Tuesday, December 16, 2008

Congress Approves Measure to Ease Pension/IRA Rules for 2009

The U.S. Congress voted to ease pension-funding requirements and excuse older retirees from having to cash out retirement funds in an attempt to blunt the recession’s impact on their savings - the measure is only for 2009 and not for 2008 required distributions.

The Senate approved legislation last Thursday by unanimous consent to eliminate various penalties on companies whose pension funding falls below federal guidelines. The bill would also temporarily suspend requirements that people aged 70 1/2 begin cashing out assets in individual retirement accounts and 401(k) and 403(b) savings accounts.

“This vital legislation addresses the immediate needs of workers, retirees and businesses hit hard by the financial and economic crisis facing our country,” said Senator Edward M. Kennedy, a Massachusetts Democrat. “With trillions of dollars in retirement savings in serious jeopardy, the relief in this bill will help Americans weather the storm until the economy begins recovering.”

The vote, one day after the House approved the plan, sends the measure to President George W. Bush. White House Spokesman Tony Fratto declined to say whether Bush would sign the bill into law. “We continue to have concerns about measures to reduce funding for worker pensions,” Fratto said in an e-mail.

Hundreds of companies petitioned Congress to relax the pension rules, saying the economic slowdown has slashed the value of assets in the accounts, which could force businesses to make unexpectedly large contributions to meet federal minimums.

Projected Liabilities

Companies are required this year to set aside enough money to cover at least 92% of projected pension liabilities. Those that fall short must fully fund their pensions immediately. In some cases, they can also be forced to freeze the plans, which would prevent employees from accruing additional benefits.

The legislation would eliminate a requirement that companies falling short of the 92% threshold immediately jump to 100%. It would prevent many companies from having to freeze their pensions and would suspend for one year the penalties imposed on those 70 1/2 who don’t make minimum required withdrawals from their retirement accounts.

The government charges a 50% tax on the amount that should have been withdrawn. That penalty is designed to prevent IRAs and other tax-advantaged retirement savings accounts from becoming tax shelters used to pass wealth on to heirs. Critics said the law forces the elderly to sell retirement assets when their value has plummeted because of the slumping economy.

Sources: Bloomberg, Financial Planning

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