Tax package could help pensions recover in dismal economy

By Larry Houff
SPECIAL TO THE DEMOCRAT

If you ever thought that a lame-duck Congress couldn't pass any meaningful tax legislation, check out the emergency package of pension recovery provisions and corrections lawmakers approved in December.

The Worker, Retiree and Employer Recovery Act of 2008 (WRERA) relieves millions of retirees by suspending required minimum distributions from 401(k) plans, IRAs and similar retirement accounts for 2009.

It also provides needed pension funding relief for businesses and makes long-awaited corrections to the Pension Protection Act of 2006.

This legislative package was passed largely in response to the dismal economic year that retirement plans had in 2008. First, Congress recognized that many retirees faced a hardship in being forced to withdraw minimum distributions when their retirement savings are at their lowest point in years.

Second, employers required by law to restore asset values to defined benefit pension plans would lead many of them to freeze their pension plans or cut back on business operations to fund the required contributions. The WRERA provides relief to retirees and businesses by relaxing these rules for 2009.

If you are age 70 1/2 or older, you are probably already aware that you are required to take minimum annual distributions from your IRA, Simple IRA or SEP-IRA plan, or else pay a whopping 50-percent penalty to Uncle Sam.

Required minimum distributions are designed to force retirees to whittle down the size of their retirement plans while they are alive and thus able to generate taxable income for the federal government. Also, 401(k) plans and 403(b) plans are subject to minimum distributions under slightly different rules.

Roth IRAs are not subject to this because distributions from such plans are tax-free to the beneficiary. The WRERA suspends distributions from these retirement accounts for 2009. But beware: Distributions for 2008 are not waived by the new law.

The Pension Protection Act was enacted in 2006 to strengthen defined benefit plans rather than accelerate the trend for businesses to eliminate them or replace them with defined contribution plans.

Although increased plan funding requirements under the PPA may have been fine under normal economic situations, many businesses now find that they cannot meet their funding obligations to the plans without jeopardizing the business itself.

Because of this, WRERA relaxes the funding requirements for 2008 and 2009 plan contributions to allow businesses to phase-in their required contributions over these two years. This will enable businesses to temporarily allocate their resources to more critical operating needs.

The WRERA legislation contains more than 100 pages of temporary relief and amends more than 130 Internal Revenue Code provisions. Retirees, plan sponsors and administrators should be aware of the many deadlines, options and mandatory changes called for in the new law. As with all tax legislation, "the devil is in the details," so contact your tax advisor soon to review these matters to see how they affect you or your business.