(taken from the
Nov/Dec 2006 issue of On Balance magazine)
Pay attention to pension protection
By Karla Machmeier, J.D.
The Pension Protection Act of 2006 was
signed into law on Aug. 17. At a whopping 900-plus pages,
the Act makes significant changes to the Code and ERISA.
Although the Act has been widely publicized in its efforts
to reform pension plans, much of it impacts defined
contribution plans such as 401(k)s, 403(b)s and 457 plans,
as well as IRAs. Below is a summary of some of the key
provisions impacting defined contribution plans and IRAs.
EGTRRA permanency. The 2006 law made permanent many of
the provisions of EGTRRA 2001 which were scheduled to expire
in 2010. These include increased IRA and 401(k) contribution
and deduction limits, age 50 and over catch-up
contributions, Roth-type contributions to 401(k)s and
403(b)s, and more favorable rollover and vesting rules.
Investment advice. The Act provides fiduciary relief to
plan fiduciaries. A prohibited transaction exemption is
included for the provision of investment advice to plan
participants. The exemption applies if the advice
arrangement between the plan fiduciary and the investment
advisor meets numerous requirements. It applies to flat fee
advice arrangements and to advice using a computer model.
Plan fiduciaries continue to have the fiduciary duty to
prudently select and monitor the investment options as well
as the investment advisor. Also, the fiduciary relief
available under the exemption only applies to advice
provided to participants, not to plan-level investment
advice provided to the fiduciary by an investment advisor or
manage r.
Automatic enrollment 401(k) safe harbor.
Under current law,
employers can design 401(k) plans to include automatic
enrollment provisions (also called negative elections).
These provisions enable them to withhold a certain amount
from an employee’s pay as a salary deferral unless the
employee affirmatively elects not to contribute to the plan.
The employee must be notified in advance.
Plans containing automatic enrollment
provisions are still subject to the ADP/ACP test and
top-heavy rules. Effective for plan years beginning on or
after Jan. 1, 2008, if this plan provision meets the new law
requirements as a "qualified automatic contribution
arrangement," the plan will satisfy the ADP/ACP test and the
top-heavy rules. The plan must contain provisions regarding
the minimum and maximum deferral amounts allowed, employee
notice requirements, and mandatory employer contributions
and vesting.
Default investment safe harbor.
The Act requires the
Department of Labor (DOL) to make a change to ERISA Section
404(c) that will provide plan fiduciaries protection for
certain types of default investments. Currently, ERISA
Section 404(c) provides relief to plan fiduciaries of
participant-directed plans if participants direct their
investments. It also provides relief if the plan satisfies
certain design and disclosure requirements. However, if
participants do not make investment selections, plan
fiduciaries remain responsible for the investment of those
participant accounts. The procedure often used is to invest
those accounts in a default investment. Usually, the default
investment has the lowest volatility of investment options
and is designed for principal preservation. That, however,
may not be the most prudent investment choice for a
participant who has decades until retirement. It is
anticipated that the new Section 404(c) default investment
requirements will allow for the use of asset allocation
funds and models that take into account risk tolerance and
estimated years to retirement.
Electronic display of
Form 5500s.
For plan years beginning
in 2008, the Form 5500 must be provided electronically so
that some information can be displayed by the DOL on the
Internet. Plan sponsors
who maintain intranet sites must also display the
information on the sponsor’s intranet site.
Benefit statement
requirements.
Currently, ERISA generally requires that defined benefit and
defined contribution plans provide participants benefit
statements upon request, but not more than once per year. In
the case of participant-directed plans intending to qualify
for fiduciary relief under Section 404(c), benefit
statements must be provided automatically and, generally, at
least quarterly. Beginning for 2007 plan years,
participant-directed plans must provide participants and
beneficiaries benefit statements at least quarterly. The
statement must contain information regarding the importance
of diversifying plan investments and a message that refers
the participant to a DOL Web site with information on
investing. Employer-directed defined contribution plans must
provide participants and beneficiaries with benefit
statements annually.
I ndividual
Retirement Accounts (IRAs).
The Act makes a
number of changes impacting IRAs.
-
Indexing traditional and Roth IRA
contribution limits. Beginning in 2007, the income limits
for traditional and Roth IRA contributions will be indexed
for inflation (rounded to the nearest $1,000).
-
Direct deposit of
tax refunds to IRAs.
Beginning with the 2007 tax
year, taxpayers may elect to direct deposit all or a
portion of their tax refunds to an IRA of the taxpayer or
spouse of the taxpayer in the case of a joint return.
Previously, taxpayers only had the ability to elect direct
deposit of their refunds to checking or savings accounts.
This provision does not modify the rules relating to the
timing and deductibility of IRA contributions or any other
rules relating to IRAs.
Direct rollover to
Roth IRAs. For distributions made in plan years beginning
on or after Jan. 1, 2008, participants in qualified
retirement plans, 403(b) plans and governmental 457 plans
will be able to roll over distributions directly from
those plans into Roth IRAs, subject to current law.
Tax-free
distributions from IRAs for charitable purposes. For the
2006 and 2007 tax years only, IRA owners who are age 70½
and older can make distributions from traditional IRAs of
up to $100,000 to tax-exempt charities.
Just as ERISA changed the retirement
landscape for millions of workers more than 30 years ago, so
too does the Pension Protection Act change the landscape of
existing laws affecting the private retirement system.
Karla Maschmeier, J.D. is an attorney
with O’Neil, Cannon, Hollman, DeJong SC in Milwaukee. She
can be reached at (414) 276-5000 or by e-mail at
karla.maschmeier@wilaw.com.
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