A Hill staffer wrote in his morning to let me know that the House passed legislation that will suspend the required minimum distribution (RMD) from retirement accounts in 2009. The Worker, Retiree and Employer Recovery Act (H.R. 7327) suspends the IRS requirement that individuals withdraw a minimum amount of money from their retirement accounts every year once they reach the age of 70-1/2.
This waiver applies to all defined-contribution plans, including 401(k), 403(b), 457(b), and IRA accounts, and is good news for seniors whose investments have been pummeled by the recent stock market turmoil. Instead of being forced to sell investments to take their RMD, they’ll be able to sit tight and wait for a recovery. Unfortunately, it’s too late to help for 2008, so retirees will still have to take their RMD this year or face a stiff penalty from the IRS.
Update1: The Senate has also approved this measure.
What follows is a listing of the key provisions of this legislation as it relates to retirement plans:
TITLE II â€“ PENSION PROVISIONS RELATING TO THE ECONOMIC CRISIS
One-year suspension of the required minimum distribution (RMD): The bill would place a one-year moratorium on the RMD for 2009. This suspension is available to everyone regardless of their total retirement account balances.
Relief for single-employer plans
Allow pension plans to â€œsmoothâ€ out their unexpected asset losses: The bill permits employers to â€œsmoothâ€ 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: PPA phases in full pension funding targets from 90% to 100% over 5 years (2008 â€“ 92%, 2009 â€“ 94%, 2010 â€“ 96%, 2011 â€“ 98%, 2012 â€“ 100%). If a plan misses its target in a phase-in year, then the target automatically increases to 100%. The bill adjusts the â€œphase-inâ€ 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, 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.
Temporary change of the limitation on benefit accruals. For purposes of staving off restrictions on benefit accruals as a result of being < 60% funded, plans would be able to look back to the previous plan year to determine their funded status as it would apply to workersâ€™ ability to accrue benefits.
Relief for multi-employer plans
Plans may elect to â€œfreezeâ€ their plansâ€™ 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 yearâ€™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. 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.