Current developments in employee benefits and pensions.

• Author: Walker, Deborah
• Position: Part 2

EXECUTIVE SUMMARY

* The Worker, Retiree, and Employer Recovery Act of 2008 contained many relief and technical correction provisions for qualified plans, including a waiver of the 2009 RMD requirement for participants in defined contribution plans, 403(b) plans, governmental 457(b) plans, and IRAs and the relaxation of funding, benefit accrual, distribution, and other requirements for certain plans.

* The IRS issued final regulations on automatic contribution arrangements and proposed regulations on midyear reductions of safe-harbor nonelective contributions and advising plan participants of the consequences of failing to defer receipt of a distribution. The IRS also issued notices providing relief for 403(b) plans' written plan requirement, the funding threshold for calendar-year plans, and the application of normal retirement age regulations for governmental plans.

* The Department of Labor postponed the effective date of regulations that would enable plan fiduciaries to give plan participants investment advice and finalized regulations that provide a safe harbor for fiduciaries regarding the treatment of missing participants and beneficiaries.

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Though 2009 featured big changes in Washington and severe challenges for plan sponsors, the year brought largely incremental changes for qualified defined benefit and defined contribution plans as the IRS and the Department of Labor (DOL) continued to interpret recent statutory guidance and Congress provided some measures of relief.

Worker, Retiree, and Employer Recovery Act of 2008 (WRERA)

As part of its initial responses to the financial crisis, Congress passed WRERA in late December 2008. (1) WRERA contained many important provisions affecting qualified plans, including relief provisions and long-awaited technical corrections to the 2006 Pension Protection Act (PPA) (2) affecting defined contribution and defined benefit plans.

Relief Provisions

WRERA contained a number of temporary provisions responding to the recent declines in the markets. These measures were designed to mitigate the adverse effects that falling plan asset values could have on plan sponsors and participants.

Relaxed required minimum distributions (RMDs): WRERA waives the calendar-year 2009 RMD requirement under Sec. 401(a)(9) for qualified defined contribution plans, 403(b) plans, governmental 457(b) plans, and IRAs. The requirement is not waived for qualified defined benefit plans or for nongovernmental 457(b) plans. The relief was provided in response to concerns that minimum distributions would be based on higher balances that existed prior to the market downturn. However, by the time Congress could take action, it was too late to effectively waive the requirement for 2008. The decision was made to waive the requirement for 2009, allowing retirement accounts to recover value before forcing distribution of more of the accounts' assets and possibly sparing recipients additional tax in a difficult year. However, RMDs for 2008 were not waived (even if scheduled to be made in 2009), and the prior minimum distribution rules will return in 2010. (3)

Shortly after WRERA passed, the IRS issued Notice 2009-9, (4) which provided guidance on how to complete box 11 (for RMDs) on the 2008 Form 5498, IRA Contribution Information. The notice indicates that box 11 should not be checked, but it also provides relief for filers who may have issued forms with the box checked. However, many questions related to the RMD relief remained unanswered until Notice 2009-82 (5) was issued on September 24, 2009. Notice 2009-82 provided fundamental clarification of the RMD waiver for 2009. It also granted transitional relief to allow RMDs made earlier in 2009 to be rolled over by November 30 and issued sample amendments that individual plan sponsors and sponsors of preapproved plans can rely on.

Among various matters, Notice 2009-82 explains:

* 2009 RMDs: The waiver applies to a participant or beneficiary who would have been required to receive an RMD for 2009 (the 2009 RMD) and who would have satisfied that requirement by receiving a distribution:

1. Equal to the 2009 RMD; or

2. Under a series of substantially equal distributions (including the 2009 RMD), made at least annually and expected to last for the life (or life expectancy) of the participant, the joint lives (or joint life expectancy) of the participant and the participant's designated beneficiary, or for a period of at least 10 years (an "extended 2009 RMD").

All other distributions--including distributions that consist partly of a 2009 RMD--fall outside the waiver and will continue to be made.

* Permissive direct rollovers: Plans are permitted (but not required) to offer a direct rollover of a 2009 RMD distribution. Notice 2009-82 clarifies that for this purpose the plan can elect to provide direct rollovers of 2009 RMDs and extended 2009 RMDs.

* Rollover to same plan: If the rollover requirements are met (and the plan document allows it), the 2009 RMD can be "rolled back" to the distributing plan.

* Substantially equal period payments under Sec. 72(t): The notice points out that the 2009 RMD waiver does not apply to payments that are being made as part of a "series of substantially equal periodic payments" to avoid the 10% early distribution tax under Sec. 72(t). If those payments are stopped in 2009 before age 59 1/2 or before five years from the date of the first payment, all the payments made under the series are subject to the recapture tax.

The notice also provides clarification on other important matters, including spousal consent, withholding requirements, the deadline for certain beneficiaries to elect distribution timing, and the ordering rule by which the 2009 RMD is identified among more than one distribution made in 2009. (The first distributions in 2009 are any RMDs from prior years not yet distributed, followed by 2009 RMDs.)

Funding relief: WRERA provided funding relief by easing the requirements to qualify for PPA's transition rules related to the full funding requirement. Under PPA, plans are subject to a funding target equal to 100% of the present value of their benefit liabilities, and, if the plan's funding is not at this level at the beginning of the year, an additional contribution is required to make up this shortfall, so the shortfall would be made up over a seven-year period. PPA included a transition rule that excused plan sponsors from this additional contribution requirement as long as the plan was at least 92% funded for its 2008 plan year, 94% for its 2009 plan year, and 96% for its 2010 plan year. However, if a plan missed one of those targets, the employer would be required to make a contribution based on a 100% funding target for the year, and the employer could not use the special transition rules in later years.

WRERA relaxed this requirement by (1) allowing a plan to calculate its funding shortfall contribution based on the difference between the transition target for the year and its actual funding level and (2) allowing the plan to use the transition target in subsequent years even if the plan missed the prior year's funding target. Thus, for example, if a plan was funded at 91% for 2008, the funding shortfall for 2008 would be 1%, and the plan would be able to continue to use the transition rule in 2009. The plan would then need to fund to 94%, rather than 100%, in 2009.

Eased restrictions on benefit accruals: PPA added rules that restrict and/or prohibit certain benefit payments, accruals, and plan amendments for single-employer defined benefit plans that do not meet specified levels of funding, including a requirement that all benefit accruals in a plan that is less than 60% funded (determined as of the beginning of its plan year) cease. For plans that are less than 60% funded, WRERA provided relief from the requirement that benefit accruals be suspended for the plan years that began between October 1, 2008, and September 30, 2009. For that year, the funding level as of the beginning of the preceding year could be used to determine whether cessation of benefit accruals was required. The relief, as enacted, lasts for one year only, though at the time of this writing, draft legislation from the House of Representatives was circulating that would serve a similar function. (6)

Technical Corrections Affecting Defined Contribution Plans

Automatic enrollment: Sec. 414(w), as added by PPA, allows plans that automatically enroll participants to allow the participants to withdraw their automatic deferrals within 90 days of their first automatic contribution if certain additional requirements are satisfied (otherwise such assets must remain in the plan until a statutorily permissible distribution event). (7) Under the law as originally enacted, the plan could allow withdrawals only if automatic contributions were invested in accordance with the DOL's qualified default investment alternative rules in the absence of a participant investment election. WRERA removed that requirement. It also extended the Sec. 414(w) permissible withdrawal feature to SIMPLE IRAs and grandfathered SARSEPs. Finally, WRERA provides that permissive withdrawals under Sec. 414(w) are disregarded when applying the Sec. 402(g) limit on elective deferrals.

Testing refunds: PPA removed the requirement that "gap period" income (income earned between the end of a plan year at issue and the date of distribution) be included in distributions of excess contributions made in order to satisfy the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests. However, PPA did not include a similar change for distributions of...