Tax Law and Business Organization Strategy

Worker, Retiree, and Employer Recovery Act of 2008

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who fails to take a required minimum distribution (RMD) is heavily penalized with taxes equal to 50% of the amount not withdrawn.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.  

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Comments (7) Read through and enter the discussion with the form at the end
Dan Klein - January 13, 2009 10:01 PM

Even though one is not required to take the RMD in 2009 can he take a partial distribution without penalty for not taking the entire RMD.

Jack Howell - January 14, 2009 3:18 PM

The only thing the Act does regarding RMDs is to do away with them for 2009. Therefore, I speculate that there would be no penalty for taking a distribution that is less than what the RMD would have been for 2009.

Ard Smith - February 11, 2009 11:16 PM

I read where the IRA distributions for 2009 can be sent to charitable organizations and the full amount withdrawn would not be counted as taxable income. If this is true, where does it appear in the the recovery act? I can't find it.

Jack Howell - February 12, 2009 10:54 AM

Ard: The extension of the charitable distribution is not located in the Worker, Retiree, and Employer Recovery Act of 2008, it is located in Public Law 110-343, entitled ‘‘Emergency Economic Stabilization Act of 2008’’ dated 01/03/08.

According to RIA's Checkpoint: "The Pension Protection Act of 2006 (2006 PPA) provided an exclusion from gross income for taxable years 2006 and 2007 for otherwise taxable IRA distributions from a traditional or Roth IRA for qualified charitable distributions. The period of the exclusion subsequently was extended to apply to such distributions in taxable years 2008 and 2009. The exclusion may not exceed $100,000 per taxpayer per taxable year. Note that this provision does not apply to distributions made in taxable years beginning after 2009."

Gary McDaniel - March 15, 2009 3:39 PM

I became 70.5 Feb. 19, 2009 and had specified before HR 7327 my 1st MRD to occur in mid-March 2009. This MRD was effective (or began) 3/9/2009. Am I allowed to reverse this and put the mony back into my 401K?

Jack Howell - March 18, 2009 10:49 AM

Gary: Under the new act, you are not required to make any 2009 required minimum distributions. So, if the RMD was for the 2009 year, which it sounds like it is, you are not required to take it. You should be able to put it back if you comply with the rules for doing so.

doreen - April 6, 2009 10:12 AM

as a survivor of a Delta pilot that received a bankruptcy claim for lost medical benefits am I eligible to roll the claim money into a Roth IRA under this 2008 Act???

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