The Pension Protection Act of 2006
Florence M. Vincent
On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006 (the "PPA"). One important purpose of the PPA is to address the ever-increasing number of under-funded qualified defined benefit pension plans ("DB Plans"). A qualified DB Plan is a retirement plan established and sponsored by an employer through which eligible employees are provided with a set retirement benefit determined pursuant to a formula. In order to provide that promised retirement benefit, employers must make contributions to the plan in accordance with actuarial valuations and federal funding requirements. To address DB Plan funding problems, the PPA strengthens existing federal funding requirements and also introduces a new interest rate methodology to determine lump sum distributions. Employers that sponsor DB Plans would be well advised to seek legal counsel regarding their funding obligations under the PPA.
The PPA also effects qualified defined contribution plans (e.g., 401(k) plans), which are far more prevalent than DB Plans. Prior to the passage of the PPA, certain provisions of the tax-code relating to DC Plans were set to expire in 2010. For example, the 401(k) current deferral limit of $15,500 would have rolled back to $10,500 in 2011, absent the enactment of the PPA. Additionally, catch-up contributions for eligible 50-year-old participants would have been eliminated in 2010; the PPA however continues to allow those contributions.
The PPA includes provisions that change the rules regarding distributions from qualified retirement plans to non-spouse beneficiaries (e.g., a child or a domestic partner). Prior to the enactment of the PPA, non-spouse beneficiaries had to take a lump-sum distribution, subject to income tax, or keep the funds with the plan (if eligible). Effective January 1, 2007, non-spouse beneficiaries may instead elect to make a tax-free rollover contribution to an IRA. The PPA also makes it possible for an employer to amend their qualified DC Plan to provide that all eligible employees are automatically enrolled, absent an election otherwise.
The PPA also includes provisions making after-tax ROTH 401(k) deferrals permanent. Beginning in 2006 (before the enactment of the PPA), DC Plans could include provisions that allowed employees to elect to make after-tax ROTH 401(k) deferrals, as well as pre-tax deferrals. Under a qualified DC Plan, pre-tax deferred dollars are taxed upon distribution, whereas after-tax ROTH 401(k) deferrals are allowed to grow tax-free. But because the tax code provisions that allowed after-tax ROTH 401(k) deferrals were set to expire in 2010, many employers were hesitant to amend their DC Plans to permit them. Because the PPA makes ROTH 401(k) deferrals permanent, employers may now include both kinds of deferrals in their DC Plans, without having the after-tax ROTH 401(k) deferral feature expire in 2010.
Because all qualified retirement plans - whether DB Plans or DC Plans - must be administered according to their terms, and the PPA changes or otherwise relates to important aspects of qualified retirement plans, employers are well advised to consult with legal counsel to make sure their plans conform to the PPA. For a more comprehensive overview of the PPA as it relates to qualified retirement plans, see the United States Department of Labor website at http://www.dol.gov/EBSA/pensionreform.html.
The PPA also effects qualified defined contribution plans (e.g., 401(k) plans), which are far more prevalent than DB Plans. Prior to the passage of the PPA, certain provisions of the tax-code relating to DC Plans were set to expire in 2010. For example, the 401(k) current deferral limit of $15,500 would have rolled back to $10,500 in 2011, absent the enactment of the PPA. Additionally, catch-up contributions for eligible 50-year-old participants would have been eliminated in 2010; the PPA however continues to allow those contributions.
The PPA includes provisions that change the rules regarding distributions from qualified retirement plans to non-spouse beneficiaries (e.g., a child or a domestic partner). Prior to the enactment of the PPA, non-spouse beneficiaries had to take a lump-sum distribution, subject to income tax, or keep the funds with the plan (if eligible). Effective January 1, 2007, non-spouse beneficiaries may instead elect to make a tax-free rollover contribution to an IRA. The PPA also makes it possible for an employer to amend their qualified DC Plan to provide that all eligible employees are automatically enrolled, absent an election otherwise.
The PPA also includes provisions making after-tax ROTH 401(k) deferrals permanent. Beginning in 2006 (before the enactment of the PPA), DC Plans could include provisions that allowed employees to elect to make after-tax ROTH 401(k) deferrals, as well as pre-tax deferrals. Under a qualified DC Plan, pre-tax deferred dollars are taxed upon distribution, whereas after-tax ROTH 401(k) deferrals are allowed to grow tax-free. But because the tax code provisions that allowed after-tax ROTH 401(k) deferrals were set to expire in 2010, many employers were hesitant to amend their DC Plans to permit them. Because the PPA makes ROTH 401(k) deferrals permanent, employers may now include both kinds of deferrals in their DC Plans, without having the after-tax ROTH 401(k) deferral feature expire in 2010.
Because all qualified retirement plans - whether DB Plans or DC Plans - must be administered according to their terms, and the PPA changes or otherwise relates to important aspects of qualified retirement plans, employers are well advised to consult with legal counsel to make sure their plans conform to the PPA. For a more comprehensive overview of the PPA as it relates to qualified retirement plans, see the United States Department of Labor website at http://www.dol.gov/EBSA/pensionreform.html.
Copyright 2007. Published for general informational purposes only, and should not be construed as legal advice. If you need legal advice please consult with your attorney.