Pension Protection Act of 2006

The Pension Protection Act of 2006, which the President is expected to sign, has much to keep administrators of retirement plans and their advisors busy.  The Act:

• Makes permanent the retirement plan provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001.

• Shortens the maximum vesting period for defined contribution plans from (1) either full vesting after 5 years of service or graded vesting over 7 years of service to (2) either full vesting after 3 years of service or graded vesting over 6 years of service (generally applies to contributions for plan years beginning after 2006).

• Requires quarterly benefit statements for plans that allow participants to self-direct investments, and annual benefit statements for other defined contributions plans, and requires these statements to include, among other items, information about any restrictions on participants self-directing investments and an explanation of the importance of diversifying investments (generally applies to plan years beginning after 2006).

• Adds a safe harbor for the default investment fund where a participant fails to self-direct investments in a plan that allows self-direction (applies to plan years beginning after 2006).

• Adds new rules for blackout periods (periods during with a participant’s normal right to self-direct investments is suspended) and for changing the investment options in plans that allow participants to self-direct investments (generally applies to plan years beginning after 2007).

• Allows (with significant limitations) automatic enrollment in 401(k) plans without violating state wage withholding laws (effective on the date of enactment of the Act).

• Allows safe harbor automatic enrollment provisions in 401(k) plans (applies to plan years beginning after 2007).

• Allows participants to receive a hardship distribution to satisfy the needs of a beneficiary who is not the participant’s spouse or dependent (to be effective as provided in Treasury regulations).

• Allows direct rollovers from retirement plans to Roth IRAs (applies to distributions after 2007).

• Allows a retirement plan to make a tax-free direct rollover to an IRA for a non-spouse designated beneficiary (applies to distributions after 2006).

• Allows pension plans to pay benefits to working employees who have attained age 62 but not the plan’s normal retirement age (applies to distributions in plan years beginning after 2006).

• Adds new requirements for plans that offer spousal joint and survivor annuities (generally applies to plan years beginning after 2007).

• Expands the 90-30 day window to a 180-30 day window for providing (1) notice of the right to waive the qualified joint and survivor annuity, (2) notice of the right to defer receipt of benefits, and (3) the Special Tax Notice (applies to years beginning after 2006).

• Requires that a notice of the right to defer receipt of benefits until the later of age 62 or the plan’s normal retirement age describe the consequences of failing to defer receipt (applies to years beginning after 2006).

• Changes the rules for funding defined benefit plans (generally effective for plan years beginning after 2007).

• Changes the interest rate for valuing lump sum benefit payments by defined benefit plans (applies to plan years beginning after 2007).

• Adds new age discrimination rules for defined benefit plans, including cash balance plans (generally applies to periods beginning after June 28, 2005).

• Taxes death benefits in excess of premiums under employer-owned life insurance, with a limited exception where the employee is given written notice and gives written consent before the policy is issued, and requires information reporting by the policyholder regarding such insurance (applies to policies issued or materially changed after the date of enactment of the Act).

• Makes many more changes.

For more information about the Act, please call one of the following attorneys in our Employee Benefits Practice Group:

Craig Smith

Everett Moreland

Jeff Kirtner