Retirement articles of interest

Maximum Dollar Limits | The Pension Protection Act of 2006

Maximum Dollar Limits

The Pension Protection Act of 2006

The major provisions of the Pension Protection Act of 2006 are as follows:

1. EGTRRA increases made permanent. The very valuable increased deferral limits  and the maximum contribution amounts implemented under the Economic Growth and Tax Relief and Reconciliation Act (EGTRRA) are made permanent, effective immediately.  (See our �Maximum Dollar Limits� chart for current limits).  The Roth 401(k) and 403(b) provisions were also made permanent, giving employees the flexibility to choose between paying their taxes now or in the future.
2. New Defined Benefit funding rules.  Beginning with 2008 plan years, the IRS will prescribe a single funding method, interest rate and mortality table to be used for funding Defined Benefit Plans adding new complexity to an already complex system.  A generous new maximum deduction limit is effective for 2006 and 2007 plan years, that may help some plans maximize their contributions.
3. Cash Balance Plans.  The act provides immediate and prospective relief from age discrimination claims for cash balance or other hybrid plans that comply with new benchmarks (that are identical to how we currently administer our cash balance plans).  A new three year cliff vesting must be used by new plans and beginning with the 2008 plan year for plans in existence on June 29, 2005.
4. PBGC Premiums.  The Flat-rate premium has increased from $19 to $30 per participant for 2006 plan years.  The Variable-rate premium will be calculated under new rules beginning with 2008 plan years, which is expected to increase greatly the premium for plans that are �underfunded.�
5. Investment Advice.  A prohibited transaction exemption effective January 1, 2007 was enacted for investment advice given to participants in self-directed plans.  There are certain notice requirements and advisor qualifications that must be met.  The Plan Fiduciary is still liable for the prudent selection and monitoring of advisors.
6. Automatic Enrollment.  State law is now preempted by Federal law to allow �automatic contribution arrangements.�  Certain notice requirements and default investment options must be provided.  Beginning with 2008 plan years, a new �Qualified Automatic Contribution Arrangement� Safe Harbor Plan is available.  These new plans will not be subject to ADP/ACP testing or Top Heavy rules.  Certain notice, minimum automatic deferral levels, employer contributions and two year cliff vesting are required similar to current Safe Harbor plans. 
7. Combined Plans (DB/DC Combinations) Deduction Limit.  Previous law limited the deduction for combined plans if the same employees participate in both plans to the greater of: 1) the amount needed to fund the DB plan, or 2) 25% of Compensation.  The new law effective for 2006 states that only contributions to the DC plan in excess of 6% of Compensation will count towards this long-standing combined limit.  Further beginning in 2008, if the single employer DB plan is insured by the PBGC, then that plan is not taken into account in applying the combined plan deduction limit.
8. Faster Vesting for Non Top-Heavy Defined Contribution Plans.  The 7 year graded and 5 year cliff vesting are no longer available for defined contribution plans, beginning with 2007 plan years.  All such plans must use either the 6 year graded or the 3 year cliff schedules.
9. Default Investment Arrangement now protected by 404(c).  If a participant fails to make investment choices, the fiduciary will receive 404(c) protection if the funds are placed in qualified �default investment arrangements� and proper notice is given.  It is no longer advisable to use Money Market funds for such purposes, since default investments must include a mix of asset classes consistent with Capital preservation and/or appreciation.  Also beginning in 2008, there will be 404(c) protection for fiduciaries during properly noticed blackout periods and any resulting mapping of investments. 
10. Non-Spouse Beneficiary Rollovers.  Beginning January 1, 2007, non-spouse beneficiaries of a decedent�s balance in a qualified plan may roll over inherited amounts, by means of a trustee to trustee transfer,  into an �inherited IRA� structured for that purpose.  This will greatly enhance the beneficiaries ability to stretch out the payments and taxation of pension death benefits.
11.  New Periodic Pension Benefit Statement.  Effective for plan years beginning on or after January 1, 2007, all Defined Contribution Plans will be required to issue a new Pension Benefit Statement, that is more like a comprehensive new notice.  This new required statement represents the most dramatic change to the disclosure requirements of ERISA since it was enacted way back in 1974.  The new Pension Benefit Statement is required each calendar quarter for plans that allow any participant directed investments and each calendar year for plans that are pooled without participant direction.  The Benefit Statement must include:
    1.  Based on the latest available information, the total accrued benefits, the value of each investment, and the impact of vesting on the value of the accounts.
    2. An explanation of any permitted disparity or any floor-offset arrangement that may apply to the plan.
    3. Limitations or restrictions on the right to direct investments.
    4. An explanation of the merits of asset diversification, with a reference to the DOL web site as a source for additional information concerning diversification.
Failure to timely issue these benefit statements will incur a stiff penalty of $110 per day per failure!
12. New Combined Defined Benefit and 401(k) Plan. Beginning in 2010, a new plan type will be available for Employers with 500 or fewer participants.  If the plan meets certain benefit, contribution, vesting and nondiscrimination requirements, these plans will be exempt from the ADP/ACP testing and the Top Heavy rules. 

� Copyright 2007. Raymond, Reeves & Stout, LLP Pension and Financial Services