Pension Protection Act of 2006
Rev. 08/07/06, E-mail Alert 2006-16
Updated August 17, 2006 with Links to Additional Articles

On August 3 at 10:54 p.m., the Senate voted 93 to 5 to pass the Pension Protection Act. The procedure behind the passage of this legislation was quite dramatic. Less than a week earlier, the House decided to take all the agreed-upon items from the joint House/Senate Conference Committee, pass them as a new law, and send it to the Senate for passage. The House then adjourned for the August recess. The Senate had to pass the bill without changes to avoid sending it back to the House for action after Labor Day. It is expected that the President will sign this Act into law within the next few weeks.

Following is an overview of the changes to qualified plans and IRAs included in the Pension Protection Act. We will be providing e-seminars on these changes. We also will have further articles on various changes included in the law. And our parent company, Newkirk, will be offering an explanatory booklet on the new law that firms can send to their plan sponsor-clients.

EGTRRA Permanence
Just a little over half way to the sunset of Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), its pension and IRA provisions have been made permanent. Thus, we no longer have to worry about the sunset of EGTRRA returning plan limits to those in effect in 2001. We do not have to worry about the Roth 401(k) and 403(b) disappearing in 2010. “Sunrise, sunset -- sunrise, sunset; swiftly fly the years” is how the Fiddler on the Roof song goes; but there will be no sunset for EGTRRA, thanks to the Pension Protection Act.

EGTRRA Provisions
The EGTRRA provisions now made permanent include: increased IRA contributions; higher maximum annual salary deferrals to 401(k), 403(b) and 457 plans; Roth 401(k) and 403(b) contributions; additional qualified plan and IRA contributions for those individuals age 50 or older; and the tax credit for lower-income individuals who save for retirement (the so-called “Saver’s Credit”). Many of the changes were set to expire after 2010, while the Saver’s Credit was due to expire at the end of 2006. PPA makes the EGTRRA provisions relating to retirement plans and IRAs permanent. Click here for a list of many of these EGTRRA provisions.

General Effective Date for Plan Amendments
The effective date for plan amendments is the end of the 2009 plan. Thus, according to PPA, plans will not have to make an amendment to add the provisions from PPA to their plan document until the end of the 2009 plan year. As is the custom, governmental and collective bargaining plans will have two additional years to amend. This seemingly sets the IRS back in their attempt to impose Interim Amendments, rather than allowing plans to operate in compliance with statutory changes and then later amending to reflect the actual operation. Click here for an FAQ.

PENSION PROVISIONS
The Pension Protection Act (PPA) makes a host of changes to the laws affecting retirement plans, sponsoring employers, and participating employees.

DEFINED BENEFIT PLAN
PPA contains a sweeping overhaul of the rules affecting defined benefit pension plans, generally effective for the 2008 plan year (with some exceptions). Among the changes, the new law:

• Reforms funding requirements for single employer and multiemployer plans.
  
• Increases the tax deduction limits for defined benefit plan sponsors, under certain conditions. (Employers will be allowed to make larger contributions in years that they can afford it.)
  
• Changes the rules for calculating lump-sum distributions from defined benefit plans.
  
• Provides special funding relief for specific industries, including airlines.
  
• Restricts benefit payouts with respect to underfunded plans and imposes significant tax penalties on executives whose nonqualified deferred compensation plans are funded when the employer’s defined benefit plan is considered to be “at risk” or the plan sponsor is in bankruptcy. This continues the philosophy that senior management should fare no better than the rank and file employees, even though there was previously no clear linkage between the operation of the various plan types.

Cash Balance Plans
The law also contains provisions affecting so called “cash-balance plans” and other hybrid retirement plans. For example, PPA imposes requirements on conversions of defined-benefit plans to hybrid plans, generally effective for conversions occurring after June 29, 2005. This still leaves the IBMs of the world who converted earlier in limbo. McKay Hochman and our document partner, Brucker & Morra, APC, will be offering an EGTRRA cash balance defined benefit plan (based on the EGTRRA Volume Submitter Defined Benefit Plan already submitted for approval). Stay tuned!

OTHER RETIREMENT PLAN PROVISIONS
Automatic enrollment. PPA provides several incentives for sponsoring employers to adopt an automatic enrollment feature in their 401(k) plans. Among the incentives: elimination of conflicts with state laws on wage withholding without employee consent, “safe harbor” rules that would provide a complying plan with relief from nondiscrimination testing with lower required employer contributions, and fiduciary liability relief with respect to default investments. For non-safe harbor plans the testing deadline would be six months after the end of the plan year rather than 2½. These changes will apply to plan years beginning on or after January 1, 2008. We will release a separate article on the new automatic enrollment rules in the near future.

Investment advice. The new law permits retirement plan service providers who offer investments to the plan (“fiduciary advisors”) to recommend their own funds without violating fiduciary rules. To qualify, an investment advice arrangement would either have to make the advisor’s fees neutral with respect to the investments chosen or use an unbiased computer model, certified by an independent expert to create a recommended portfolio for a participant’s consideration. These new rules are generally applicable in 2007. This will also be the subject of a future article. (We believe that the MasteryPoint Guidance Plus Product, offered by our sister company, will meet these requirements. For further information, please contact efreeman@newkirk.com)

New participant disclosure rules. Included in these changes are requirements that defined contribution plans provide a benefit statement at least quarterly to participants who can direct their own investments and annually for plans without investment direction. For defined benefit plans, active participants having nonforfeitable accrued benefits must receive a benefit statement at least once every three years (or annually on written request by the participant). Generally, these new requirements go into effect for plan years beginning after 2006. Single employer DB plans would be subject to a new funding notice starting with the 2008 plan year.

DB(k) Plans. For plan years beginning in 2010 and later, an “eligible combined plan” will allow elements of a defined-benefit pension to be combined with those of a 401(k) arrangement into a single plan. The plan will be limited to no more than 500 employees. The 401(k) component must include an automatic enrollment feature and a fully vested 50% match on the first 4% of pay deferred. We will provide more details on this dramatic change in a future article.

Direct rollovers. Beginning in 2008, participants will be able to make direct rollovers of distributions from their qualified plans to Roth IRAs. It is important to remember that this will still be a taxable event at the time of the rollover, which could impact how much of the distribution the participant can afford to roll to the Roth IRA.

Inherited benefits. Beginning in 2007, nonspouse beneficiaries of a decedent’s balance in a qualified plan (such as a 401(k) plan) may roll over the inherited amounts to their own IRAs. Previously, only surviving spouses could do this. However, the nonspouse beneficiaries must begin their distributions immediately using the so-called “minus one” method, while the spouse can continue to defer amounts until they attain age 70½ before having to begin distribution.

In-service distributions. Effective for distributions in plan years beginning after 2006, defined benefit plans may make in-service distributions to participants age 62 or older who seek to phase into retirement. This impacts the IRS’s proposed phased retirement regulations. This does not go as far as some employer’s had hoped, since they wanted to allow phased retirement at ages earlier than 62. Even IRS proposed regulations had used age 59½.

Tax refunds to IRA. Starting in 2007, taxpayers can have all or part of their federal income-tax refunds directly deposited into an IRA. Obviously the statutory limits still apply, so a taxpayer could not deposit a $10,000 refund into their IRA.

Saver’s Credit. The income limits applicable to the Saver’s Credit will now be adjusted for inflation.

IRA Income Limits. The income-related limits that apply to deductible contributions to traditional IRAs and after-tax contributions to Roth IRAs are made subject to inflation indexing.

Hardship withdrawals. Hardship withdrawals will be permitted for a person who is a participant’s beneficiary under the plan, even if that beneficiary is not the participant’s spouse or dependent.

402(f) Notice. The 90 days advance notice requirement has been expanded to a 180 day notice period.

Form 5500EZ. The Form 5500EZ filing threshold is increased to $250,000 (from $100,000.) This is effective for the 2007 plan year.

Top Heavy vesting schedule for all employer contributions to a DC plan. All employer contribution must now be vested at least as rapidly as would occur under either of the top-heavy vesting schedules. This will apply to plan years starting after Dec 31. 2006 and must be applied to participants who work an hour of service in the first plan year commencing after that date. This follows the EGTRRA provision that applied to matching contributions.

Missing participants in a terminated DC plan. DC plans may voluntarily participate in the PBGC missing participant program.

Bonding increase. Effective for plan years beginning after Dec. 31, 2007, the bonding requirement for plans that hold employer securities shall increase from $500,000 to $1,000,000.

DB and DC Combined Deduction Limit Change. PPA changes the 25% deduction limit for employers who make contributions to both a defined benefit and a defined contribution plan. Elective deferrals continue to be excluded. For defined contribution plans only employer contributions that exceed 6% of participant’s compensation would be subject to the limit. Plans that are covered by the PBGC are not included in the combined limit.

Congress has instructed the DOL to:

• Issue a fiduciary investment safe harbor for ERISA 404(c) for individual account plans. Effective for plan years beginning on or after January 1, 2007.
  
• Display form 5500 annual report information electronically within 90 days of receiving it. This will apply for plan years beginning after Dec. 31, 2007.
  
• Create a new Shorter Form 5500 for small plans with less than 25 participants. The plan must meet coverage without another employer and may not include leased employees or related group members. The form will be available for the 2008 plan year.
  
• Issue model benefit statements. These are to be made available one year after the President signs the bill into an act.
  
• Issue regulations to clarify that a QDRO shall not fail to be treated as a QDRO because the order is issued after, or revises, another domestic relations order or QDRO; or because of the time at which it is issued. These regulations are to be issued not later than 1 year after the date of the enactment of this act.
  

Bill Grossman, QPA