Untitled Page

Defined Benefit

Will the new law change the amount I have to contribute to my defined benefit plan?

Under the new bill, the minimum required contribution will be determined differently. The new bill does not allow much discretion in the actuarial methods and assumptions. Generally, the minimum required contribution will increase due to the conservative, statutory assumptions. The new funding rules will begin in 2008. The funding rules for 2005 will remain in effect for 2006 and 2007.

What funding changes are effective for 2006?

Under the new bill, there is some possible relief for the minimum required contribution. The RPA '94 interest rate relief that had expired at the end of 2005 was extended through 2007. For plans with more than 100 participants, this may lower any additional funding charge that is added to the minimum contribution. The maximum tax deductible contribution has been increased.

Is it true the new law limits my defined benefit plan's ability to pay lump sums?

Under the new bill, a plan's ability to make lump sum distributions after 2007 depends upon the asset level compared to plan liabilities. If a plan's asset level drops below 60% of plan liabilities, lump sum payments may not be allowed. If a plan's asset level is between 60% and 80% of plan liabilities, lump sum payments may be restricted but not eliminated.

Does the new law apply to governmental defined benefit plans?

In general, the bill changes IRS code sections from which governmental plans are exempt.

How do the changes affect a frozen DB plan?

Frozen plans must comply with the new rules - both funding and reporting. The minimum required contribution for a frozen plan may increase because of the amortization of the shortfall. Currently, a frozen plan would have no normal cost and would be amortizing changes (cost method change, assumption change, actuarial gains & loses) over various periods of time. If the plan has over 100 participants, it may also be subject to the additional funding charge. Under the new rules, the normal cost will remain zero but the shortfall, if any, will be amortized over 7 years and the plan may have increased funding if it is at-risk. If the frozen plan is well funded, the contribution could be $0.

If one plan in a control group is "at-risk" are all plans considered "at risk" and therefore subject to higher funding?

No. You must look at all defined benefit (DB) plans participants in the control group to determine if the count is over 500. If it is, all DB plans in control group must look at their individual funding ratios. Each DB plan will then determine its at-risk status own its own.

Could you explain forfeiture of a credit balance?

Remember that the credit balance is sort of "paper money," that is, it isn't cash you can put your hands on. If the plan keeps its credit balance, the assets are reduced by the credit balance. This will reduce the funding ratio and increase the funding target; however, the minimum required contribution may be reduced by the credit balance (if the funding ratio is at least 80%). If the plan forfeits some or all of its credit balance, the funding ratio will increase and the funding target will decrease; however, there will be no credit balance (or there may be a reduced credit balance) to reduce the minimum required contribution. The funding ratio and at-risk rules are probably the decision driving items. The plan may need (or be forced) to forfeit some or all of the credit balance to avoid becoming at-risk.

Defined Contribution

What is the new automatic enrollment safe-harbor for 401(k) plans?

To qualify for the automatic enrollment safe-harbor, a plan must use an auto enrollment rate of at least 3% for the first year. The withholding rate must automatically increase by 1% each year until it reaches 6% in the third year.

In addition, the employer must make a matching contribution or a non-elective (profit sharing) contribution. The match must be at least as generous as 100% of the first 1% of employee deferrals plus 50% of the next 5%. For employers electing the non-elective contribution, the minimum amount is 3% of pay for all eligible participants. Both types of employer contributions must be fully vested after no more than 2 years.

All other safe-harbor rules, i.e. annual notice, withdrawal restrictions, etc., apply.

Can you have automatic enrollment in a 401(k) plan that is not taking advantage of the safe-harbor?

Yes. Plans automatically enroll participants at whatever level they deem appropriate without being subject to the automatic increases, mandatory employer contribution and accelerated vesting of the safe-harbor. While such plans are subject to the annual ADP non-discrimination test, they have an additional 3½ months to correct test failures without incurring an excise tax.

What is a Qualified Reservist Distribution?

Reservists called to active duty for more than 179 days any time between September 11, 2001 and December 31, 2007, are eligible to treat withdrawals from their IRA, 401(k) or 403(b) as a Qualified Reservist Distribution.

Such distributions are not subject to the normal 10% early withdrawal penalty. The distributions can also be "re-contributed" to an IRA within 2 years after the end of active duty.

Will there be a new code for Box 7 on Form 1099-R to designate a distribution as a Qualified Reservist Distribution?

It's still too early to know exactly how these distributions will have to be reported.

Will vendors who provide participant investment advice (investment advisors/agents/brokers, etc.) have to disclose the amount of revenues received from revenue sharing agreements with mutual funds or money received from insurance companies/securities firms for "shelf space" for certain products?

Yes. To qualify for the prohibited transaction and fiduciary liability relief, any advisor providing participant investment advice is required to disclose in writing all compensation s/he will be paid in connection with the advice or any of the investment options in the plan. The disclosure must also include any material relationships between the advisor and any entity providing any of the plan's investment options. Please see our summary of PPA's investment advice provisions.

	5901 Peachtee Dunwoody Road Building B, Suite 170 Atlanta, GA 30328 (770) 396-6601 www.swerdlin.net


Pension Protection Act of 2006 Questions & Answers For more information on the Pension Protection Act of 2006, please visit our summary. Defined Benefit Q&A Defined Contribution Q&A Investment Advice Provisions (PDF) Defined Benefit *Will the new law change the amount I have to contribute to my defined benefit plan?* Under the new bill, the minimum required contribution will be determined differently. The new bill does not allow much discretion in the actuarial methods and assumptions. Generally, the minimum required contribution will increase due to the conservative, statutory assumptions. The new funding rules will begin in 2008. The funding rules for 2005 will remain in effect for 2006 and 2007. *What funding changes are effective for 2006?* Under the new bill, there is some possible relief for the minimum required contribution. The RPA '94 interest rate relief that had expired at the end of 2005 was extended through 2007. For plans with more than 100 participants, this may lower any additional funding charge that is added to the minimum contribution. The maximum tax deductible contribution has been increased. Is it true the new law limits my defined benefit plan's ability to pay lump sums? Under the new bill, a plan's ability to make lump sum distributions after 2007 depends upon the asset level compared to plan liabilities. If a plan's asset level drops below 60% of plan liabilities, lump sum payments may not be allowed. If a plan's asset level is between 60% and 80% of plan liabilities, lump sum payments may be restricted but not eliminated. Does the new law apply to governmental defined benefit plans? In general, the bill changes IRS code sections from which governmental plans are exempt. How do the changes affect a frozen DB plan? Frozen plans must comply with the new rules - both funding and reporting. The minimum required contribution for a frozen plan may increase because of the amortization of the shortfall. Currently, a frozen plan would have no normal cost and would be amortizing changes (cost method change, assumption change, actuarial gains & loses) over various periods of time. If the plan has over 100 participants, it may also be subject to the additional funding charge. Under the new rules, the normal cost will remain zero but the shortfall, if any, will be amortized over 7 years and the plan may have increased funding if it is at-risk. If the frozen plan is well funded, the contribution could be $0. If one plan in a control group is "at-risk" are all plans considered "at risk" and therefore subject to higher funding? No. You must look at all defined benefit (DB) plans participants in the control group to determine if the count is over 500. If it is, all DB plans in control group must look at their individual funding ratios. Each DB plan will then determine its at-risk status own its own. Could you explain forfeiture of a credit balance? Remember that the credit balance is sort of "paper money," that is, it isn't cash you can put your hands on. If the plan keeps its credit balance, the assets are reduced by the credit balance. This will reduce the funding ratio and increase the funding target; however, the minimum required contribution may be reduced by the credit balance (if the funding ratio is at least 80%). If the plan forfeits some or all of its credit balance, the funding ratio will increase and the funding target will decrease; however, there will be no credit balance (or there may be a reduced credit balance) to reduce the minimum required contribution. The funding ratio and at-risk rules are probably the decision driving items. The plan may need (or be forced) to forfeit some or all of the credit balance to avoid becoming at-risk. Defined Contribution What is the new automatic enrollment safe-harbor for 401(k) plans? To qualify for the automatic enrollment safe-harbor, a plan must use an auto enrollment rate of at least 3% for the first year. The withholding rate must automatically increase by 1% each year until it reaches 6% in the third year. In addition, the employer must make a matching contribution or a non-elective (profit sharing) contribution. The match must be at least as generous as 100% of the first 1% of employee deferrals plus 50% of the next 5%. For employers electing the non-elective contribution, the minimum amount is 3% of pay for all eligible participants. Both types of employer contributions must be fully vested after no more than 2 years. All other safe-harbor rules, i.e. annual notice, withdrawal restrictions, etc., apply. Can you have automatic enrollment in a 401(k) plan that is not taking advantage of the safe-harbor? Yes. Plans automatically enroll participants at whatever level they deem appropriate without being subject to the automatic increases, mandatory employer contribution and accelerated vesting of the safe-harbor. While such plans are subject to the annual ADP non-discrimination test, they have an additional 3½ months to correct test failures without incurring an excise tax. What is a Qualified Reservist Distribution? Reservists called to active duty for more than 179 days any time between September 11, 2001 and December 31, 2007, are eligible to treat withdrawals from their IRA, 401(k) or 403(b) as a Qualified Reservist Distribution. Such distributions are not subject to the normal 10% early withdrawal penalty. The distributions can also be "re-contributed" to an IRA within 2 years after the end of active duty. Will there be a new code for Box 7 on Form 1099-R to designate a distribution as a Qualified Reservist Distribution? It's still too early to know exactly how these distributions will have to be reported. Will vendors who provide participant investment advice (investment advisors/agents/brokers, etc.) have to disclose the amount of revenues received from revenue sharing agreements with mutual funds or money received from insurance companies/securities firms for "shelf space" for certain products? Yes. To qualify for the prohibited transaction and fiduciary liability relief, any advisor providing participant investment advice is required to disclose in writing all compensation s/he will be paid in connection with the advice or any of the investment options in the plan. The disclosure must also include any material relationships between the advisor and any entity providing any of the plan's investment options. Please see our summary of PPA's investment advice provisions.