The Pension Protection Act of 2006 makes significant changes affecting 401(k) plans – for the most part favorable to plan sponsors and participants.

Here is a summary of those changes effective in 2007:

  • Increased 401(k) Limits. For 2007, the annual limit for 401(k) contribution increases to $15,500. The catch-up for age 50 and older remains at $5,000.
  • Default Investments. Beginning after January 1, 2007, the Act permits the use of default investment choices beyond money market and stable value funds that plan sponsors can use for employees who do not make investment elections. The Department of Labor issued proposed regulations late last year which will be finalized soon.
  • Investment Advice. Beginning after January 1, 2007 the Act encourages plan sponsors to make investment advice available to 401(k participants. There will be much to comment upon later this year.
  • Faster Vesting of Employer Non-Elective Contributions. Effective in 2007, employer non-elective contributions, i.e., profit sharing, must vest according to rules applicable to matching contributions: no less favorable than either 3-year cliff vesting (100% vested after 3 years of service), or 6-year graded vesting (20% after two years, 20% a year thereafter, 100% after six or more years).
  • More Frequent Benefit Statements. Effective in 2007, the new law requires that Plan Administrators must provide a benefit statement: 1) at least once a quarter to participants in plans in which they can self-direct their accounts, 2) at least once a year to participants in plans in which they cannot self-direct the investment of their accounts, and 3)upon request to any beneficiary.
  • Diversification of Investments in Employer Stock.  Effective in 2007, participants must be given the right to diversify their investments in employer stock. Exceptions to the new law are provided for certain privately-held companies and Employee Stock Ownership Plans.

Finally, if you didn’t add a Roth 401(k) provision to your 401(k) plan in 2006, consider doing so in 2007 to allow participants to diversify their future tax burden.