obligated to up the funding percentage to 100%, as had been required under the PPA. In addition, the rules were changed to allow for smoothing of unexpected gains and losses in assets over a two-year period, rather than using only the current fair market value of assets to determine funding levels. Especially in a slowing economy, smoothing can help lower the immediate cost of meeting certain funding levels.

To ease the former restriction on benefit accruals for plans that are less than 60% funded in the current year, the new law allows plans to use their adjusted funding target attainment percentage (AFTAP) from the previous year to determine their funding status. Revising a previous rule that prohibited plans that fall below the 60% funding level from making accelerated benefit distributions, the new law permits lump-sum distribution payments of $5,000 or less.

The new law relaxes funding restrictions for multi-employer plans that are considered to be in endangered or critical status. Multi-employer plans may elect to freeze their current funding certification based on the previous year’s status. The new law also provides a three-year extension of the funding improvement and rehabilitation period for plans in the critical or endangered status, from 10 to 13 years, and for those in the seriously endangered status, from 15 to 18 years.

For plans with 500 or more participants, the new law adjusts the threshold used to identify at-risk plans, to which the PPA imposes additional funding requirements, to help some plans avoid at-risk status. For small plans with 100 or fewer employees that have an alternate valuation date for the determination of contributions and restrictions, the Treasury and the IRS are authorized to establish special rules.

The new law clarifies the withdrawal rules related to automatic enrollment arrangements and extends them to include SIMPLE IRAs and SARSEPs. A number of adjustments in the new law also provide some relief for hybrid plans.

Relief for Individuals

To help individuals who have recently experienced declines in the balance of their retirement savings, the new law temporarily waives required minimum distributions (RMDs)—normally mandatory after age 70½—for IRAs and qualified defined contribution plans. The suspension of RMDs is in effect for 2009 only; RMDs for 2008 are not waived.

Clarifying the provision of the PPA that allows rollovers from qualified plans to non-spouse beneficiaries, the new law requires all qualified plans to permit rollovers out of the plan for non-spouse beneficiaries starting in 2010. Plan sponsors must also provide the rollover notice to non-spouse beneficiaries. It is important to note that, under current law, there is no non-spouse rollover available from IRAs.


James A. Klein, president of the American Benefits Council, described the passage of the legislation as “a crucial first step to ensure stability in pension plan funding next year.” The new law, Klein said, “will help mitigate the artificially inflated funding obligations brought about by unprecedented market volatility and help avoid triggering a requirement for many employers to restrict pension benefits.”

Instead, Klein added, “those funds will be available for job retention, job creation, and capital investment.” Looking forward to 2009, Klein also called upon the 111th Congress and new administration “to pursue further efforts to stabilize pension plan funding during these difficult economic times.”

However, Mark Ugoretz, president of the ERISA Industry Committee (ERIC), an advocacy group representing the benefits interests of major employers, argued that the new legislation may not go far enough. In particular, he asserted that the law does not provide enough relief for plans that fall below the currently acceptable funding corridor of 90%–110%, thus triggering significantly higher funding requirements. To help ease the pressure on these plan sponsors, he called for an expansion of the corridor to 80%–120%.

“Ultimately, the bill does not provide adequate relief, falling short of addressing or even reflecting the dramatic downturn in the markets,” Ugoretz said. “There is a short window of opportunity until early next year before companies start cutting jobs and business investments to make up for massive pension contributions that would otherwise be corrected as the country moves out of the current recession.”