Pension Protection Act of 2006

The federal Pension Protection Act of 2006 (PPA) was signed into law in August of 2006. A major goal of the PPA is to reform pension law and ensure that employee pension plans are fully funded and able to pay pensions to employees as promised.

The PPA also made it easier for employers to enroll their employees in their 401(k) plans and increased both the individual retirement account (IRA) contribution limits and salary deferral contribution limits for 401(k) plans.

Before the PPA became law, there were loopholes that allowed the companies that paid into the Pension Benefit Guaranty Corporation (PBGC) to cut their funding of their own pension plans or skip payments. Employers did this in order to save money. Other employers terminated their plans altogether.

If this happened, the employees of the company would be forced to turn to the PBGC, creating a greater financial obligation for that agency. To close the loopholes that made it possible for companies to skip payments to their pension plans, the PPA now requires those guilty of underfunding to pay higher premiums to the PBGC.

The PBGC is a federal corporation that was established under the Employee Retirement Income Security Act of 1974. Its main function is to guarantee the payment of the basic pension benefits earned by 44 million American workers and retirees who participate in more than 29,000 private-sector defined benefit pension plans. The agency is not funded by general tax revenues. Rather, its operations are financed mostly by insurance premiums paid by companies that sponsor pension plans. It also earns revenue for its operation through returns on investments.

The PBGC funds eligible, private-sector, defined pension plans so that workers continue to receive pension payments even if the employer is not able to pay the promised pension. So, the PBGC is a sort of insurance company for unpaid pension payments up to a certain limit.

To Which Retirement Plans Does the PPA Apply?

The PPA affects mostly defined contribution pension plans and defined benefit plans. However, the act also affects individual retirement accounts. In addition, the Pension Protection Act also contains various provisions that affect only certain sectors of the economy. For example, this includes state and local governments, the airline industry and religious institutions such as churches.

What Are Some Major Points of the PPA?

Basically, the PPA requires employers to take extra steps to protect funding for employee pension plans. Certain provisions of the PPA require companies whose pension plans are underfunded to pay more to the PBGC. The PPA also seeks to ensure that employers keep their 401(k) plans funded. Some of the important provisions of the PPA are:

• Companies with underfunded pension plans must pay additional premiums to the PBGC;
• Companies that terminate pensions must provide additional funding for a newly-created pension insurance system;
• The PPA contains provisions designed to make sure that employers closely monitor pension plans;
• The PPA closes some loopholes that had allowed under-funded pension plans to miss pension payments;
• The PPA raises the cap on the amount that employers may invest into pension plans. The goal of this is to help prevent pensions from “running dry” in times of economic difficulty; and
• It prevents companies with pension plans that are inadequately funded from promising extra benefits without first paying for the promises up front.

In addition, the PPA requires all employees to be enrolled in their employer’s 401(k) plan when one is offered to them. The goal of this automatic enrollment provision is to help those who may not be familiar with the possible options for retirement savings to build their retirement savings.

In addition, the change encouraged employers to offer training to their employees on how to save, invest and prepare for retirement. This move was partly motivated by research on the subject of what is known as “behavioral finance.” Behavioral finance research has found that automatic enrollment of employees in 401(k) plans, in addition to education about saving and investing for retirement, can lead employees to pay more attention to their financial planning.

The PPA expands the disclosures that workers have about the performance of their pensions.

The PPA contains many provisions affecting pensions and retirement savings accounts. Some are very technical and not of great relevance to the average worker who is saving for retirement. However, some of the other more relevant provisions are as follows:

• It gives workers more control over how their retirement savings accounts are invested;
• It extends the 2001 contribution limits for IRAs and 401(k)s;
• It allows automatic contributions to be returned to employees without tax penalties, if an employee opts out of retirement account withholdings within 90 days of enrollment;
• It establishes safe harbor investments, also known as Qualified Default Investment
• Alternatives, to protect employers from liability for losses suffered by automatically enrolled employees.

The PPA contains several provisions regarding taxation. One tax benefit allowed under the PPA is for qualified retired “Public Safety Officers.” They may exclude from their income the cost of their health insurance. This exclusion is shown on the tax return by subtracting the health insurance exclusion from the figure shown on the Internal Revenue Service (IRS) Form 1099-R, and placing the smaller figure on the pension income line on the IRS Form 1040. The text “PSO” must be written on the dotted line to the left of the figure on the Form 1040. Public safety officers comprise police, firefighters, emergency medical technicians, and many types of federal and state employees who deal with criminals and prison inmates.

The PPA also gives the Secretary of Treasury the authority to provide more exceptions to the 10% penalty on withdrawals from a retirement account made before the account owner reaches the legal retirement age. In particular, some penalty exceptions were very narrowly defined to cover only IRA accounts, and they excluded 401(k) and other plans. The PPA gives the Secretary of the Treasure the authority to include more kinds of retirement plans in the exceptions to the penalty provision.

The PPA provides a new way for an IRA to be bequeathed to a beneficiary who is not a surviving spouse. Bequeathing an IRA account to an heir in this way can allow better control over when withdrawals can be made and taxes paid on inherited IRA funds. An IRA account can only be bequeathed to an heir one time, and it is not directly transferred into a beneficiary’s account. Instead, a special IRA account with a special heading required by law is set up to accommodate the transfer.

Should I Hire a Lawyer for Help with PPA Issues?

The provisions of the PPA are very broad , intricate, and technical. Understanding them can be challenging for the person who is not a professional. What is outlined above is a very basic overview of the PPA.

If you are an employer, it may be beneficial to hire a workers’ compensation lawyer to ensure you comply with the PPA requirements. If you have violated the PPA, a lawyer can help you strategize and fix any mistakes made in a cost-effective manner.

If you are an employee, a lawyer can help you with any disputes or questions about your particular pension plan, IRA or 401(k) plan. Hiring a lawyer would particularly be helpful if your employer has an underfunded plan and has failed to comply with the PPA in the past.