Impact of Financial Crises on Retirement Plans Requires Immediate Legislation, American Benefits Council Warns

"The financial crisis is having an unprecedented impact on qualified retirement plans across the board at the employer, employee, and retiree levels," James Klein, president of the American Benefits Council (ABC), stated at a press briefing in Washington. DC on October 22. Unveiling ABC's "10-Point Plan to Help Employees and Retirees and to Strengthen the Economy and the Retirement System," Klein emphasized that existing tax law is standing in the way of an immediate solution, and that Congress needs to act quickly to remedy the situation. He added that it seemed plain that Congress never intended to hamstring employers, employees and retirees by application of certain provisions in existing tax law to unprecedented economic circumstances.

Although retroactive relief is possible in certain circumstances if remedial legislation were to wait until January, Klein stated that a lame-duck session of Congress could prevent the irretrievable loss of certain benefits by making provisions immediately effective in 2008. He stressed that any new economic stimulus package should contain ABC's proposed relief - or a close variation - as essential to the nation's immediate economic health. Lynn Dudley, senior VP, Policy, at ABC, indicated that there already has been outreach to members of Congress about the 10-Point Plan, and that reception on the Hill to the need for legislative action "had been positive." Dudley stated that ABC's plan will be submitted to the various congressional committees over the next several weeks in conjunction of hearing that have been scheduled on the economic crisis.

ABC's 10-Point Plan offers retirement plan-based solutions that address three major concerns: (1) how to help individuals weather the financial storm; (2) how to help businesses already in economic straits to meet what will be crushing funding obligations under existing law; and (3) how to encourage savings for the long term in the face of current market conditions.

ABC's 10-Point Plan looks to the tax law to help individuals in three areas:

(1) Help more middle-class taxpayers rebuild their retirement nest egg (or encourage them to start one) by expanding the income level at which the existing Saver's Credit would be available;

(2) Allow retirees a chance to keep their retirement accounts whole while catching the market on the upswing by temporarily suspending required minimum distribution rules; and

(3) Allow hard-strapped defined contribution plan and IRA participants to withdraw up to $10,000 with easy repayment terms.

Funding of Defined Benefit Plans

"Current funding rules for defined benefit (DB) plans create enormous problems for both employers and employee," stated Kent Mason, partner, Davis & Harman LLP, counsel for ABC. According to ABC, current funding rules will precipitate widespread freezes of existing DB plans, will force companies to divert funds that could otherwise be used to help build their businesses, and will mean fewer jobs as companies cut back to meet their funding obligations.

ABC's legislative proposals on the funding front all center around the need to delay certain of the additional requirements imposed on pension plans by the Pension Protection Act of 2006 (PPA) (P.L. 109-280). According to ABC, Congress never intended a quick transition from prior law to PPA rules to have such a draconian effect due to unanticipated "extreme market conditions." Mason emphasized that ABC was not proposing the repeal of the PPA but, rather, a slower transition of certain requirements. Specifically, as part of the 10-Point Plan, ABC recommends in connection with mandatory funding requirement:

--To permit pension plans to smooth out unexpected asset losses for 36 months for 2009 through 2010;

--To allow smoothing of asset losses, even in excess of 10-percent of the fair market value of assets;

--To roll back for 2009 the phase-in of funding levels to 92-percent of full funding to pay projected benefits and removing cliff vesting at 100 percent for those companies with assets that miss the 92-percent target;

--To permit 10-year amortization (rather than seven-year) of 2008 losses recognized in 2009; and

--To permit a flexible interpretation of other PPA provisions on funding elections to avoid benefit restrictions and keep plans viable.

Encouragement of Future Participation

ABC's 10-Point Plan also includes a recommendation to enhance financial education to encourage individuals to save for retirement. Dudley pointed to model notice that is being developed by the Department of Labor to help employers inform employees about the need to save for retirement, to diversify those savings and to continue to save even in a declining market. She mentioned that some employers have avoided giving employee/participants any investment advice over fears of being sued for incorrect recommendations. ABC also recommends that the Department of Education develop a five-year program to enhance financial literacy starting in the schools.

Finally, in taking a long-range view to retirement savings, ABC recommends increasing the start-up tax credit for small business retirement plans. Under the recommendation, 75-percent of costs would be covered (rather than 50 percent), with a three year maximum credit increased from $500 to $2,000.

By George Jones, CCH News Staff

Tax Matters Partner's Consent to Extend Limitations Period Invalid; Conflict of Interest Established (Leatherstocking 1983 Partnership, CA-2)

Due to a conflict of interest, a limited partner was not bound by an extension of the assessment period signed by the partnership's tax matters partner (TMP). The TMP's plea agreement with the IRS for crimes unrelated to the partnership created a disabling conflict of interest that disqualified him from binding the partnership when he consented to extend the statute of limitations at the IRS's request. The TMP had pled guilty to structuring crimes in exchange for his agreement to cooperate fully with the IRS in order to resolve his tax liability and any tax liability and examination of the partnership. The plea agreement was a clear incentive for the TMP to ingratiate himself to the government, particularly since he would not be sentenced until almost a year later. The government knew that the TMP and the limited partner had conflicting interests when the TMP executed the requested consents, but continued to seek and secure the TMP's consents, without the limited partners' knowledge, until several years into the TMP's incarceration. Consequently, the consents executed by the TMP were rendered invalid, and the tax adjustments proposed by the IRS to the partnership's returns were time-barred.

Unpublished opinion reversing the Tax Court, 92 TCM 106, Dec. 56,585(M), TC Memo. 2006-164.

Leatherstocking 1983 Partnership, CA-2, 2008-2 USTC ¶50,597

Other References:

Code Sec. 6221

CCH Reference - 2008FED ¶37,569.01

Code Sec. 6229

CCH Reference - 2008FED ¶37,749.10

Code Sec. 6231

CCH Reference - 2008FED ¶37,849.30

CCH Reference - 2008FED ¶37,849.35

Tax Research Consultant

CCH Reference - TRC PART: 60,354