Hot! Brand New Retirement Plan Reforms

On August 17, 2006, President Bush signed the Pension Protection Act of 2006 into law.  The new law is the most extensive revision of pension law in 30 years.  The Act has a multitude of provisions affecting individual savings and retirement accounts, defined benefit plans, defined contribution plans, as well as charitable contributions.

The new law is aimed at stabilizing corporate pension plans.  Over 700 pension plans have collapsed in the past five years.  The federal agency that insures these plans, the Pension Benefit Guaranty Corporation, is currently running at a $23 billion deficit due to the collapse of these plans.  According to the Labor Department, private pension plans are currently underfunded at an estimated $300 to $450 billion.  Fears of a government bailout of these plans prompted the Act.

Employers should learn about the new provisions under the Act, not only to ensure that they are in compliance with the Act, but to capitalize on options that are now available.  Following are some of the provisions in the 900-plus page Act.

Single-Employer Defined Benefit Laws
Among the provisions in the Act concerning single-employer defined benefit plans are the following:

• Requirements for employers to make contributions to pension plans over the next seven years in order to meet a 100% funding requirement versus the current requirement of 90%,
• Prohibitions on employers and union leaders from increasing benefits if a plan is less than 80% funded, unless the benefits are paid for immediately,
• Permanent establishment of an employer premium paid to PBGC if a plan sponsor terminates an employee pension plan upon bankruptcy,
• Increases in disclosure rules to participants and in 5500 filings.

Multi-Employer Pension System Laws
Among the provisions in the Act concerning multi-employer pension plans are the following:

• Prohibitions on benefit increases if the increase will cause the plan to be less than 65% funded,
• Requirements for plan trustees to improve the health of the plan by one-third in the next ten years if a plan is less than 80% funded or will hit a funding deficiency in the next seven years,
• Increases in disclosure rules to participants and in 5500 filings.

Hybrid Pension Plan Laws
Among the provisions in the Act concerning Hybrid Pension Plans are the following:

• Provisions ensuring that cash balance pension plans remain a viable option for employees and employers,
• Provisions establishing an age discrimination standard for all defined benefit plans to clarify current law with respect to age discrimination requirements under ERISA prospectively.

Defined Contribution Laws
Among the provisions in the Act concerning defined contribution plans are the following:

• Safe harbor provisions for employers who automatically enroll employees into 401(k) plans. (Automatic enrollment can increase participation among employees in the lower-pay ranges which could assist a plan in meeting nondiscrimination rules under ERISA.)
• Details regarding automatic enrollment provisions need to be filled in by the Department of Labor.  These final regulations are due out six months after the law’s enactment.
• The new law also requires the Treasury to issue rules allowing 401(k) plan hardship withdrawals with respect to any person listed as a beneficiary under the plan.  These rules are to be consistent with those currently allowing spouses of plan participants to make hardship withdrawals.
• Provisions allowing plan providers to offer personalized investment advice to accountholders.

If you would like to discuss the subject matter of this article or any other employment-related issue, please feel free to contact attorney Jeffrey A. Risch at 630.377.1554 or email him at jerisch@stch.w-p.com.