LEGISLATIVE UPDATE: The Pension Protection Act
of 2006
The 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”).
We
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).
Benefit
Statements
All 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 participant’s 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.
Comment:
Sponsors 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.
Participant
Notices
The 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 59½. For
participants with vested benefits in excess of $5,000, a retirement plan cannot
make a current distribution of benefits without the participant’s 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
participant’s right to defer receipt of the distribution to the plan’s
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 distributions begin.
Comment:
The Special Tax Notice and participant benefit election forms
need to be revised for distributions after December 31, 2006.
Accelerated
Vesting
All
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.
Annual Reports
Additional
information must be included in plan annual reports including, in the case of
defined benefit pension plans, additional information on the plan’s 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.
Investment
Advice
In an 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 requirements.
Comment:
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.
Joint and
Survivor Annuity Option
Defined
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.
Phased
Retirement
Under
current law, a defined benefit or “money purchase pension plan” is
prohibited from providing distributions to participants before they attain the
plan’s 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.
Automatic
Section 401(k) Enrollment
Starting 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.
Comment:
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.”
Edition Date: September 12, 2006
Andrew S. Williams
has practiced in the
employee benefits and ERISA arena since ERISA was passed in 1974. He has
been recognized by his peers through a survey conducted by Leading Lawyers
Network as among the top 5 percent of employee benefit lawyers practicing in
Illinois
. He maintains a website at www.benefitslawgroupofchicago.com with
additional updates, commentary and analysis of benefits and employment topics.
The above material is intended for general information purposes and should not
be relied on or construed as professional advice.
Andrew
S. Williams
Aronberg Goldgehn Davis & Garmisa
330 North Wabash Avenue, Suite 3000
Chicago
,
Illinois
60611
(312) 755-3145
awilliams@agdglaw.com
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