The Congress passed this Act last Thursday, December 11, and the president is expected to sign it.
The Act should help give older Americans some much needed financial flexibility as they struggle to manage their finances during this difficult economic time. A key provision in the Act is designed to help alleviate the financial burden facing seniors who have seen their retirement savings shrink dramatically. The new provision provides relief to senior citizens by allowing them to continue to keep money in retirement accounts that they are typically required by law to withdraw once they reach age 70 1/2.
The Act also includes important provisions that ease funding requirements for employer-sponsored pension plans. Absent the new legislation, these plans would have been forced to make significantly increased contributions during the current financial crunch when they are very short on cash. The new law provides pension funding relief for both single-employer and multi-employer plans.
Here's a brief summary of the new provisions.
Generally, individuals with retirement accounts must make required withdrawals based on the size of their account and their age every year after age 70 1/2. This rule is intended to prevent wealthy individuals from using retirement accounts as a tax shelter. Any individual who fails to take a required minimum distribution (RMD) is heavily penalized with taxes equal to 50% of the amount not withdrawn. The Act suspends the required minimum distribution from retirement accounts in 2009. This waiver, which is available to everyone regardless of their total retirement account balances, applies to all defined-contribution plans, including 401(k), 403(b), 457(b), and IRA accounts. Suspending the mandatory withdrawal allows retirees to keep the money in their account if they choose, and possibly recover some of their losses.
The Act permits employers to “smooth” the value of pension plan assets over 24 months instead of having to apply the mathematical average that Treasury normally requires. This change will soften the accounting of 2008 plan losses.
Previous pension legislation phases in full pension funding targets from 90% to 100% over 5 years (2008 - 92%, 2009 - 94%, 2010 - 96%, 2011 - 98%, 2012 - 100%). If a plan misses its target in a phase-in year, then the target automatically increases to 100%. The new law adjusts the “phase-in” rule to allow plans which miss their phase-in funding target to retain the same target and not jump to the 100% target. For example, for plans that are less than 92% funded in 2008, their shortfall would be estimated relative to 92%, not 100%. With a sizable number of plans below 92% funded next year, the adjustment of this phase-in rule could provide significant relief.