Pension Protection Act makes extensive changes to existing law.
President Bush signed the Pension Protection Act (PPA) of 2006 on Aug. 17, providing extensive changes to existing law and new rules affecting qualified retirement plans, plan sponsors and plan participants. The PPA makes comprehensive amendments to the Internal Revenue Code and to the Employee Retirement Income Security Act of 1974, as amended. Not only retirement plans, but corporate-owned life insurance, health and welfare plans, charitable organizations and Sec. 529 plans are also affected.EGTRRA Permanency
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made many favorable changes to the IRC, such as catch-up contributions for workers age 50 and over, increased contribution limits and expanded rollovers. The PPA makes EGTRRA provisions relating to retirement plans permanent.
Sec. 401(k) Plans
Automatic Enrollment
Effective for plan years beginning in 2008, the PPA permits expanded options for employers to "automatically" enroll employees into their 401(k) plans without first obtaining a written election to contribute from the employees. The automatic enrollment feature has been added to ERISA and federally preempts state law.
If the automatic enrollment feature of a plan is "qualified" it will be treated as satisfying the annual anti-discrimination testing (ADP/ACP tests). Qualified automatic enrollment plans must provide for either an employer matching contribution or a profit-sharing contribution. Unlike the existing Sec. 401(k) safe harbor, these contributions must be fully vested within two years, rather than immediately.
To satisfy the automatic enrollment safe harbor, elective contributions must fall within a range from a minimum contribution of 3 percent up to 10 percent of compensation depending on, and increasing with, the employee's length of participation. Matching contributions or profit sharing contributions must also satisfy certain percentages, and notice requirements apply as well.
A plan with an automatic enrollment arrangement that is not qualified will be allowed to make ADP/ACP refunds up to six months after the close of the plan year (rather than 2.5 months under prior law), without a 10 percent excise tax on the employer.
DB(k) Plans
Subject to certain conditions, beginning in 2010, an "eligible combined plan" (no more than 500 employees; subject to single Form 5500) can contain both a 401(k) component and a defined benefit component. These plans must provide a 4 percent of pay automatic enrollment feature and a fully vested 50 percent match on the first 4 percent of pay deferred under the 401(k) component. Each component will be subject to its respective rules under the IRC and ERISA. Nonelective contributions will be permitted.
Increased Deduction Limits
Combined Deduction Limit Under IRC Sec. 404(a)(7)
For plan years beginning in 2006, the IRC Sec. 404(a)(7) deduction limitation--will be determined without regard to DB plans that are covered by the Pension Benefit Guaranty Corporation.
This means that an employer can fully fund a DB plan plus contribute 25 percent of compensation to a DC plan. If the employer maintains a DB plan not governed by the PBGC, the 25 percent limit will only apply to the combined plans if employer contributions to the DC plan exceed 6 percent of eligible compensation. Sec. 401(k) contributions are disregarded for purposes of the 25 percent limitation, as they are under pre-PPA law.
Contributions to DB Plans
For DB plans, the PPA encourages sponsors to ensure proper funded status by increasing the deduction limit. Current law limits the deduction to 100 percent of the plan's current liabilities, but the new rules will allow deductions up to 150 percent of current liabilities.
Reporting and Disclosure
Form 5500-EZ
Effective for plan years beginning in 2007, the threshold for filing IRS Form 5500-EZ (one-participant plans) is increased from $100,000 to $250,000. Also for 2007, there will be a new, streamlined Form 5500 for small plans. This simplified return will be available for any retirement plan that covers fewer than 25 participants on the first day of the plan year and must be posted on employee intranet sites.
Reporting and Disclosure Statements
Benefit statements will be required for all DC plans, e.g. 401(k) plans, profit sharing plans, etc., at least quarterly for those who direct their own investments, and annually for those who do not. The statement must contain information regarding vesting and the value of each investment held. This rule takes effect for plan years beginning in 2007. Failure to comply will carry a penalty of up to $100 per day per participant. DB plans will be required to provide statements and individual benefit notices every three years or upon written request. Effective for plan years beginning after 2007, DB plans will have to furnish participants with an annual funding notice.
Fiduciary Rules
Investment Advice
Effective in 2007, the PPA provides for a prohibited transaction exemption for certain investment advice to participants in individual account plans. The advice must be provided by a "fiduciary adviser," which is defined as a registered investment adviser (under the Investment Advisors Act of 1940) or a bank, insurance company or broker-dealer (under the Securities Act of 1934). The advice must be made pursuant to an "eligible investment advice arrangement," which either provides that the fees received by the fiduciary adviser do not vary on the basis of which investment options are chosen, or uses a computer model under an investment advice program meeting certain conditions, and the arrangement must be fully disclosed. If stipulated requirements are satisfied, the fiduciary relief under Sec. 404(c) of ERISA will apply to default investments in individual account plans. The Department of Labor will issue regulations on how to map investment options when there is a change in investment provider, which will be effective for plan years beginning in 2008.
Cash Balance Pension Plans
The PPA provides that DB plans (including cash balance) are not inherently age discriminatory. However, a participant's accrued benefits under a DB plan must be fully vested after three years of service. Furthermore, an age discrimination test will be satisfied if a participant's accrued benefit is not less than the accrued benefit of any otherwise identical younger employee.
For cash balance or hybrid plans, the accrued benefit may be expressed as an annuity payable at retirement age, the balance of a hypothetical account, or the current value of the cumulative percentage of the employee's final compensation. These rules are generally effective for plan years beginning after June 29, 2005, except for the vesting provisions, which take effect in 2008.
Portability
The PPA contains provisions that broaden the opportunity for participants to move their retirement savings to other retirement plans and receive plan payouts.
Non-spouse Rollovers. A non-spouse beneficiary can roll over benefits from a plan to an IRA so that the IRA, rather than the plan, can satisfy the minimum distributions due the beneficiary. This is effective for distributions made after 2006.
Hardship Withdrawals. Participants will be entitled to hardship withdrawals for hardships experienced by their beneficiaries, if the hardship would qualify for distribution if experienced by a spouse or dependent. The PPA instructs the Treasury to issue rules that allow 401(k) plan withdrawals for such hardships and unforeseen financial emergencies.
Tax-free IRA Distributions for Charitable Giving. Up to $100,000 can be distributed tax-free in 2006 and 2007 from a traditional or Roth IRA if it is made to a charitable organization, and the IRA owner is at least 70.5 years old.
Pension Funding Reform
The PPA establishes new funding requirements and limits benefit accruals for certain plans deemed "at risk," which means the accrued benefits under the plan are less than 80 percent funded based on the prior year's assets. At-risk plans will trigger accelerated funding requirements and may, depending on the level of under funding, cease benefit accruals under the plan (if the plan is 60 percent under funded) or disallow benefit increases (if the plan is between 60 percent and 80 percent under funded). These rules apply only to plans with more than 500 participants and will generally be effective for plan years beginning in 2008.
This article was reprinted from the October 2006 issue of California CPA, by permission of the California Society of CPAs.
Mark W. Clark, APA. QPA is a partner in Benefit Associates, Inc., a fee-only pension and profit sharing plan consulting and administration firm. You can reach him at mclark@benefitassoc.com.
Meredith J. Sesser, Esq. is a Los Angeles-based attorney with Brucker & Morra, specializing in all tax and ERISA aspects of employee benefits. You can reach her at msesser@pension-lawyers.com.
By Mark W. Clark APA, QPA and Meredith J. Sesser, Esq.
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| Author: | Clark, Mark W.; Sesser, Meredith J. |
|---|---|
| Publication: | Catalyst (Dublin, Ohio) |
| Date: | Nov 1, 2006 |
| Words: | 1401 |
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