Highlights of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA)
Rev. 02/05/09; E-mail Alert 2009-2

The previous E-Mail Alert contained an article that discussed the suspension of required minimum distributions for 2009.  The Act also contained several important technical corrections being made to the Pension Protection Act of 2006 (PPA).  The following are some highlights of the Act, which was signed by President Bush on December 23, 2008.

Elimination of gap period income on excess deferrals. Gap period earnings will no longer need to be calculated when distributing excess deferrals.  The Pension Protection Act eliminated gap year earnings when calculating refunds due to a failed ADP/ACP test; this change eliminates gap year earnings entirely. The change is effective for plan years after December 31, 2007.  (The same effective date as the elimination of the ADP/ACP gap period calculation.)  Thus, when doing 2008 valuations all return amounts will receive uniform treatment. The failure to make this change in PPA was an oversight.

90-day permissible withdrawal for all automatic contribution arrangements. The 90-day permissible withdrawal provision that is available only within an eligible automatic contribution arrangement (EACA) will now be available for all automatic contribution arrangements. This option was previously allowed only when a plan satisfied the qualified default investment (QDIA) rules of ERISA 404(c)(5) as part of an EACA. [The law repeals the requirement that an EACA must invest contributions of a participant who does not make an investment election in a QDIA.]  The change is effective for plan years after December 31, 2007.

Nonspouse beneficiary rollovers. Plans will be required to allow non-spousal beneficiaries the ability to elect a direct rollover distribution beginning with plan years starting after December 31, 2009. This will also require non-spousal beneficiaries to be sent a 402(f) notice. The IRS  had said this provision was mandatory as of the 2008 plan year, but they did not have statutory support.  Many PPA amendments were written with this provision taking effect in 2008. If an employer wants to delay implementation, they may need to modify sponsor level amendments provided to them by prototype sponsors.

Designated Roth rollover to Roth IRA no longer tied to income. Effective for plan years after December 31, 2007, participants may rollover their designated Roth accounts to a Roth IRA without regard to income limitations.   Note that there are still income restrictions on the ability to make a Roth IRA contribution, other than a rollover.

PFEA amendment deadline extension. The Pension Funding Equity Act (PFEA) amendment deadline has been changed by WRERA so that it is consistent with all other PPA provisions at the end of the 2009 plan year.

Involuntary cashouts. DB plans may make involuntary cashouts without participant consent on amounts not more than $5,000 (present value) regardless of whether the plan is subject to the distribution restrictions found in Code section 436.

Funding rule relief for single-employer plans. This new law also allows single-employer plans to “smooth” the value of pension plan assets over 24 months instead of using an “averaging” method. This change will help soften the impact of investment losses. 

Transition shortfall relief. A single-employer DB plan will not have a shortfall amortization base as of 2008. WRERA provides relief if an eligible plan falls below the applicable percentage (92% for ’08, 94% for ’09, 96% for ’10). Going forward, only the applicable percentage of the funding target is taken into account in determining the shortfall amortization base.

Small employer lump-sum distributions. For a small employer (less than 100 participants), a lump-sum distribution may be calculated using a fixed interest rate of 5.5%.

For reference: WRERA;  Joint Committee Report