Pension Protection Act makes extensive changes to existing law.

• Author: Clark, Mark W.

President Bush signed the Pension Protection Act (PPA) of 2006 on Aug. 17, 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. Not only retirement plans, but corporate-owned life insurance, health and welfare plans, charitable organizations and Sec. 529 plans are also affected.

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EGTRRA Permanency

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made many favorable changes to the IRC, such as catch-up contributions for workers age 50 and over, increased contribution limits and expanded rollovers. The PPA makes EGTRRA provisions relating to retirement plans permanent.

Sec. 401(k) Plans

Automatic Enrollment

Effective for plan years beginning in 2008, the PPA permits expanded options for employers to "automatically" enroll employees into their 401(k) plans without first obtaining a written election to contribute from the employees. The automatic enrollment feature has been added to ERISA and federally preempts state law.

If the automatic enrollment feature of a plan is "qualified" it will be treated as satisfying the annual anti-discrimination testing (ADP/ACP tests). Qualified automatic enrollment plans 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 contributions must also satisfy certain percentages, and notice requirements apply as well.

A plan with an automatic enrollment arrangement that is not qualified will be allowed to make ADP/ACP refunds up to six months after the close of the plan year (rather than 2.5 months under prior law), without a 10 percent excise tax on the employer.

DB(k) Plans

Subject to certain conditions, beginning in 2010, an "eligible combined plan" (no more than 500 employees; subject to single Form 5500) can contain both a 401(k) component and a defined benefit component. These plans must provide a 4...