President Signs Pension Funding Relief and Technical Corrections to PPA

The Worker, Retiree and Employer Recovery Act (WRERA), signed into law on Dec. 23, 2008, provides some funding relief to defined benefit (DB) sponsors affected by recent market declines, as well as temporarily waiving the minimum distribution rules for seniors. The act also makes permanent technical corrections to the Pension Protection Act of 2006 (PPA).

WRERA passed both House and Senate chambers by unanimous consent on Dec. 12, 2008. The administration had voiced opposition to some of the pension provisions, but later formally indicated that President Bush would sign the bill when it reached his desk.

Temporary relief for plan sponsors
To moderate companies’ DB funding requirements during the financial crisis, the act relaxes the transition rule for phasing in liability targets and allows a look-back for the restriction on benefit accruals.

The PPA establishes higher funding targets but provided a graduated phase-in schedule for meeting them: 92 percent for 2008, 94 percent for 2009 and 96 percent for 2010. A sponsor that failed to meet a funding requirement in one year was no longer eligible for the transition relief. So a plan less than 92 percent funded for the 2008 plan year would be required to fund to 100 percent of its funding target for 2009 and 2010.

WRERA generally makes the transition relief available to all sponsors (except those subject to a deficit reduction contribution in 2007). The phase-in schedule is available for 2008, 2009 and 2010 plan years, regardless of whether the plan met the phase-in percentage in prior years. Plans with a shortfall amortization charge included in their 2008 minimum required contribution may have to recalculate the 2008 minimum under the new provision.

Another relief provision allows plans to look back to the prior year’s Adjusted Funding Target Attainment Percentage (AFTAP) when determining whether the plan is subject to restrictions on benefit accruals. The PPA restricts benefit accruals when a plan’s funding percentage falls below 60 percent. Under WRERA, for plan years beginning between Oct. 1, 2008, and Sept. 30, 2009, sponsors can use the previous year’s AFTAP to meet the 60 percent cutoff (assuming it is greater than the current year’s AFTAP). There is no look-back relief for determining other benefit restrictions, such as restrictions on lump-sum distributions for plan participants.

Other provisions provide relief to multiemployer plans. These plans can elect to delay the designation of endangered or critical status for the first plan year beginning between Oct. 1, 2008, and Sept. 30, 2009. Another provision extends the funding improvement and rehabilitation period from 10 years to 13 years for plans in critical or endangered status for 2008 or 2009.

Relief for seniors
WRERA temporarily waives the minimum required distribution rules under tax code section 401(a)(9) for the 2009 calendar year. Without the waiver, participants who are either retired or at least age 70½ generally would have to take distributions from certain retirement plans or pay a 50 percent penalty. Under WRERA, amounts in defined contributions plans (including those defined under sections 403(a), 403(b) and 457(b)) and IRAs are not subject to the distribution rules for 2009. The provision is intended to help retirees avoid market losses they would incur by selling assets when the market is so far down.

Figure 1 describes the temporary relief provisions in WRERA.

Figure 1
WRERA temporary provisions

Source: Watson Wyatt Worldwide

Technical corrections
WRERA includes permanent changes to the PPA that will affect plan funding and administration, and many of these provisions have a retroactive effective date. The provisions are listed in Figure 2. Key provisions would permit 24-month asset smoothing, change the definition of target normal cost and allow small lump sums to be paid regardless of the plan’s funding status.

Asset smoothing allows plans to use an assumed earnings rate to determine the actuarial value of assets, which cannot exceed the third segment rate under the plan. The provision is unlikely to provide much relief to plan sponsors for 2009 because of the asset corridor — which requires the actuarial asset value to fall within 90-110 percent of the fair market value.

The change to the definition of target normal cost is effective for plan years beginning after Dec. 31, 2008 (and optional for the preceding plan year), so plan sponsors need not recalculate their 2008 minimum required contributions. Target normal cost is amended to include plan-related expenses expected to be paid from plan assets during the year and exclude mandatory employee contributions expected to be paid during the plan year.

Many plans provide mandatory cash-outs of small lump-sum amounts. However, the PPA restricts lump sum payouts if the plan’s funding status falls below 80 percent. WRERA allows plans to continue paying out these mandatory cash-outs regardless of the plan’s funding status.

Figure 2 describes key permanent provisions in WRERA.

Figure 2
WRERA key permanent provisions

Source: Watson Wyatt Worldwide.