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H.R. 7327 Pension Plan Implications

December 2008

On Thursday, December 11, 2008, Congress passed H.R. 7327, the Worker, Retiree, and Employer Recovery Act of 2008 (the “Act”). The Act’s provisions represent an important first step in helping companies navigate the current economic crisis while minimizing the adverse impact on their businesses, workers and the pension benefit plans they sponsor. As President Bush is expected to sign the Act into law, we have prepared this Client Alert to highlight key provisions of the Act relating to pension plans.

One significant provision in the Act is designed to alleviate the financial burden facing retirees who have recently seen their retirement accounts shrink dramatically. Generally, existing tax rules require retirees, after the age of 70½, to begin taking mandatory withdrawals from retirement accounts, including all defined contribution plans (i.e., 401(k), 403(b), 457(b)) and Individual Retirement Accounts (“IRAs”), based upon their age and the size of their account. If a retiree fails to take their required minimum distribution (“RMD”), they would be subject to an excise tax of 50% on the RMD that was not taken. The Act suspends RMDs for 2009, allowing retirees to keep the money in their account if they choose. However, note that RMDs for 2008 are not waived by the Act.

The Act also includes several technical corrections to the Pension Protection Act of 2006 (the “PPA”), which Congress passed with the intention to shore up the pension system by requiring companies to raise their funding levels. The problem for employers who sponsor defined benefit pension plans is that their plan’s assets have been diminished due to the stock market plunge this year at the same time that the PPA pension funding rules became effective. The Act provides relief to both businesses and individuals by implementing the following clarifications to the PPA:

•Companies can meet their funding targets through the use of a “smoothing” technique over a two-year period. These rules allow the plan sponsor to smooth the year-to-year fluctuations in investment returns and actuarial assumptions so that pension funds are not dramatically over- (or under-) stated when their investments produce a single year of above- (or below-) average performance. Thus these rules will reduce the impact of 2008’s stock losses and its effects on a plan’s funded status.

•The Treasury and IRS are given the authority to prescribe special rules for small defined benefit plans (100 or fewer participants) to allow them to use an alternative valuation date other than the first day of the plan year for purposes of quarterly contributions and determining the application of the benefit restriction rules that are based on a plan’s funded percentage.

•The Act clarifies that non-spousal beneficiaries of qualified plans must be allowed to transfer account balances from qualified plans, 403(b) plans or 457(b) plans on behalf of the designated non-spousal beneficiary to an IRA. Prior to the Act only spouses were able to rollover the deceased participant’s qualified plan interest.


For more information on the Act and how it may impact you or your company, please contact: Stephen L. Ferszt at (973) 530-2020 or via email at:


This Client Alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your specific situation or any legal questions you may have.