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Pension Protection Act of 2006
On the eve of August 3rd, the U.S. Senate passed the Pension Protection Act of 2006, and President Bush is expected to sign it within the next couple of weeks. The 900-page bill that has been years in the making includes provisions that significantly impact practitioners and sponsors of qualified and non-qualified plans. While the provisions are too extensive to list in this newsflash, here are a few of the highlights:
- An additional safe harbor option for 401(k) plans using automatic enrollment
- Automatic enrollment of at least 3% and increasing 1% per year up to 6%
- Matching contribution of 100% of the first 1% plus 50% of the next 5%
- Full vesting after 2 years of service
- ADP testing relief for 401(k) plans
- Refund deadline extended to 6 months after the end of the plan year for 401(k) plans using automatic enrollment
- Refunds are always taxable in the year of distribution, regardless of timing
- Increased rollover flexibility
- Non-spouse beneficiaries permitted to roll over benefits to IRA accounts
- Direct rollovers permitted from qualified plans to Roth IRAs
- New combination defined benefit/401(k) plan
- DB accrual of at least 1% of pay for up to 20 years of service
- Automatic 401(k) enrollment at 4% plus a match of 50% of the first 4%
- Provides 401(k) safe-harbor and deemed to be not top heavy
- Pension provisions from the Economic Growth and Tax Relief Reconciliation Act of 2001 including all increased contribution and deduction limits made permanent
- Increased deduction limits
- Permits defined benefit deductions of up to 150% of applicable funding target
- Limit for defined contribution plans calculated without regard to PBGC-covered defined benefit plan of the same employer
- Cash Balance plans clarified
- Deemed not to violate the Age Discrimination in Employment Act
- Requires full vesting after no more than 3 years
- Reporting and disclosure changes
- Form 5500 filing exemption for one-person plans expanded to plans with less than $250,000 in assets
- Simplified Form 5500 to be established for plans with 25 or fewer participants
- Companies using intranets for internal communications must post their annual Form 5500 on their intranet sites
- Fiduciary "free pass" for participant investment advice provided by
- A fee-based, independent investment advisor whose fee is not affected by the investments chosen by the participants
- A computer model provided by an investment institution and verified by an independent third party
- Other fiduciary safe-harbors
- Mapping investments in a participant direct defined contribution plan
- Default investment option when participant does not make an election
- New rules effective for 2008 for calculating lump sum payments from defined benefit plans
- Increased funding targets for defined benefit plans deemed to be "at risk"
- Determined using new 70%/80% test
- Applicable only to plans with more than 500 participants
- Additional loading factors for plans that are at-risk in any 2 of the 4 preceding years
- Valuation of defined benefit plans
- Significant changes to minimum funding calculations
- Plans with more than 100 participants must use the first day of the plan year as the valuation date
- Smoothing over a period not to exceed 24 months can be used for asset valuation
- Miscellaneous
- For defined contribution plans, reduction of maximum vesting schedule to the 2/20 graded or 3-year cliff schedule
- PBGC missing participant program open to terminated defined contribution plans
Swerdlin & Company is conducting two workshops for you to learn more about this monumental legislation.
- We will hold a webcast on Thursday, August 10, 2006 from 2:00 pm to 3:30 pm. For more information on the webcast, please visit www.swerdlin.net/news/2006-08-webcast.html
- We will hold a breakfast workshop at the Ashford Club in Atlanta, Georgia on Thursday, August 17, 2006. For more information on the workshop, please visit
www.swerdlin.net/news/2006-08-17-workshop.html
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