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 Pension Protection Act of 2006

On August 3^rd, by a vote of 93 to 5, the Senate passed HR4, the long awaited Pension Protection Act of 2006. The Act, which is 907 pages, is the most comprehensive pension reform legislation in decades and comes on the heels of House passage on July 28^th.  President Bush signed the bill on August 17^th.  

Most importantly, the legislation includes the permanent extension of EGTRRA, which is a huge victory. EGTRRA is the 2001 pension reform act that included such provisions as increase in 401(k) and IRA deferral limits, catch-up deferrals for those at least age 50, increase in the individual annual limit in Defined Contribution plans from 25% to 100% of wages, etc.  For a complete summary of EGTRRA, please click here.”

Another major item in the bill is that for combined Defined Benefit (including Cash Balance) / Defined Contribution plans, the 25% maximum deduction limit is waived as long as the employer contribution in the Defined Contribution plan does not exceed 6% of participant compensation.  This will have a positive impact on a number of our clients’ plans as we will now be able to provide the owners with a larger contribution in the Defined Benefit (Cash Balance) plan. Currently, we’ve had to limit the contribution to the owners  in some cases because we hit the 25% maximum deduction limit.  The effective date of this provision is for plan years beginning after 12/31/05.

The legislation also overhauls pension funding rules, and includes reforms affecting defined contribution plans, defined benefit plans (including cash balance plans), and nonqualified deferred compensation plans.  Following is a listing of some of the key provisions contained in this bill. Unless otherwise noted, these provisions are effective for the 2008 plan year.  

 1.    Age Discrimination: The law clarifies that all defined benefit plans (including cash balance
     plans) are not inherently age discriminatory, as long as they meet certain new requirements
     contained in the bill.

2.      Accelerated Vesting for Cash Balance Plans: Cash Balance plans will be required to provide full vesting upon three years of service.

3.      Excess Contributions: A plan with an eligible automatic enrollment arrangement will be allowed to make ADP/ACP refunds (deferrals/match due to the ADP or ACP test failing) up to six months after the close of the plan year without a 10% excise tax on the employer.

4.      Direct Rollovers into Roth IRAs: Plan distributions may be rolled over directly to Roth IRAs, with the taxable portion of the rollover amount taxed at the time of the rollover.  They will still be subject to the Roth IRA conversion rules (i.e. no more than $100,000 adjusted gross income.)

5.      Non-Spouse Rollovers: A non-spouse beneficiary will be permitted to roll over benefits to an IRA so that the IRA could satisfy the minimum distribution requirements rather than the existing plan.  Effective for distributions made after 2006.

6.      Accelerated Vesting Under Defined Contribution Plans: All DC plan employer contributions must have a vesting schedule equal to or more liberal than either a 3-year cliff (0% vested in first two years and 100% after third year of service) or 6-year graded (0% in year one, 20% in year two and in each subsequent year.) Effective for plan years beginning in 2007.

7.      Form 5500-EZ: Exempts filing for one-participant plans with assets not in excess of $250,000 (present law is $100,000.) Effective for plan years beginning in 2007.

8.      Investment Safe Harbor : The Department of Labor is to issue a fiduciary safe harbor under ERISA 404(c) for the assets in an individual account plan, under which the participant would be deemed to be exercising investment control. The default applies when the participant has failed to make an investment election. Effective for plan years beginning in 2007.

9.      Transfers to Fund Retiree Health Benefits: Surplus assets under a Defined Benefit plan may be transferred to fund retiree health benefits. Effective for transfers made after date of enactment.

10.    Tax Refunds: A taxpayer can direct a tax refund to be paid directly into an IRA. Effective for taxable years beginning in 2007.

11.    IRA Limits: The gross income levels for IRA deductions and for Roth IRA contribution limits are subject to indexing.

12.    Tax-Free IRA Distributions for Charitable Giving: Up to $100,000 may be distributed tax-free from an IRA if it is made to a charitable organization and the IRA owner is at least 70 ½ years old. Applies only to distributions made in 2006 and 2007.

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