The Pension Protection Act and Disclosures and Notices
Rev. 09/14/06, E-mail Alert 2006-19

The Pension Protection Act (PPA) of 2006 represents the most dramatic change to the ERISA disclosure requirements since 1974. While ERISA is designed to protect employees’ retirement income by imposing financial disclosure requirements and required minimum funding provisions, PPA adds additional disclosure obligations to provide employees with a better understanding of the plan's assets and how they are invested. PPA does this by adding new statement requirements, notices, disclosures and extended time periods for providing certain notices.

Statement requirements. Before PPA, employers were only obligated to give an active 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 requirement applied to a terminated participant with an account balance or accrued benefit under the plan or one who had a “break-in-service” during the year. Under PPA, a defined contribution plan, such as a 401(k), profit sharing or money purchase plan, must provide a quarterly statement to participants who may select their own investments. Otherwise, an annual statement is required to be provided to those participants for whom the fiduciary directs investments. For defined benefit plans, active participants having a nonforfeitable accrued benefit must receive a benefit statement at least once every three years or annually, upon written request. Generally, these requirements go 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.

Funding Notice. Single and multiple employer defined benefit plans will be subject to a new funding notice requirement starting in the 2008 plan year. This notice is similar to the notices already required of multi-employer plans. The new notice must disclose whether the plan has met its funding target attainment percentage for the current and two preceding years, or the exact percentage if it is not 100%. In addition, it must disclose the plan's total assets and liabilities, its funding policy, plan amendments that increase or decrease benefits and other information.

Rollover Notice. The rollover notice, also known as the 402(f) notice, explains the rollover and taxation rules for distributions from a qualified plan. The timeframe for providing the notice has been changed from 30 to 90 days in advance of a distribution being processed, to a period of 30 to 180 days in advance of a distribution period. This will simplify operations for plans administered under the balance forward method while still allowing waiver of the 30-day period. The rule requiring a minimum seven-day period for plans subject to qualified joint and survivor rules remains in effect, however. The IRS will update the notice to include information on the non-spouse beneficiary rules and direct rollover from a qualified plan to a Roth IRA.

Notice of Divestiture of Employer Stock. Beginning with the 2007 plan year, certain plans holding employer stock must permit participants to divest any employer securities that were purchased with their elective deferrals or other employee contributions immediately and to diversify the proceeds into other plan investments. Where employer securities were bought with employer contributions, plans must allow divestment anytime after the participant has completed three years of service. The above diversification requirement does not apply to Employee Stock Ownership Plans (ESOPs) that do not hold elective deferrals, other employee contributions, or employer matching or certain nonelective contributions. A three-year phase-in period applies to employer contributions in existing plans. The IRS will issue a model participant notice within six months after August 17, 2006. We will have a future article on the divestiture of employer stock subject.

Blackout Notices. A technical change was made removing the blackout requirement from plans with only an owner and spouse or a plan with only partners and their spouses. This is effective retroactively to the enactment date of Sarbanes-Oxley.