The bill, H.R. 7327, includes important short-term relief provisions to help individuals and plan sponsors with management relief during the market downturn. The bill also includes a number of important provisions that could not be reflected in guidance until technical corrections had been enacted, including giving the Treasury Department the authority to write rules for small defined benefit plans with end-of-year (EOY) valuation dates regarding benefit restrictions and quarterly contributions.
A. Non-clerical provisions in Title I of H.R. 7327 include the following:
- Target normal cost includes plan-related expenses expected to be paid from plan assets during the plan year and is reduced by mandatory employee contributions expected to be made during the plan year. This provision is effective for plan years beginning after 2008 unless the plan sponsor elects to apply the provision to years beginning in 2008.
- Defined benefit plans may pay benefits that could be distributed immediately without participant consent (i.e., where the present value is not more than $5,000) even though the plan is subject to the benefit restrictions of IRC §436.
- The new vesting requirements for applicable defined benefit plans (e.g., cash balance plans) only apply to participants with an hour of service after the effective date of the requirements.
- For combined defined benefit/defined contribution plans, if contributions to the defined contribution plan are less than six percent of compensation, the defined benefit plan is not subject to the overall deduction limit (25 percent of compensation). If contributions to the defined contribution plan exceed six percent of compensation, only the contributions in excess of six percent of compensation count toward the overall limit.
- Effective for plan years beginning after December 31, 2009, rollovers by non-spouse beneficiaries are generally subject to the same rules as other eligible rollovers. This means plans are required to provide a direct rollover option for non-spousal beneficiaries and must provide an IRC § 402(f) notice to the non-spousal beneficiaries.
- Permissible withdrawals under automatic contribution arrangements are no longer conditioned on satisfying ERISA §404(c)(5), and are available to SIMPLE and SEP IRAs. Permissive withdrawals are also disregarded in applying the annual limit on elective deferrals under IRC §402(g)(1).
- The requirement that gap period income be distributed on excess deferrals (i.e., deferrals in excess of the IRC §402(g) limit) is eliminated. Thus, gap period income no longer is required on excess contributions, excess aggregate contributions, and excess deferrals distributed to satisfy IRC §§ 401(k)/(m) or 402(g).
- The value of defined benefit plan assets for valuation purposes can be “smoothed” using an interest rate no higher than the third segment rate. Asset smoothing also is made available under the special airline funding rules.
- Effective for plan years beginning after 2008, defined benefit plans sponsored by small employers (100 or fewer employees) can provide a fixed 5.5% interest rate for determining maximum lump sum benefits under IRC §415; and
B Title II of the bill includes provisions related to the economic crisis, under this title, the following applies:
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