Fall 2006-14 Pension Protection Act of 2006

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Number 65
Fall 2006

Pension Protection Act of 2006

The Pension Protection Act of 2006 is one of the most comprehensive pension reform legislations by the United States Congress since ERISA was enacted in 1974.

It strengthens plan reporting and participant disclosure rules, requires stricter funding rules for single-employer and multiemployer defined benefit pension plans, resolves legal uncertainty surrounding cash balance and other hybrid defined benefit plans, allows plan fiduciaries to give investment advice to participants, and makes permanent significant tax retirement savings incentives enacted under prior law.

Effective date

The act will be phased in over the next few years. Some of the disclosure requirements and diversification rules will go into effect after December 31, 2006; while most of the other rules will not be effective until 2008. Other rules, such as those involving cash balance or hybrid plans, will be effective retroactively or upon enactment.

The act will cause changes in the way pension plans are designed and administered, amend plan documents, increase plan funding, and make additional plan disclosures in regulatory filings and to plan participants.

Reporting and disclosures

In the case of multiemployer defined benefit plans, § 202 requires actuarial certification as to whether the plan is in endangered or in critical status.

Section 503 requires additional information to be provided in the Form 5500 annual report, for certain defined benefit pension plans.

Section 504 requires plan Form 5500 annual reports to be made available electronically on the Department of Labor's website and on the sponsor's website.

Section 1103 directs the Secretary of the Treasury and the Secretary of Labor to simplify Form 5500 annual return reporting requirements for certain plans with fewer than 25 participants, and the filing requirements for one-participant plans.

Notices

Section 501 requires single-employer defined benefit pension plans to provide an annual funding notice, similar to the current rules for multiemployer plans, and eliminates the summary annual report requirement for single-employer defined benefit pension plans.

Section 507 requires a notice when participants are eligible to exercise their right to divest employer securities.

Section 508 requires quarterly benefits statements for participant-directed defined contribution plans, annual statements for other defined contribution plans, and statements every three years for defined benefit pension plans.

Section 506 requires notices to workers and retirees for plan terminations, and § 509 for blackout periods.

Pension funding

Section 101 § 102 replace the existing funding rules and establish new minimum funding standards for single-employer defined benefit pension plans.

Section 201 establishes new minimum funding rules for multiemployer defined benefit pension plans and extends interest rate rules for the funding standard account for multiemployer defined benefit plans that require the use of a rate based on long-term investment grade.

Section 405 allows small plans that are fully-funded to pay variable-rate premiums to PBCC and establishes special PBCC premiums for small plans.

The act also accelerates contribution requirements for at-risk plans; amends the interest rate calculation for lump sum distributions; limits benefit increases and accruals for under-funded plans; requires that shutdown benefits be funded through corporate assets; and promotes increased funding for retiree medical costs and long-term care costs, by allowing transfer of excess pension assets to fund the estimated retiree medical costs.

401(k) plans

Section 903 provides rules for an "eligible combined plan," allowing small employers (with up to 500 employees) to establish combined defined benefit and automatic enrollment 401 (k) plans using a single plan document and trust fund, beginning in 2010.

Section 611 creates a prohibited transaction exemption for advice provided by a "fiduciary adviser" under an "eligible investment advice arrangement." Fiduciary advisers of a plan are allowed to give investment advice to 401(k) participants or beneficiaries if requirements are met.

Miscellaneous

Section 701 establishes new rules for testing defined benefit plans, including cash balance and other hybrid plans, for age discrimination under the Internal Revenue Code, ERISA, and the Age Discrimination in Employment Act (ADEA).

Title XII of the act also includes miscellaneous provisions related to exempt organizations and charitable contributions, including public disclosure of Forms 990T by 501 (c)(3) organizations.

Finally, the act establishes a new independent audit requirement for certain defined contribution plans; creates a safe harbor to encourage employers to offer automatic enrollment in their defined contribution plans; allows direct rollovers from retirement plans to Roth IRAs; and requires defined contribution plans to permit employees to diversify out of investments in employer securities if the securities are publicly traded.


© 2006 Goldman Antonetti & Cordova, LLC