The Pension Protection Act of 2006
being signed into law on August 17, 2006, the Pension Protection Act of 2006 (PPA)
had been under consideration by Congress for several years. The legislation is
in part a response to recent failures of large defined benefit plans and the
funding shortage of the Pension Benefit Guaranty Corporation (PBGC). Congress
also recognized the need to provide more incentive for young workers to enroll
in 401(k) plans. To some, the PPA represents the most significant and
comprehensive changes to federal laws pertaining to retirement plans in the past
30 years, while others are disappointed that it will not provide security for
millions who are facing retirement.
900 pages, the Act covers a wide range of issues. Some of the key provisions
from the House Committee on Education & the Workforce summary of the Act are
IRA - Individual Retirement Accounts - Qualified charitable distributions.
- Certain taxpayers will be allowed to
make charitable contributions of their otherwise taxable
IRA distributions. The following rules apply to charitable contributions of
- The IRA owner must have attained age
- Tax-free distributions from an IRA
donated to a charitable organization may not exceed
$100,000 per year, per individual for both 2006 and 2007. The $100,000
annual limit is
based on the aggregate amount of a taxpayer’s qualified charitable
distributions in a year. If
the aggregate amount of qualified charitable distributions exceeds $100,000
in a tax year, the
excess amount cannot be carried over to the following year, and must be
included in the
taxpayer’s gross income for the tax year in which the excess distribution
- A qualified charitable distribution
must be made directly by the IRA trustee to the charitable
- The entire distribution from the IRA
must qualify as a charitable contribution deduction
without regard to the charitable deduction percentage limits. If any part of
contribution fails to qualify as a deduction, none of the IRA distribution
is excluded from
- If the IRA consists of deductible and
nondeductible contributions, the distribution is treated
as consisting of income first, up to the total amount that would be
includible in gross
- IRA distributions that are excluded
from gross income because they are contributed to a
charity are not allowed as a charitable contribution deduction.
- Qualified charitable distributions can
be used to satisfy the IRA owner’s required minimum
distribution for the tax year.
- The exclusion does not apply to SEPs
or SIMPLE IRAs.
- Effective for IRA distributions made
in tax years beginning after December 31, 2005, and before
January 1, 2008.
Funding Rules for Single-Employer Defined Benefit
single-employer defined benefit plans, the Act:
Provides a new interest rate based on a modified "yield curve" for employers
to more accurately measure current pension liabilities.
employers to make sufficient contributions to plans in order to meet a 100%
funding target and erase funding shortfalls within seven years.
Triggers accelerated contributions for "at-risk" plans.
Permits employers to make additional maximum deductible contributions of up
to 180% of current liability.
Prohibits employers and union leaders from increasing benefits if a plan is
less than 80% funded, unless the benefits are paid for immediately.
Prohibits further benefit accruals for lump-sum distributions or shutdown
benefits from plans funded at less than 60%.
Restricts the use of deferred executive compensation arrangements for
employers with severely under funded plans.
Funding Rules for Multiemployer
Defined Benefit Plans
multiemployer defined benefit plans, the Act:
detailed new rules for multiemployer plans, requiring plans that fail to
meet certain funding and other tests to adopt funding improvement plans or
the amortization schedule for any planned benefit amendments from 30 years
to 15 years.
Increases the maximum deductible limit to 140% of current
liability, providing additional funding flexibility for plans each year.
Requires plan trustees to improve the health of the plan by
one-third within 10 years if a plan is less than 80% funded or will hit a
funding deficiency within seven years.
benefit increases if the increase causes the plan to fall below 65% funded
new funding standards and possible benefit restructuring for multiemployer
plans that are funded at less than 65%.
to investment advice, the Act:
new category of prohibited transaction exemption under ERISA for providing
investment advice after 2006 through an "eligible investment advice
arrangement" to participants and beneficiaries of a defined contribution
plan who direct the investment of their accounts under the plan and to the
beneficiaries of IRAs.
qualified "fiduciary advisors" to offer face-to-face, personally tailored
investment advice to help employees manage their 401(k) and other retirement
tough fiduciary and disclosure safeguards to ensure that advice provided to
employees is solely in their best interest.
fiduciary advisors for employer-sponsored plans to base their
recommendations on a computer model that is certified and audited by an
hybrid pension plans, the Act:
legal certainty for hybrid pension plans by ending the legal uncertainties
surrounding cash balance pension plans.
Establishes an age discrimination standard for all defined
benefit plans that clarifies current law with respect to age discrimination
requirements under ERISA on a prospective basis.
Provides rules for converting defined benefit plans into cash
provisions of the Act include the following:
includes a new safe harbor that encourages employers to offer automatic
enrollment in defined contribution plans with salary deferrals, while
giving workers the option to opt out of making the deferral.
PPA makes permanent the retirement plan provisions under the
Economic Growth and Tax Relief Reconciliation Act of 2001. This includes
the "savers' credit" and savings provisions under §529.
PPA provides for tax-free rollovers from the IRA or
retirement plan of a deceased individual to an IRA or retirement plan of a
Defined contribution plans’ vesting will be limited to three
years cliff or six years for graded vesting starting at no less than 20% per
year after two years of service.
PPA requires defined contribution plans other than ESOPs
holding publicly traded employer securities to offer a new diversification
requirement beginning in 2007.
Beginning in 2007, PPA indexes the income limits for
deductible IRA contributions for active participants in an
employer-sponsored plan and the $150,000 income limit for deductible
contributions to a spousal IRA. PPA also indexes the $95,000 and $150,000
AGI phase-out figures pertaining to eligibility for Roth IRA contributions.
Beginning in 2008, PPA allows distributions from qualified
retirement plans, tax-sheltered annuities, and governmental 457 plans to be
rolled over directly into a Roth IRA.
The Act provides for phased retirement allowing in-service
distributions to participants who have attained age 62 and have not yet
separated from employment.
PPA will allow rollovers between SIMPLE IRAs and other
tax-favored retirement plans within the first two years of participation.
PPA provides new rules for employer-owned life insurance
contracts to provide income-tax-free death benefits. These requirements
include the insured being an employee within 12 months of his or her death,
the insured being a highly compensated employee, and the proceeds being paid
to the individual’s family or designated beneficiary or used to buy an
equity or partnership interest from the family member or beneficiary.
Notice and consent requirements are also required—i.e., the employee must be
notified and provide written consent.
PPA will allow long-term care insurance coverage to be
combined with annuity contracts.
College for Financial Planning