Pension Protection Act of 2006
By Polly Heins
On Aug. 17, President Bush signed the Pension Protection Act of 2006 (PPA-06), a comprehensive pension reform bill that has been the subject of negotiations between the House of Representatives and the Senate since early in 2006. Certain provisions of PPA-06 take effect immediately. Other provisions will become effective in 2007 or later.
The Pension Protection Act indicates retirement plan amendments are needed, but will not be required before the last day of the first plan year beginning on or after Jan. 1, 2009 (2011 for certain governmental plans). This article presents an overview of the major components of PPA-06 pertaining to defined contribution plans and IRAs (Joint Committee on Taxation summary of PPA-06 can be found at http://www.house.gov/jct/x-38-06.pdf).
PPA-06 provisions make the following changes to IRAs:
• Makes permanent the EGTRRA Traditional, Roth and SIMPLE IRA contribution, catch-up contribution and portability provisions;
• Provides for indexing of Traditional and Roth IRA income restrictions (deduction and contribution eligibility);
• Makes permanent the EGTRRA Saver’s Tax Credit for IRA contributions;
• Provides for direct rollovers (or conversion if pretax) of assets from QRPs, governmental 457(b) plans, 403(a) and 403(b) plans to Roth IRAs (effective for distributions after Dec. 31, 2007);
• Allows Traditional and Roth IRA holders age 70-and-a-half and older who direct IRA distributions to be paid directly to qualified charities to exclude donated assets of up to $100,000 per year from their income. This is effective for 2006 and 2007;
• Allows certain guardsmen or reservists called to active duty for 180-plus days to take penalty-free distributions from IRAs, and to repay those amounts to IRAs over a two-year period (distributions after Sept. 11, 2001, and before Dec. 31, 2007);
• Allows income tax refunds to be paid directly to an IRA (effective after Dec. 31)
• Provides investment advice guidance and a prohibited transaction exemption for fiduciary advisors of IRAs, health savings accounts and Coverdell education savings accounts (effective after Dec. 31); and
• Allows employees participating in 401(k) plans of certain bankrupt employers to make additional IRA contributions (up to $3,000 per year) above the annual contribution limit (effective only for tax years 2007 through 2009).
Defined Contribution Retirement Plans
PPA-06 makes the following changes for defined contribution plans:
• Makes permanent the EGTRRA contribution, catch-up (including SEP and SIMPLE IRA plans), portability provisions, and the qualified Roth contribution program for 401(k) and 403(b) plans;
• Makes permanent the EGTRRA Saver’s Tax Credit, allowing up to $2,000 in tax credits to qualifying taxpayers who make contributions to deferral-type employer plans;
• Encourages participation in 401(k), 403(b), and governmental 457 plans through automatic enrollment. Introduces actual deferral percentage (ADP), actual contribution percentage (ACP) and top-heavy safe harbors for 401(k) and 403(b) plans with automatic enrollment and automatic deferral increases (effective for plan years after Dec. 31, 2007);
• Provides guidance on employer-provided investment advice with employer protection from fiduciary liability, and mandates use of a computer model or direct advice (effective after Dec. 31, 2006);
• Mandates participant’s ability to immediately divest elective deferrals invested in company stock and mandates participants ability to divest employer contributions invested in company stock after three years of service;
• Mandates defined contribution plans (excluding one-person plans) to provide benefit statements quarterly to plan participants in participant-directed accounts, and annually to participants of other types of accounts;
• Simplifies Form 5500 filing (raises Form 5500-EZ threshold from $100,000 to $250,000 effective in 2007 and simplifies Form 5500 reporting for plans with fewer than 25 participants);
• Allows for 401(k)/defined benefit combo plans for small employers;
• Modifies hardship distribution definition to include a hardship of a participant’s beneficiary, even of a nonspouse or nondependent beneficiary (effective on date of enactment);
• Gives the IRS more authority to modify sanctions under the Employee Plans Compliance Resolution System (EPCRS) and create programs for small employers;
• Allows certain guardsmen or reservists called to active duty for 180-plus days to take penalty-free distributions of deferral assets from 401(k) and 403(b) plans and to repay those amounts to IRAs over a two-year period (distributions after Sept. 11, 2001, and before Dec. 31, 2007);
• Allows nonspouse beneficiaries of qualified retirement plans (QRPs), governmental 457(b) plans, 403(a) and 403(b) plans to roll inherited plan assets to a beneficiary IRA (effective for distributions after Dec. 31, 2006);
• Provides greater portability of after-tax assets between employer-sponsored plans (401(k) and 403(b)) (effective after Dec. 31, 2007);
• Accelerates vesting in defined contribution plans for certain employer contributions; and
• Extends the deadline for qualified retirement plans to provide certain distribution notices (e.g. 402(f) notices) to no more than 180 days before the distribution is made.
Certain provisions of the Pension Protection Act of 2006 take effect immediately. Other provisions will become effective in 2007 or later. Financial organizations must take immediate steps to familiarize staff with the new rules and modify their internal procedures and retirement services technologies as needed. The Pension Protection Act of 2006 will affect financial organizations in the following areas:
• Operational procedures;
• Training and staff development;
• Systems and technology; and
• Marketing and business development.
Now is the time to begin your analysis of how to implement the Pension Protection Act of 2006. BISYS Retirement Services has posted an “alert” on their Web site, www.bisysretirement.com, for further analysis of PPA-06.
Polly Heins is consultant/editor at BISYS Retirement Services.