Frequently Asked Questions on the
Pension Protection Act of 2006 (PPA)
Rev. 12/15/06, E-mail Alert 2006-23

We have been receiving numerous calls from clients with questions regarding Pension Protection Act changes that will be effective soon. Below are those questions and our answers.

Do plans have to be amended for the PPA vesting change to implement the top-heavy schedule for employer contributions?

No. The PPA indicates that no amendments are required until the 2009 Plan Year. However, the plan’s vesting schedule must be no longer than a top-heavy vesting schedule for contributions made to employees who work at least one hour in plan years beginning after December 31, 2006. Therefore, the plan needs to be operated under the law for this vesting change. Note that if the IRS issues guidance requiring an interim amendment in 2007 for this vesting change, then it will be required.

Optionally, a plan’s vesting schedule may be amended to a top heavy or better schedule for all contributions made to the plan, including those which were made to eligible participants before 2007. This would make the recordkeeping simpler and more cost-efficient than having to recordkeep two vesting schedules for the same source based on whether the contributions were made before or after 12-31-06.

Can plans comply with the Qualified Default Investment Alternatives (QDIA) rules now?

Although PPA calls for the implementation of the QDIA for plan years beginning after 12-31-06, the Act also instructed the DOL to issue guidance on what investments are QDIA’s within 6 months after enactment. The PPA was enacted Aug. 17, 2006, giving the DOL until Feb. 16, 2007 to issue guidance. The DOL has issued proposed QDIA rules. The DOL has stated in these proposed rules that the QDIA rules will be effective 60 days after they are published in final form in the Federal Register. Thus, it is impossible to provide a notice in advance of the plan year beginning on 1-1-07. The question of what to offer as a QDIA on 1-1-07 cannot be answered now based on proposed regulations. The final regulations will no doubt address implementation timeframes for the QDIA for plan year’s beginning 1-1-07. Notwithstanding the above, if a plan currently defaults to a more conservative investment vehicle which only considers capital preservation and does not properly take into account capital accumulation, then the fiduciaries should consider a change of default investments more in line with the proposed guidance.

Can a hardship distribution be made for a beneficiary?

The IRS was instructed in PPA to revise the hardship regulations within 6 months of the enactment of PPA to incorporate this change. Without this regulatory guidance, may a hardship be made based on the beneficiary’s hardship? Not only is there no guidance, there are also no document provisions providing this situation. True, PPA stated no amendments would be necessary until 2009, but without guidance or plan provisions, we are not comfortable with hardships being made on behalf of beneficiaries, at least until the IRS guidance is issued. This may be another reason that the IRS will require a plan amendment in 2007.

Can a nonspouse beneficiary roll over to an inherited IRA if the participant died before 2006?

The law states simply that nonspouse beneficiaries may rollover amounts paid after 12-31-06. This works simply for participants who pass during 2006 or later. The question is for participants who died before 2006. For example, today we received a call from an administrator about a participant who died in 2005 before RBD. The plan has the five-year rule and the administrator wanted to know if the beneficiary could roll the amount over in 2007. The final RMD regulations require beneficiaries who wish a life expectancy distribution, to establish that method of payout before the end of the year after the participant’s death. In this example, the beneficiary would have to establish the life expectancy payout during 2006 in the qualified plan and, if IRS guidance permits, roll the remaining amount to an inherited IRA in 2007 and continue payouts from the inherited IRA.

For a terminating defined contribution plan, what amendments must be made in 2006?

The final 401(k) and (m) amendment must be made. In addition, optional amendments would include the Roth 401(k) and the Hurricane amendments (which we placed in the 401(k) amendment). There are no amendments required for PPA.

Must statements for participants who select their own investments be amended for the new PPA disclosure rules by the first quarter’s statement in 2007?

It would appear that the safe answer would be yes. Even though the DOL does not have to issue a model benefit statement until August 17, 2007, PPA theoretically requires the updates to the statements for the first quarterly statement in 2007. These statements would be provided to participants who direct their own investments. The vesting and the disclosure language about having diversified investments are part of the compliance provisions of PPA.

Bill Grossman, QPA