New Funding Relief for Single and Multiemployer Defined Benefit Plans, special rule for Charity Defined Benefit Plans

Obama signs "Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010"

In an obvious attempt to create an acronym that can't be pronounced, President Obama signed the above Act into law on June 25, 2010.

Single Employer Plan Relief:

The new law provides important funding relief for Single Employer Defined Benefit Plans.  The law permits plan sponsors to extend the amortization of their "funding shortfall" in one of two ways:

1) The "2 plus 7 relief" allows the shortfall to be amortized over nine years (the first two of which represent interest-only payments on the amount of the shortfall).

2) The "15 year relief" allows the shortfall to be amortized over 15 years.

The funding "shortfall" is the excess (if any) of plan liabilities (as calculated by the actuary) over plan assets.  Prior to this relief, amortization of this shortfall had to be accomplished over seven years.

The relief can be taken for one or two plan years between 2008 (for those plan years still open) and 2011.  The same method must be used for both years.

When relief is taken, there is a slight (and temporary) relaxation of the rules regarding funded status as it affects benefit restrictions.

Special Relief for Defined Beneft Plans sponsored by 501(c)(3) Charities

For defined benefit plans sponsored by 501(c)(3) organizations, there is additional relief provided by the new law.  Prior to the law, a defined benefit plan could only use its credit balance if a plan was 80% funded.  A plan will have a credit balance if the sponsoring organization has made contributions in excess of the required minimum contributions over the years.  The law now provides that an eligible plan can look back to the funded status in 2008 (prior to the market crash) to determine whether a credit balance can be used to offset a current contribution for 2010 or 2011.

There is also special relief in the form of an extended PPA effective date when two or more charities are members of the same plan.

Multiemployer Relief:

For multiemployer plans, the law creates a "Solvency Test" as a gateway to permit extended amortization of investment losses and more lenient asset averaging for funding. 

The "Solvency Test" essentially requires that a plan has sufficient assets and income to make all expected benefit payments and expenses during the extended amortization periods. 

Passage of the "Solvency Test" permits the plans to:

1) Separately identify investment losses occurring in either of the two plan years occurring after August 31, 2008 and amortize them over a period of up to 29 years (rather than 15 years).

2) Spread investment gains and losses over a period of up to ten years (rather than 5 years).

3) Permit the resulting actuarial assets to be as high as 130% of market value (previously only as high as 120% of market value). 

 Timing of 401(k) Deposits

 The Department of Labor has finally clarified the specific amount of time with which small (i.e. fewer than 100 employees) employers have to transmit the 401(k) contributions they have withheld from employees’ payrolls.

Effective January 14, 2010, the rule is that amounts remitted within seven business days of a payroll will be considered timely. 

This past week, both the House and Senate passed versions of pension relief for retirement plans that have been battered by the large asset losses during 2008. The title of the bill is the Worker, Retiree and Employer Recovery Act of 2008.

The relief takes several forms, and the below descriptions are from the House version of the bill. As you know, the House and Senate meet in joint committee to design a compromise bill, which then goes to the president to sign.

1) Defined Contribution Plans. If you are required to take a Mandatory Distribution from your defined contribution plan or IRA because you are age 70 ½ or older, the bill SUSPENDS the requirement for distributions made ON BEHALF of 2009 for one year. This avoids the necessity to take market losses.

But be careful. If you were required to take a distribution in April, 2009 because you became 70 ½ in 2008, you MUST still take that distribution. But if you become 70 ½ in 2009 and your first distribution is required in April, 2010, the requirement to take that distribution is waived until 2011.

This does not mean that you cannot take a distribution, only that if you choose not to do so, there will be no excise tax.

2) Defined Benefit Plan Funding. The House bill addresses several areas of relief for defined benefit funding. It is important to note that the bill concerns itself with 2009 funding because the asset losses in 2009 directly impact on 2009 funding. Certain plans with end-of-year valuation dates will still (as of this writing) have to put up with potential large increases in contributions.

A. Creation of Shortfall Amortization Base. For Defined Benefit plans, a transition rule that would have only applied for 2008 plan years has been extended to 2009 and to plans that otherwise would not have qualified. This provision mitigates the amount of unfunded liability a plan must amortize and lowers required contributions for some plans.

B. Future Benefit Accrual Restrictions on Some Underfunded Plans. For certain underfunded Defined Benefit Plans, benefit accruals and lump sum distributions are restricted when the funded percentage (AFTAP) falls below a certain percentage. This provision relieves defined benefit plans who have suffered large asset losses in 2008 from restricting benefits and lump sum payouts in 2009 by allowing a plan to use the 2008 AFTAP to determine whether there are restrictions, rather than a recalculation for 2009.

C. Asset Valuation Method. For Defined Benefit plans, under the Technical Corrections portion of the Act, the Treasury will now allow asset-averaging methods that utilize "expected earnings". This method had always been in effect prior to the passage of the Pension Protection Act of 2006 (PPA), but was eliminated by PPA. This is a positive result for Defined Benefit plans, and will result in lower funding requirements in times of asset decline.

We will be providing more details when we get the joint finance committee bill and the Act is finally passed.