LEGISLATIVE UPDATE: The Pension
Protection Act of 2006
Act has wide-ranging impact in the retirement plan area.
There are provisions imposing funding reforms for defined
benefit pension plans, promoting "cash balance" retirement
plans, liberalizing the Roth IRA rules, adding IRA "rollover"
options, and making "permanent" the various increases in
contribution limits provided by the Economic Growth and Tax Relief
Reconciliation Act of 2001 ("EGTRRA").
feel that the following new requirements are most likely to impact
the greatest number of qualified retirement plan sponsors (most of
these changes are effective for non-collectively bargained plans as
of the first plan year beginning after December 31, 2006, so for
calendar year plans, they apply as of January 1, 2007).
individual account plans (profit sharing and Section 401(k) plans)
will be required to provide participants benefit statements at least
annually, and plans which permit participant investment direction
(including Section 403(b) plans of tax-exempt organizations) must do
so on a quarterly basis. Sponsors
of defined benefit plans will have to provide participant statements
at least once every three years and more frequently on request.
Under current law, participants are entitled to benefit
statements only if they request them in writing.
The new benefit statements will be required to state the
participantís total accrued benefit, the vested portion of such
benefits, an explanation of any "permitted disparity" affecting
benefit allocations, an explanation of any applicable limitations
and restrictions on the right of participants to direct their
investments, an explanation of the importance for retirement
planning of well-balanced and diversified investments, and a notice
directing participants to a Department of Labor (DOL) web site for
sources of investment information.
The Act requires the DOL to issue model statements of the
required explanatory material, but those model statements are not
due until August 16, 2007.
of individual account plans that permit participant investment
direction need to work with their third party administrators and
other service providers to be in a position to provide the required
disclosures by the first quarter of the 2007 plan year.
Special Tax Notice that generally advises participants in pay status
of the tax effect of the various distribution options they may elect
will have to be revised to include a statement warning participants
of the consequences of "failing to defer" receipt of a
distribution by transfer to an IRA or otherwise.
Those consequences include income tax on the amounts not
rolled over into an IRA within 60 days plus a 10% early distribution
penalty for benefit recipients under age 59Ĺ.
For participants with vested benefits in excess of $5,000, a
retirement plan cannot make a current distribution of benefits
without the participantís written consent.
Under current law, such consent is not valid unless it is
responsive to a written explanation of (1) the material features and
relative values of the optional forms of benefits, (2) the
participantís right to defer receipt of the distribution to the
planís normal retirement age or to have the distribution
transferred directly to another qualified plan or to an IRA, and (3)
the rules concerning taxation of a benefit distribution.
Under current law, this explanation must be given no less
than 30 and no more than 90 days before the distribution begins.
Under the Act, the maximum period during which participants
may consider their distribution elections is extended from 90 to 180
days, so that the written explanation of distribution options must
be given no less than 30 days and no more than 180 days before
The Special Tax Notice and participant benefit
election forms need to be revised for distributions after December
employer contributions to defined contribution retirement plans will
be subject to new rules
that require full vesting at least as fast as provided under two
alternate schedules (plans can choose either 100 percent "cliff"
vesting after three years of service or graduated vesting at 20
percent per year over years of service two through six).
This will require conforming amendments to many defined
contribution plans. Vesting
rules for defined benefit plans are not changed by the Act.
information must be included in plan annual reports including, in
the case of defined benefit pension plans, additional information on
the planís funding status. At
the same time, defined benefit plans will no longer be required to
provide participants with "summary annual reports."
One-participant plans with assets that do not exceed $250,000
will no longer have to file annual reports, and simplified reporting
requirements will be provided for certain plans with fewer than 25
participants. At the
same time, the annual report requirements applicable to qualified
retirement plans, as modified by the Act, are extended to the
Section 403(b) plans of tax-exempt organizations.
For the 2008 plan year, basic plan information and actuarial
information included in the annual report for defined benefit plans
must be filed with the DOL in an electronic format that accommodates
display of this information by the DOL on the internet.
effort to promote the use of investment advisers who will meet
personally with participants to assist them with investment
decisions relating to their directed retirement accounts (including
IRAs), the Act provides an exemption from the prohibited transaction
rules of ERISA and the Internal Revenue Code for "eligible
investment advice arrangements."
Eligible investment advice arrangements are written
agreements between a "fiduciary adviser" and an employer or
other plan fiduciary that (1) authorize the arrangement, (2) contain
an acknowledgment of fiduciary status by the "fiduciary
adviser," and (3) provide for "objective" advice by requiring
the adviser to either give advice based on a computer model or
charge a flat fee not tied in any way to the recommended investment.
Only an investment adviser registered under the Investment
Advisers Act of 1940, a bank, an insurance company, or a broker or
dealer registered under the Securities Exchange Act of 1934 (and
their properly authorized employees) can act as a "fiduciary
adviser," and there are associated participant disclosure
Defined contribution plans with fiduciary advisers will be
subject to an annual audit by an independent auditor, which will be
burdensome for smaller plans not otherwise required to have an
annual plan audit. Most
of these smaller plans will take a pass on providing "fiduciary
advisers" for plan participants.
and Survivor Annuity Option
benefit plans and defined contribution plans subject to the joint
and survivor annuity rules will have to make available an additional
benefit option (the "qualified optional survivor annuity"),
which is an equivalent value joint annuity with a survivor annuity
payable in an amount equal to 75 percent of the benefit payable
while the retiree and the beneficiary are both alive.
This change is effective for the 2008 plan year for
non-collective bargaining plans, and will require a plan amendment
for almost every defined benefit plan.
current law, a defined benefit or "money purchase pension plan"
is prohibited from providing distributions to participants before
they attain the planís normal retirement age unless they have
separated from employment. Under
the Act, new rules allow defined benefit plans to be amended to
permit in-service distributions to participants age 62 and older.
Section 401(k) Enrollment
with the 2008 plan year, Section 401(k) plans have an extra
incentive to provide "automatic enrollment," or a plan provision
requiring eligible employees to have elective contributions made on
their behalf from their compensation unless they affirmatively elect
to contribute at another rate or they elect not to participate at
all. A plan offering a "qualified automatic rollover feature" will be deemed to satisfy
the anti-discrimination tests applicable both the deferral
contributions and related matching or nonelective employer
contributions and, if the
plan consists solely of contributions pursuant to a "qualified
automatic rollover feature," it will not be subject to the
top-heavy rules. Under
a qualified automatic rollover feature, the eligible employee is
treated as making an elective contribution of between three and ten
percent of compensation (the exact percentage is designated within
that range for all participants) unless the employee elects
otherwise. The employer
is also required to make either matching contributions that satisfy
minimum requirements or nonelective contributions equal to three
percent of the compensation of each nonhighly compensated eligible
employee. Any such
employer contributions must vest over an accelerated schedule so
that participants with two years of service are 100 percent vested.
Current Section 401(k) regulations already permit the
use of the automatic enrollment feature without special contribution
limits, additional employer contributions or accelerated vesting.
Most employers will consider current options before turning
to the "qualified automatic rollover feature."
Date: September 12, 2006
Golan Christie Taglia LLP
70 West Madison St.
Chicago, Illinois 60602