Pension Protection Act Update

We are continuing to focus on the changes contained in the Pension Protection Act of 2006 (PPA). Last month we outlined the benefits and concerns of 401(k) Automatic Enrollment. This month we are highlighting additional changes resulting from PPA.

Plan Amendment

Retirement plans will be amended for these changes on or before the last day of the first plan year beginning on or after January 1, 2009; i.e., calendar-year plans must be amended by December 31, 2009. Any plan that is terminated effective January 1, 2007 and later must be amended for PPA.

Quarterly Benefit Statement Requirements

Effective in 2007, participants in defined contribution plans who have the right to direct their investments must be provided with quarterly benefit statements. Defined contribution participants who cannot direct investments must be provided with benefit statements at least annually.

Some of the statement requirements are:

ACCRUED BENEFIT INFORMATION

The benefit statement must include the total benefits accrued and the value of each investment. 

VESTING INFORMATION

Vesting information may be provided in each quarterly benefit statement or at minimum on an annual basis.

INVESTMENT PRINCIPLES AND REFERENCE TO DOL WEBSITE

A participant must be provided an explanation of the importance of a well-balanced and diversified investment portfolio as well as a notice directing participants to the DOL's website for additional information on investing.

EXPLANATION OF PERMITTED DISPARITY AND INVESTMENT RESTRICTIONS UNDER THE PLAN

A benefit statement must be provided that includes an explanation of any permitted disparity or any floor-offset arrangement that may be applied in determining any accrued benefits. In addition, an explanation of any limitations or restrictions on any participant or beneficiary under the plan to direct an investment is required.

Forced Distributions

The new provision doubles the length of the notice and consent period for mandatory cash-out distributions and eligible rollover distributions to 30-180 days (from 30-90 days).

Qualified Reservist Distribution

This is an optional change. Exemption from 10% early-distribution penalty for reservists called to duty for at least 179 days (for periods of active duty after September 11, 2001, and before December 31, 2007). The reservist can repay an elective deferral/IRA dsitribution within two years from the later of August 17, 2006 or their return from active duty.

Rollovers by Non-spouse Beneficiaries

This is an optional change. Benefits received by a nonspouse beneficiary from a qualified plan may now be directly rolled over to an IRA, which is treated as an inherited IRA.

Expanded Hardship Withdrawals

This is an optional change. Beginning August 17, 2006, hardship withdrawals for qualifying hardship reasons may be made by the participant's designated beneficiary (even if not a spouse or dependent). For this purpose, the primary beneficiary under the plan is an individual who is named as a beneficiary under the plan and has an unconditional right to all or a portion of the participant's account balance under the plan upon the death of the participant. A hardship can not be taken by a contingent beneficiary.

Default Investments

This is an optional change. Default investments are required for plans with Automatic Enrollment. When a participant does not provide investment information upon enrollment, PPA provides ERISA section 404(c) protection and expands the use of lifecycle and certain balanced fund options in workplace plans. The DOL provides "safe harbor" to plan fiduciaries who provide certain "default" investment options. The default investment must offer a "broad range of investment alternatives" and must describe the investment objective.

The default investment will include a mix of asset classes consistent with capital preservation or long-term capital appreciation or a blend of both. Participants must be able to direct investments out of the default investment no less frquently than quarterly. The communication to employees must be provided 30 days before the first investment. It must be easy to understand and must explain how assets will be invested in the absence of an election. The notice must communicate that the participant has the right to determine allocation of assets in their account and not rely on the default investment option.

Increased Portability to Roth IRAs

Effective January 1, 2008, Roth rollover eligible amounts in a 401(k), 403(b), or governmental 457(b) plan will be eligible to be rolled over directly to a Roth IRA, subject to the current Roth IRA conversion rules. The participant will be required to pay income taxes on the pre-tax rollover/conversion amount, but not the IRS 10% premature distribution penalty tax. Note that rollovers made between 2008 and 2010 (when the adjusted gross income cap for conversions to Roth IRAs is lifted) will only be permissible if the participant does not exceed the adjusted gross income limits. In 2010, no Adjusted Gross Income cap will apply.