On Thursday, August 3, the Senate passed significant pension reform legislation by a wide margin (93 to 5). The bill enacted by the Senate is identical to the one passed by the House of Representatives last week. The President is expected to sign the bill into law.
The legislation, called the “Pension Protection Act of 2006", makes significant changes to practically every retirement plan in which approximately 44 million people are participants. The 900 page bill affects all types of retirement plans including defined benefit plans, profit sharing and 401(k) plans, cash balance plans, and employee stock ownership plans (ESOPs). Most of the changes are effective in 2007 and 2008 but some are retroactive or delayed.
The Act includes the following provisions:
Defined Contribution Plans
- Encourages automatic enrollment in 401(k) plans
- Permits employees to diversify their company stock accounts among other investments
- Removes the scheduled expiration of increased contribution limits, Roth contributions, and the saver’s credit
- Requires faster vesting of employer profit sharing contributions
- Allows non-spouse beneficiaries to rollover their distributions to IRAs
- Adds new requirements for notice to participants
- Changes the rules for 401(k) providers to provide investment advice to participants
- Resolves major controversies surrounding cash balance plans on a prospective basis
Defined Benefit Pension Plans
- Requires faster funding of pension obligations
- Allows larger tax deductions based on funded status of the plan
- Changes the method of calculating the lump sum equivalent of annuity benefits
- Requires additional survivor option
- Changes the basis of calculating PBGC premiums
- Allows participants age 62 and older to take in-service distributions
- Permits certain small employers to have defined benefit pension plans with 401(k) provisions
I will be providing more detailed analysis and comments on the Act’s provisions in the future.