Pension Protection Act of 2006: Sweeping Changes for Retirement Plans

Congress has passed (and the President is expected to sign) the most significant retirement plan legislation since the Tax Reform Act of 1986:  the Pension Protection Act of 2006.  Employers who sponsor all kinds of retirement plans-including 401(k) plans, 403(b) plans, profit-sharing plans, cash balance plans, traditional defined benefit pension plans, and ESOPs-should know how the new law affects them.

The following are some of the highlights of the Act:

• Significant changes to the laws regulating defined benefit pension plans including new funding requirements;
• Certain benefits provisions that were scheduled to sunset after 2010 have been made permanent including the higher contribution and deduction limits, catch-up contributions, and Roth 401(k)/403(b) provisions;
• New vesting requirements for employer nonelective contributions to defined contribution plans (including profit-sharing plans and 401(k) plans);
• Rules regulating and intended to encourage automatic enrollment in 401(k) plans;
• Required diversification of publicly traded employer stock held in participants' accounts (other than certain ESOPs);
• Provisions regarding investment advice to participants;
• A new approved design for cash balance and pension equity plans;
• In-service pension plan distributions to participants age 62 or older;
• New rules allowing beneficiaries other than a participant's spouse to take a rollover of benefits to an "inherited IRA" and permitting rollovers to Roth IRAs;
• New rules allowing small employers to adopt a new type of single defined benefit/401(k) plan;
• Changes in plan asset rules regarding benefit plan investors to limit the extent to which equity interests are consider plan assets and to exclude investments by governments and foreign plans; and
• Required quarterly benefit statements for most defined contribution plans with information regarding prudent investment practices.

The different provisions of the Act are subject to several effective dates.  Some provisions are effective retroactively, some are effective immediately upon enactment of the legislation, and others will not be effective until 2007 or 2008.  Generally, while plans do not have to be amended immediately to comply with the Act, they will have to comply in the interim.  Plan sponsors and administrators will need to determine which administrative and other actions must be implemented immediately and which actions (including plan amendments and changes in administrative procedures) will have to be completed at a later date.