The Pension Protection Act (PPA) of 2006 became law on August 17, 2006. PPA constitutes one of the most significant changes to retirement plan law since 1974 when ERISA was enacted. Its major focus is to enhance defined contribution plans and to shore-up defined benefit plan funding. In addition, it contains a number of new disclosure and notice requirements, new plan design concepts, and additional portability options to accommodate the changing retirement plan universe.

EGTRRA Permanency. The Economic Growth Tax Relief Reconciliation Act of 2001 (EGTRRA) became law as part of a budget bill, and thus, it had a 10-year lifespan. The impending 2011 sunset of EGTRRA cast a shadow over all of the retirement plan enhancements that EGTRRA created. PPA makes the EGTRRA changes permanent. EGTRRA permanency provides much needed stability for plan sponsors, participants, and service providers.

The EGTRRA 403(b) provisions of note that are now permanent include:
  >> the elimination of the maximum exclusion allowance (MEA) calculation,
  >> the higher deferral limits,
  >> the section 414(v) catch-up contributions for participants age 50 or older,
  >> the ability to make designated Roth 403(b) contributions, and
  >> the ability to rollover from 403(b) arrangements to qualified or 457(b) plans (and vice versa).

Effective date for plan amendments. Generally, 403(b) plans do not have to be formally amended to add PPA provisions until the end of the 2009 plan year. Governmental and collective bargaining plans will have two additional years to amend. However, if the IRS issues guidance requiring an interim amendment before 2009, we will provide the guidance needed to update plan documents.

Accelerated Vesting Schedules Apply to ERISA plans. All employer contributions made to a 403(b) plan must now be vested at least as rapidly as would occur under either a three-year cliff or a six-year graded vesting schedule. This accelerated vesting requirement has applied to matching contributions since 2002 because of EGTRRA, and PPA further extends its applicability to nonelective employer contributions. The accelerated vesting schedule requirement goes into effect as of the first day of the 2007 plan year and applies to all employer contributions made after that date. The accelerated schedule will apply to any participant who works one hour of service in the 2007 or later plan year. For ease of administration, it may be sensible to consider applying the new vesting rules to all of a participant’s employer contributions, including amounts contributed before 2007, rather than applying multiple vesting schedules.

Automatic enrollment. To increase retirement savings opportunities, PPA provides several incentives for employers to adopt automatic enrollment. Among these incentives is a new automatic enrollment safe harbor, which will allow 403(b) plans that provide a prescribed matching contribution to avoid ACP testing. These plan designs may be adopted beginning with the 2008 plan year.

Investment advice. The new law provides participants with greater access to professional investment advice. Retirement plan service providers who offer investments to the plan (“fiduciary advisors”) will be allowed to recommend their own funds without violating fiduciary rules. To qualify for this exception, an investment advice arrangement must either make the advisor’s fees neutral with respect to the available investment options or they must use an unbiased computer model, certified by an independent expert, to create a recommended portfolio for the participant’s consideration. These new rules are generally applicable in 2007.

Direct rollover into a Roth IRA. Beginning in 2008, participants will be able to make direct rollovers of plan distributions to Roth IRAs. However, such distributions will be taxable at the time of the rollover, and this may impact how much of the distribution the participant can afford to move to the Roth IRA.

Direct rollover of after-tax amounts between various plans. Although current IRS guidance on designated Roth contributions does not permit direct rollovers between designated Roth 401(k) plans and designated Roth 403(b) arrangements. The PPA provision that expands the ability to do direct rollovers of after-tax amounts may serve as the basis for the IRS to reverse current Roth guidance and permit direct rollovers between designated Roth 401(k)s and designated Roth 403(b)s.

Non-spouse inherited benefits. Beginning in 2007, a non-spouse beneficiary will be permitted to roll over the account balance to an "inherited" IRA. Previously, only surviving spouses could rollover such amounts. However, a non-spouse beneficiary must begin distributions immediately using a single life expectancy, while a spouse may defer distributions until personally attaining age 70½.

Unemployment and Rollovers. As of August 17, 2006, the states are prohibited from reducing an unemployment compensation payment if an individual rolls over his or her retirement plan distribution and therefore avoids taxation.

Hardship withdrawals. Hardship withdrawals may now be taken on behalf of any beneficiary of a plan participant, even if that beneficiary is not the participant’s spouse or dependent. The Treasury has been instructed to issue regulations within 180 days after the enactment date of August 17, 2006.

Distribution and Rollover Notice. The 402(f) notice is the distribution notice that explains the rollover and taxation rules to plan participants. The timeframe for providing this notice has been expanded from a 30 to 90 days window in advance of a distribution to a period of 30 to 180 days in advance of the distribution period.

Statement requirements for defined contribution plans. Before PPA, employers were only obligated to give a participant an account or accrued benefit statement once a year, and then only if the participant made a written request for it. The only other statement requirements applied to a terminated participant with an account balance or accrued benefit under the plan or those incurring a break-in-service during the year. Under PPA, ERISA 403(b) plans would be required to provide quarterly statements if the participant is selecting his or her own investments and annual statements if the investments are directed by the employer. Generally, this requirement goes into effect for plan years beginning after 2006. The DOL has been instructed to issue model benefit statements within 12 months after August 17, 2006.