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Pension Reform Act of 2006: Impacts and Recommendations

Explore the effects of the Pension Reform Act of 2006 on retirement plans, employer responsibilities, and employee options. Learn about the pros and cons, new regulations, and key considerations for compliance and oversight. Stay updated on IRS requirements and legislative developments in the retirement sector.

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Pension Reform Act of 2006: Impacts and Recommendations

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  1. VSA Retirement Committee January 14, 2008 Meeting

  2. Pension Reform Act of 2006 • Upsides • Align 403(b) rules w/ 457(b) and 401(k) plans • Strategic opportunities for employers to help plan participants • Improve performance and reduce fees for employees • Downsides • Heightened employer role (shift) • Fiduciary due diligence • More active management = more employer costs • Heightened responsibilities for all plans • Increased oversight, plan compliance, and regular investment reviews

  3. Pension Reform Act of 2006 (cont’d) • Effective date: 01/01/09 • New/Continued Employer Responsibilities: • Plan Document (coordination!) • Review and description of investment opportunities • Investment options • Clarity eligibility • Benefits • Contribution limits • Loans • Hardship withdrawals • Rollovers • Who is responsible for IRS compliance across all providers and investment options

  4. Pension Reform Act of 2006 (cont’d) • Stricter Transfer Rules • Transfers/exchanges within the same 403(b) plan, among sponsor-approved investments, as spelled out in the plan document • Transfers to another 403(b) plan, but only under certain circumstances • Bright Line Test for Universal Availability Rule • Offer to all employees, with limited exception • Test = 1,000 hours of service • Employers must designate approved investment providers and products • No new incidental life insurance is allowed

  5. Q’s and A’s • Q: Do pre-existing investment options have to change? • A: No. However, plan document to rule. (No incidental stand alone life insurance is permitted.) • Q: Are Roth contributions permitted? • A: Yes, on optional basis (if noted in plan). • Q: Distributions? • A: Restrictions retained as in past.

  6. Q’s and A’s (cont’d) • Q: May 403(b) plans be terminated by employer? • A: Yes, if held by the employer. Assets would be distributed to employees. • Q: Notification of plan availability required? • A: Yes. Annually, with opportunity to make, revoke, modify decision.

  7. IRS and Audit Requirements [abbreviated checklist] • Organization must qualify as public education institution • Employees working 20 hours a week or more must be given opportunity to make a salary deferral • Elective deferrals, including any designated Roth contributions, must be limited to amounts specified per calendar year • Total employer and employee contributions must not exceed limits • If 15 years of service catch up provision used, then employee must have the required 15 years of full time service w/ same employer

  8. IRS and Audit Requirements [abbreviated checklist (cont’d)] • Of age 50+ catch up contributions permitted, each employee >50 must be notified of rights • Annuity contract or custodial contract must contain non-transferability provisos • If plan offers a five year post-severance provision, amounts must be contributed through a non-elective method • Must enforce participant loan repayments and limits • Demonstrated documentation of hardship required

  9. Legislative Bill Tracking System • Keyword: Retirement • http://www.leg.state.vt.us/database/search/search.cfm?Session=2008

  10. Status Points • Vermont identified as an early adopter (VALIC: 01.11.08) • IRS final (final!) regs. issued in Nov., 2007 • New wrinkle: “coordination”, post-dated 01.01.05! • AASA 403(b) “Toolkit” • Delayed until late Jan. • (first copies being sent +/- Jan. 25) • Effort underwritten by vendors • Treasurer’s Bill: • Not yet entered into legislature • Districts beginning to become besieged with vendor and employee mailings, calls, etc.

  11. Suggested Directions • Interim memorandum from committee to field • Conversation w/Treasurer • Await “Toolkit” from AASA for announced planning steps • Assess “turnkey” opportunities being promoted • Consider a macro-contract w/tax attorney to serve VSA’s interests • Track ongoing state legislation

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