What is the Pension Protection Act of 2006?
The Pension Protection Act of 2006 was signed into law on August 17, 2006. The law codifies sweeping reforms in the way that pension plans are dealt with by companies and also provides for aggressive reform of the IRS tax code.
The Pension Protection Act requires companies who have underfunded pension plans to pay higher premiums to the Pension Benefit Guaranty Corporation and those that terminate their pension plans to provide extra funding to the PBGC. It is primarily an Act to close loopholes and enforce obligations made by corporations to ensure the well being of individuals with pension plans.
The Pension Protection Act consists of over 900 pages of reform legislation. These are some of the highlights of the Act.
Provides statutory authority for employers to enroll workers in defined contribution plans automatically; formerly, the authority came from Department of Labor rule making
Expands disclosure that workers have about the performance of their pensions
Removes the conflict of interest fiduciary liability from giving self-interested investment advice for retirement accounts
Gives workers greater control over how their accounts are invested
Extends the 2001 tax act’s contribution limits for IRAs and 401(k)s.
Allows automatic contributions to be returned to employees without tax penalties, if employee opts out within 90 days
Established safe harbor investments, also known as Qualified Default Investment Alternatives, to protect employers from liability of losses suffered by automatically enrolled employees
What does the Pension Protection Act do?
A 401(k) is a type of retirement savings plan sponsored by an employer. It enables employees to save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.
The Pension Protection Act strengthens employee 401(k)s by providing a safe harbor provision for plans with a “qualified” automatic enrollment feature. Under the qualified automatic enrollment program, eligible employees automatically defer to the plan a certain stated percentage of compensation unless the employee affirmatively elects a different percentage or to forgo withholding altogether.
In addition, participants or beneficiaries in a 401(k) who have the right to direct their investments in a defined contribution plan must be provided benefit statements on a quarterly basis. For participants or beneficiaries who do not have the right to direct their investments, a benefit statement must be provided on a yearly basis.
The Pension Protection Act also aids in benefiting beneficiaries of a 401(k) that are non-spouses. Beneficiaries other than a spouse named in 401(k) may roll the plan funds they inherit directly to their own 401(k). Prior to the change, non-spouse beneficiaries had to receive the 401(k) funds in whatever manner the plan documents prescribed, usually as a one time payment which allowed the funds to be immediately taxable by the state and federal government which could put the beneficiary in a higher tax bracket. Non-spouse beneficiaries also can be included in those for whom hardship withdrawals qualify, giving families more resources in the event of a medical or other emergency.
The Pension Protection Act toughens the tax laws for charitable donations from qualified pension plans. Under the Pension Protection Act, taxpayers must keep records of all cash donations. Individuals must show a receipt from the charity, a canceled check, or credit card statement to prove their donation. No tax deduction will be allowed if the taxpayer cannot provide any supporting documentation. Taxpayers will not need to mail in the receipts with their tax return. Instead, taxpayers will need to keep receipts and other documentation with their copy of the return in the event of an IRS audit.
The new law also toughens the rules for non-cash donations. Donated items, such as cars, clothing, and household goods, must be in good condition. No tax deduction is allowed for items in less than good condition.
The Pension Protection Act allows taxpayers over 70.5 years old to donate money to charity directly from their IRA account. The distributions will be tax-free and avoid the penalties associated with early withdrawal of a qualified pension plan. Taxpayers are allowed to donate up to $100,000 per year from their IRA.
MILITARY & LAW ENFORCEMTN PERSONNEL
The Pension Protection Act eliminates the 10% early distribution tax that normally applies to most retirement distributions received before age 59½. The new law provides this relief to reservists called to active duty for at least 180 days or for an indefinite period.
The Pension Protection Act also gives an “eligible retired public safety officer” the ability to claim a tax exclusion of up to $3,000 for amounts deducted from their retirement benefits for qualified health insurance premiums.
What do companies need to do to comply with the Pension Protection Act?
SINGLE EMPLOYER PLANS
Under the Pension Protection Act, single-employer plans are required the amount of money in the pension funding account to be equal to 100% of the plan’s liabilities. Any unfunded liability will have to be amortized over seven years. Employers who have underfunded plans that are at risk of defaulting are be required to fund their plans according to special rules that can result in higher employer contributions to the plan. The purpose behind this is obvious. Due to the default of several pension plans prior to the act, most famously Enron, Congress felt that in order for employees to be guaranteed their pension plans it would require employers to maintain the exact amount to cover all its liabilities in the case of employer bankruptcy.
Multi-employer plans are collectively bargained plans maintained by several employers, usually within the same industry, and a labor union.
The plan is implemented, once again, to ensure against abuses that came about in the 2005 pension crises. In a multi employer pension plan the sponsor of the plan has 90 days after the start of the year to certify the funding status of the plan for that year and to project its funding
status for the following six years. If the plan is underfunded, it has 30 days after the actuarial certification to notify participants and approximately eight months to develop a funding schedule to present to the parties of the plan’s collective bargaining agreement.
Other provisions of the Pension Protection Act
In addition; to the laws regulating employer contribution and oversight, 401(k)s, and charitable contributions, the Pension Protection Act also allows for employees to request investment advice on what employer pension plans are most suitable to their needs.
The Pension Protection Act also permits an employee to request that their federal and state tax refunds be distributed directly into their employee pension plan. This accomplishes the ultimate goal of removing the tax refund from any immediately taxable income for the following year while streamlining the contribution process.
When the law was enacted an employee was allowed to contribute $5,000, avoiding immediate taxation, into their employee pension plan on a yearly basis. As of 2010 that provision sunset and employees are currently allowed to contribute $2,000 to their employee pension plan yearly, while avoiding tax consequences. If an employee contributing to the plan is 50 years or older he/she may add another $1,000 to their plan.
Seeking advice on employee pension plans
The provisions of the Pension Protection Act are very complex and these are just the basic overviews of who and what is affected by the implementation of the Act. The Pension Protection Act has significantly altered the tax code and many provisions have already expired. If you or someone you know has an employee pension plan it is beneficial to seek the advice, that you are obligated by the Act to receive. In addition, a tax lawyer will be beneficial in helping you determine the proper way to reduce your tax liabilities while providing for the present and future.
Under the George W. Bush administration, a piece of legislation was passed into effect for the purpose of providing for the safety of pensions and jobs and as such identified as the Pension Protection Act. This package of legislation for a Pension Protection Plan received Congressional and Presidential approval in 2006.
Placing the Pension Protection Act into effect under U.S. law allows for pensions and jobs to be safeguarded specifically through the device of the Pension Benefit Guaranty Corporation. The Pension Protection Act is largely an enforcement measure created to be directed against organizations which are not found to be living up to their promises and obligations to their labor force in regard to pensions and jobs.
The Pension Protection Act will accordingly impose new financial obligations on business groups when it can be shown that their packages for pensions and jobs were not funded to the level required for the financial well being of their employees. These obligations will be fulfilled through making payments to the aforementioned Pension Benefit Guaranty Corporation. The Pension Protection Act was conceived and passed, in part, in recognition of harmful behavior among companies which had taken advantage of certain exceptions in laws on pensions and jobs.
The Pension Protection Act is also geared toward carrying out its stated purpose by allowing pension plans to be prepared for periods of financial austerity by being eligible for increased funding during economic high points. The Pensions and Jobs law also removed certain rules against the occurrence of conflict of interest in dispensing investment advice.