The Pension Protection Act of 2006
PPA2006 was signed into law by President George W. Bush on August 17, 2006. A brief summary prepared by Sungard, Inc.
The bill makes sweeping changes to the defined benefit funding requirements. In addition, there are significant changes affecting all profit sharing and 401(k) plans. Highlights of some of the more important provisions included in the bill:
Perhaps the most important aspect of the bill is to make permanent the beneficial changes previously enacted as part of EGTRRA. For example, the higher contribution limits for 401(k) plans, catch-up contributions for 50 year olds, higher deduction limits for profit sharing plan contributions, and the “Roth” option for 401(k) contributions were all part of EGTRRA and would have otherwise expired in 2011, but for the new bill.
Defined Benefit Plan Funding
Many changes were made in how employers who sponsor defined benefit plans will go about determining their minimum contribution obligation. Generally, employers who sponsor non-multiemployer plans will be obligated to contribute the normal cost for the year plus amortize funding shortfalls (below 100% of a plan’s liabilities) over a 7-year period. This new rule takes effect in 2008 and the current rules remain in place for 2006 and 2007. There are also a number of transitional rules and exceptions included in the bill (including special rules for multiemployer plans).
There are numerous changes that will impact 401(k) plans. Some of the more popular include:
- Elimination of the gap period income calculation for ADP/ACP corrective distributions, effective for plan years beginning in 2008.
- Elimination of retroactive inclusion in income for ADP/ACP corrective distributions made to HCEs effective for plan years beginning in 2008.
- New regulations for “default” investment safe harbors to be issued by DOL within 6 months of enactment. Plans (401(k) and other) will have 404(c) protection if they invest participant funds under the DOL rules when the participant does not make an affirmative fund selection. 404(c) protection will also be extended when plans “map” investment choices to a new provider.
- The addition of two new statutory prohibited transaction exemptions that will allow for investment advice to be given by fiduciaries who are also receiving compensation for securities purchased in conjunction with such advice. These new exemptions are subject to a number of limitations and will not be available until 2007.
Automatic Enrollment 401(k) Plans
The bill makes a number of changes that are intended to make 401(k) plans which provide for automatic enrollment more attractive to plan sponsors. Among these changes:
- Clarification that Federal law under ERISA preempts any state laws that attempt to regulate automatic enrollment plans or withholding from employee paychecks.
- An extended corrective distribution period of 6 months (rather than the normal 2½-month period) to avoid the 10% excise tax under Code Section 4979.
- A new correction option allowing for the return of deferrals that were made erroneously during the first 90 days after the employee was automatically enrolled.
- New safe harbor contribution options for 401(k)(12) plans that meet certain requirements and provide for automatic enrollment. The safe harbor matching contribution formula for a qualifying plan could be reduced to a 100% match on deferrals of up to 1% of compensation plus a 50% match on deferrals of between 1% and 6% of compensation. The nonelective contribution would remain at 3%. However, vesting of these safe harbor contributions under a qualifying automatic enrollment plan could be determined using a 2-year cliff vesting schedule (rather than 100% immediate vesting that would normally apply. Additionally, the automatic enrollment percentage must begin at between 3% and 10%, with the minimum automatic enrollment percentage rising by 1% point in each of the next 3 years.
H.R. 4 makes a number of other changes. They include:
- Non-spouse beneficiaries will be permitted to roll over distributions made at the death of the participant to an inherited IRA, effective for distributions made after 2006.
- Terminating defined contributions plans will be permitted to transfer the accounts of missing participants to the PBGC. Amounts transferred in this way will be distributed in accordance with the PBGC missing participant program that previously only applied to defined benefit plans. However, the expanded program will only be effective after regulations are issued.
- Contributions to all defined contributions plans would be subject to the same vesting schedules that presently apply to matching contributions (i.e., 6-year graded or 3-year cliff). This change is generally effective for contributions made for plan years beginning after 2006. (Elective deferrals, QNECs and QMACs remain subject to a 100% vesting requirement.)
- New required benefit statements (quarterly participant-directed plans; annually for other defined contribution plans);
- Expanded rollover options, including the option to roll directly from a pre-tax plan account to a Roth IRA (subject to existing rules for conversion of a traditional IRA to a Roth IRA);
- New rules for “cash balance” and “PEP” type defined benefit plans; and
- A new type of combination defined benefit/401(k) plan beginning in 2010.
The DOL will electronically post 5500s on their Web site beginning in 2008. Additionally, employers will be required to post 5500 on their own Intranet sites available for employees.