Eaton Peabody

An Overview of the Employee Benefit Provisions of the

Pension Protection Act of 2006

This Client Alert is to inform you of several key employee benefit provisions contained in the Pension Protection Act of 2006, which has been approved by Congress and which the President is expected to sign in the near future.

I. Defined Benefit Plans

In an effort to strengthen defined benefit plans, the Act makes several major changes to the rules applicable to such plans, including the following:

• Beginning in 2008, the new law requires most defined benefit plans to become fully funded over a seven year period. Prior law only required 90% funding. Certain “at-risk” plans require even stricter funding requirements.
  
• Beginning in 2008, plans that are below 80% funded are prohibited from using credit balances for funding or from making promises to provide any new or enhanced benefits.
• Beginning in 2008, plans that are less than 60% funded will be restricted from offering any lump sum payments and benefit accruals will be frozen.
• Effective upon enactment, payouts under nonqualified deferred compensation plans will be restricted in the case of severely underfunded plans.
• Effective upon enactment, the new law provides for a higher limit on the amount of employer contributions that are deductible.
• Beginning in 2007, in-service distributions from defined benefit plans are allowed once the participant reaches age 62.
• The new law requires defined benefit plans to educate participants about their rights and responsibilities, including investment education and the tax consequences of various payout options.
• Beginning in 2007, the Act requires defined benefit plans that must offer a qualified joint and survivor annuity to offer as an option a survivor benefit that provides at least a 75% survivor benefit.

II. Defined Contribution Plans

The Act permanently extends certain benefits enacted in 2001 and adds some new rules which include the following:

• The Act makes it easier for employers to provide for automatic enrollment in their 401(k) plans beginning in 2007 and requires employees to affirmatively opt out in order not to participate
• Effective in 2007, the Act allows providers to offer personalized investment advice to accountholders
• For tax years beginning in 2007, taxpayers will be able to direct the IRS to deposit tax refunds into an IRA
• Certain individuals called to active duty can make penalty-free early distributions from their 401(k)’s, IRA’s and similar arrangements
• Beginning in 2007, a nonspouse beneficiary may roll over his/her interest in a decedent’s qualified plan into an IRA without being taxed except as normal distributions are taken
• Beginning in 2008, taxpayers can do direct rollovers from a qualified retirement plan directly to a Roth IRA

III. Permanent EGTRRA Retirement Provisions

Upon enactment of the Act, the following EGTRRA provisions will be made permanent, rather than sunsetting after 2010:

• Permanent higher dollar amounts for IRA contributions
• Permanent higher dollar limits on defined contribution plans and elective deferrals
• Permanent increases in the annual benefit limit under a defined benefit plan
• Permanent catch-up contributions for older workers
• Permanent faster vesting of employer matching contributions
• Permanent higher deductible amounts for employer contributions to employee retirement plans
• Permanent Roth 401(k)’s and 403(b) plans
• Permanent deemed IRA’s set up under an employer plan

IV. Cash Balance Plans

The Act resolves three of the major controversies surrounding cash balance and other hybrid plan designs retroactive to June 29, 2005:

• These plans are protected against challenges under age discrimination rule found in the Internal Revenue Code, ERISA, and the ADEA, so long as their vesting schedules and interest crediting rates meet specified standards.
• The Act prohibits “wearaway” of previously accrued benefits following the conversion of a traditional defined benefit plan into a hybrid plan.

• When a participant in a hybrid plan elects a lump sum distribution, the plan may distribute just the participant’s hypothetical account balance.

If you would like further information regarding the Act, or if you would like guidance regarding the impact of the Act on your employee benefit plan, please contact Christine Worthen. a shareholder in Eaton Peabody's Tax Practice Group.

This paper is provided as general information, and is not a substitute for legal or other professional advice.