Pension Protection: the Pension Protection Act of 2006 makes extensive changes to existing law.

• Author: Clark, Mark W.
• Position: NEWLEGISLATION

President Bush signed the Pension Protection Act of 2006 on Aug. 17, 2006, providing extensive changes to existing law and new rules affecting qualified retirement plans, plan sponsors and plan participants. The PPA makes comprehensive amendments to the Internal Revenue Code and to the Employee Retirement Income Security Act of 1974, as amended.

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The following is a summary of the major provisions of the PPA that affect retirement plans. Note, too, that the PPA contains other important provisions that affect corporate-owned life insurance, health and welfare plans, charitable organizations and Sec. 529 plans. (For more information on the PPA, see pages 29 and 35.)

EGTRRA PERMANENCY

The Economic Growth and Tax Relief Reconciliation Act of 2001 made many favorable changes to the IRC, such as catch-up contributions for workers age 50 and over, increased contribution limits and expanded rollover options. The provisions of EGTRRA were temporary and were set to sunset after Dec. 31, 2010. The PPA makes EGTRRA provisions relating to retirement plans permanent, which means that plans will not need to go back to the pre-EGTRRA plan rules.

SEC. 401(K) PLANS

Automatic Enrollment

Effective for plan years beginning in 2008, the PPA permits employers to "automatically" enroll employees into their 401(k) plans without first obtaining a written election to contribute from the employees. Instead, an employee must opt out of contributing to the plan. While automatic enrollments were available before the PPA, this feature has been expanded and added to ERISA and comes with federal pre-emption of state law, thereby eliminating concerns over California labor law restrictions.

If the automatic enrollment feature of a plan is "qualified" it will be treated as satisfying the annual anti-discrimination testing (ADP/ACP tests), and will be exempt from the top-heavy requirements. To be a qualified automatic enrollment feature, the plan must provide for either an employer matching contribution or a profit sharing contribution. Unlike the existing Sec. 401(k) safe harbor, these contributions must be fully vested within two years, rather than immediately.

To satisfy the automatic enrollment safe harbor, elective contributions must fall within a range from a minimum contribution of 3 percent up to 10 percent of compensation depending on, and increasing with, the employee's length of participation. Matching contributions or profit sharing...