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Overview of the Pension Protection Act of 2006. Brian Graff, Esq., ASPPA Executive Director/CEO. Pension Reform Passes. H.R. 4, the “Pension Protection Act of 2006” (PPA) passed by House on July 28, 2006 (279-131); passed by Senate on Aug. 3, 2006 (93-5).

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overview of the pension protection act of 2006

Overview of the Pension Protection Act of 2006

Brian Graff, Esq., ASPPA Executive Director/CEO

pension reform passes
Pension Reform Passes
  • H.R. 4, the “Pension Protection Act of 2006” (PPA) passed by House on July 28, 2006 (279-131); passed by Senate on Aug. 3, 2006 (93-5).
  • President Bush signed into law on August 17, 2006.
  • Revenue lost relating to pension and retirement savings provisions: $66 billion.
    • SBJPA of 1996—cost of pension provisions was $2 billion.
  • Possibility of technical corrections bill?
egtrra permanency
EGTRRA Permanency
  • Provisions were set to expire 12/31/2010.
  • Increased contribution limits to 401(k)s and DC plans.
  • Catch-up contributions for older workers.
  • Increased benefit limits for DB plans.
  • Increased compensation limit.
  • Roth 401(k)s.
  • Relaxation of top heavy rules.
  • SAVER’S credit made permanent.
    • Was set to expire in 2006
    • Income eligibility brackets indexed beginning in 2007
ppa 06 summary
PPA ’06 Summary
  • DC plan changes to promote automatic enrollment and give participants access to more investment advice.
  • New benefit statement requirements.
  • Increased deduction limits for combination plans.
  • Prospectively clarifies age discrimination rules for cash balance and other hybrid plans.
  • Replaces current funding rules with a single minimum funding standard with enhanced funding requirements for “at-risk” plans.
  • Various PBGC premium and related changes.
auto enrollment safe harbor
Auto Enrollment Safe Harbor
  • Effective beginning in 2008, provides 401(k) plans with an automatic enrollment “safe harbor” pass on 401(k) and top-heavy testing, where certain conditions are met.
  • Must cover all eligible employees (employees can opt out anytime).
  • Applies to new hires and those who did not make an affirmative election to participate.
    • May make sense to go to existing workers before implementing to confirm non-participation
  • Automatic enrollment percentage must be between 3% and 10%.
  • Employee contributions must automatically increase by 1% annually after the first full plan year of participation to reach at least 6% (but no more than 10%) of pay.
  • Matching contributions for NCHEs equal to 100% of first 1% of pay, plus 50% of the next 5% of pay OR at least a 3% nonelective contribution.
  • Matches and nonelectives must be 100% vested after 2 years.
auto enrollment safe harbor7
Auto Enrollment Safe Harbor
  • Annual notice must be provided within a reasonable time period before each plan year—at least 30 days if based on current law 401(k) plan safe harbor.
  • Preemption of State Laws to ERISA-covered plans provided notice is given—first time preemption would be conditioned—this may be changed.
    • Default investments must also be invested in accordance with DOL guidance
  • Allows for permissible withdrawals requested within 90 days after first deferral is made.
    • Distribution presumably within reasonable period
    • Need guidance on impact of permissible withdrawal
  • All automatic enrollment plans have extended ADP testing period to 6 months (e.g., June 30th).
  • For all 401(k) plans, excess contributions taxed in year distributed—gap period income no longer required to be calculated.
    • Effective in 2008—will Treasury waive before then?
investment advice
Investment Advice
  • Beginning in 2007, provides a new prohibited transaction exemption for “fiduciary advisers” to provide advice to participants and beneficiaries on their own funds under 2 alternative exemptions:
    • Does not apply to plan level advice
    • Joint Tax description indicates this is not intended to circumvent existing guidance (e.g., Sun America)
  • Fee leveling exemption: fees received by fiduciary adviser are not dependent on the investment selections made.
    • Application to individual fiduciary adviser versus financial institution?
investment advice9
Investment Advice
  • Computer Model Exemption: advice delivered to be generated by computer model certified by independent investment expert.
    • Computer model must take into account all plan investments and must not be biased in favor of adviser’s own investments
    • Does not preclude participant from requesting other advice
      • Unclear whether that allows advice outside of computer model
investment advice10
Investment Advice
  • Detailed disclosures required to be made before the initial advice given, as well as annually thereafter.
    • The relationship between the fiduciary adviser and the plan investment options and fees that will be received
    • The past performance of investment options under the plan
    • Services provided by the adviser and that the adviser is a fiduciary
    • That the participant is free to engage an independent adviser
    • Other disclosures required by securities laws
  • “Fiduciary adviser” defined as an RIA, bank, ins. co., broker/dealer, or an affiliate (any employee).
investment advice11
Investment Advice
  • Transactions must be “arm’s length” and occur solely at participant direction—fees must be reasonable.
  • Employer liable for prudent selection and periodic review of adviser, but not responsible for monitoring specific advice given to participants.
  • Both exemptions require independent audit for compliance with requirements—need guidance on extent of audit requirement and whether adviser can pay for this.
  • DOL to determine feasibility of applying computer models to IRAs and HSAs.
    • May need technical correction to allow class exemption for advice for IRAs and HSAs—statute would require fee leveling
prohibited transaction exemptions
Prohibited Transaction Exemptions
  • Block Trades – Exemption provided for the purchase or sale from a party in interest of a “block trade” transaction (defined as at least 10,000 shares or market value of $200,000) that is allocated across two or more unrelated client accounts of a fiduciary (certain conditions apply).
    • This exemption allows “block” sales for more than one party to secure lower fees and transaction prices
    • Eases current restrictions on block trades, but it is unclear whether it is available where the counterparty in the block trade is a plan fiduciary
prohibited transaction exemptions13
Prohibited Transaction Exemptions
  • Transactions with Plan Service Providers—provides a broad exemption for transactions between a plan and party in interest (solely by reason of providing services) where the plan receives “adequate consideration,” defined as:
    • For securities traded on a generally recognized market: (1) the prevailing price on a national exchange; or (2) a price not less favorable than the offering price established by an independent party, or
    • In the case of assets other than a security, the fair market value of the assets as determined in good faith in accordance with DOL regulations
    • Exemption does not apply to transactions between a plan and fiduciary with discretion over the assets involved in the transaction
prohibited transaction exemptions14
Prohibited Transaction Exemptions
  • Correction Period—Permits a 14-day correction period for certain nonfiduciary securities- or commodities-prohibited transactions (in general, once a transaction has settled, a prohibited transaction is deemed to occur).
    • Exemption permits correction of transaction within the 14-day window from the date discovered (or that reasonably should have been discovered)
  • Foreign Exchange Transactions—Exempts foreign exchange transactions between a plan and a bank or broker-dealer (or affiliate) in connection with the sale, purchase, or holding of foreign exchange securities upon certain conditions.
    • Many foreign exchange transactions are with a plan’s trustee or custodian, upon which existing class exemptions require the need for individualized or standing direction
    • Exemption does not provide relief for foreign exchange transactions between the plan and fiduciary who has discretion over the assets in the transaction
prohibited transaction exemptions15
Prohibited Transaction Exemptions
  • Regulated electronic communications network—Provides an exemption for securities transactions (and other property) executed through an electronic communications network (ECN), an alternative trading system (ATS) or similar execution trading system.
    • Plans are requesting services through electronic systems in which broker-dealers and financial institutions have an ownership interest
  • Cross Trading for Large Plans—Provides an exemption for active cross trades (a direct purchase or sale of securities with another client of an investment manager) of large plans with assets of $100 million or more.
    • The exemption contains detailed conditions on fees and a prohibition on commissions, which is not likely to alter reliance on existing cross trading exemptions for passive or agency cross trades
definition of plan assets
Definition of Plan Assets
  • Under prior law, hedge funds and private equity funds with more than 25% of their assets from public, private and foreign employee benefit plans were considered fiduciaries under ERISA subject to the PT rules.
  • PPA narrows the “benefit plan investor” definition under ERISA for purposes of considering what is a plan asset to include only:
    • Plans covered by ERISA
    • IRAs and other arrangements subject to IRC Sec. 4975, and
    • Those entities whose assets include plan assets by reason of a plan’s investment in the entity
  • Amendment has the effect of excluding some non-ERISA plans (e.g., foreign plans), which will allow more plan investments in alternative asset classes, such as hedge and private equity funds.
  • Amendments give DOL legislative authority to issue regulations that define when an entity holds “plan assets,” which DOL did not previously have under prior law.
changes to fiduciary rules
Changes to Fiduciary Rules
  • Gives DOL authority to establish default investment that satisfies ERISA section 404(c).
    • DOL has 6 months to issue final guidance
    • Likely to consider lifestyle and/or balanced funds
    • Unclear if this will apply for 404(a) purposes
    • Will there be interim reliance on proposed rules?
    • Requires annual notice of right to invest
  • Penalties for coercive interference with participant’s rights.
    • Up to 10 years in prison and $100,000 fine
  • Directs DOL to issue guidance within 1 year that the selection of annuity as a form of distribution does not need to meet the safest available annuity requirement.
changes to fiduciary rules18
Changes to Fiduciary Rules
  • 404(c) protection doesn't apply during blackout period—DOL directed to issue guidance on how to satisfy fiduciary requirements during blackout.
    • One-participant plans not required to give blackout notice
  • Effective in 2008, 404(c) safe harbor where right to invest affected by change in investment options.
    • At least 30-60 days in advance of the change, participants are notified and given right to direct among new (or remaining) investments
    • In the absence of affirmative election, investments are mapped to the new options that are reasonably similar in terms of risk and return
    • Unclear when no similar investment exists—possible use of default option
other dc reforms
Other DC Reforms
  • Beginning in 2007, DC plans invested in publicly traded employer securities must give employees right to diversify.
    • Immediate right with respect to elective deferrals
    • After 3 years of service with respect to employer contributions
    • 3-year transition rule for employer contributions invested in employer securities as of 12/31/06 (except for employees who attained age 55 during the 2006 plan year)
    • Stand-alone ESOPs exempt; applies to KSOPs
    • No collective fund exception—may need technical correction
    • Notice of right to diversify required 30 days in advance—first notices required by Dec. 1st of this year—need guidance quickly
other dc reforms20
Other DC Reforms
  • All DC contributions (not just matching contributions) must vest under either a 3-year cliff or 6-year graded vesting schedule.
    • Applies beginning with contributions attributable to the 2007 plan year
    • Service prior to 2007 considered
  • Beginning in 2007, after-tax contributions can be rolled over from a QP to a 403(b) annuity and vice versa.
    • Note: 403(b) regulations effective date delayed until 2008
    • Should allow rollovers from Roth 401(k) to Roth 403(b)
other dc reforms21
Other DC Reforms
  • Beginning in 2008, rollovers from QPs, 403(b) annuities and 457 plans allowed directly to a Roth IRA.
    • Subject to current law conversion restrictions ($100,000 AGI limit) until they are eliminated after 2009
    • Note: IRA conversion provision allows conversions to Roth IRAs in 2010 with tax spread over 3 years
  • Treasury directed to revise hardship distribution rules to allow for hardship distribution if the conditions constituting a hardship or an unforeseeable emergency occurs with respect to a beneficiary under the plan.
other dc reforms22
Other DC Reforms
  • 10% early withdrawal tax does not apply to IRA distributions or distributions from a 401(k) or 403(b) plan (but not 457 plan amount-attributable rollovers) attributable to elective deferrals, if made to an individual called to active duty for at least 180 days (or for an indefinite period) if made after the individual is called for duty and before the period of duty ends.
    • Effective for distributions made after 9/11/01 for those called to duty after 9/11/01 but before 12/31/07
    • 401(k) and 403(b) plans permitted to make these distributions regardless of QP distribution restrictions
    • Make-up contributions permitted within 2 years after end of duty period—do not impact contribution limits
    • Claims for refund allowed for at least one year
    • Reporting guidance needed quickly
other dc reforms23
Other DC Reforms
  • Beginning in 2007, benefits payable under a QP, 403(b) annuity, or 457 plan to a beneficiary other than a surviving spouse may be transferred directly to an IRA and treated as an inherited IRA.
    • Amounts rolled to an IRA generally must be paid out within 5 years
  • Directs IRS to develop forms allowing income tax refunds to be deposited directly to an IRA.
  • Special IRA catch-up contributions (up to $3,000 per year) permitted for 2006-2009 for individuals who participated in a 401(k) plan matched with employer stock where the employer went bankrupt and executives were indicted as a result of transactions relating to the bankruptcy.
    • Those age 50 and older not also eligible for catch-up contributions
miscellaneous qp provisions
Miscellaneous QP Provisions
  • Beginning in 2007, permits tax-free distributions ($3,000 annually) from governmental retirement plans for health and long-term care insurance premiums for retired public safety officers.
  • All governmental plans (including CODAs) are exempt from the nondiscrimination and participation rules.
  • Permits governmental plans to allow participants to purchase service credits for a period regardless of whether service is performed (within limits).
  • Tribal plans treated as governmental plans for all ERISA and Code purposes so long as all employees are performing essential government services and are not performing commercial activities (e.g., casino employees).
    • Controversial provision that may be repealed
miscellaneous qp provisions25
Miscellaneous QP Provisions
  • DOL directed to issue within 1 year regulations clarifying that a QDRO will not fail because of the time it is issued or because it is issued after or revises another QDRO.
    • Concern that this will allow post-death QDROs
  • IRS directed to update EPCRS program, taking into account concerns of small employers.
    • May lead to EPCRS covering scrivener’s errors
  • Notice and comment period regarding distributions expanded to 30-180 days before the distribution commences.
    • Notice must include language about the consequences of a participant’s failure to defer receipt, if applicable
    • Effective for distributions in 2007—180-day period theoretically already in effect
miscellaneous qp provisions26
Miscellaneous QP Provisions
  • DOL directed to provide simplified 5500 Form (beginning with 2007 plan years) for plans with fewer than 25 participants.
  • For plan years beginning in 2007, one-participant plans with assets less than $250,000 will be exempt from the 5500 Form filing requirement.
  • Rollover distributions will no longer result in a reduction in unemployment compensation.
  • Plan amendments made pursuant to PPA, or regulations thereunder, may be retroactively effective and will not violate the anti-cutback rule, if made by the end of the 2009 plan year.
    • IRS permitted to carve out exceptions to the anti-cutback relief—guidance on exceptions, if any, needed quickly.
benefit statements
Benefit Statements
  • New benefit statement requirements for all plans—effective 1/1/07—DOL will issue model notice.
  • Benefit statements required (1) quarterly for participant-directed plans; (2) annually for other DC plans; and, (3) every 3 years for DB plans (application of effective dates for DB plans unclear?).
  • Actual DB not required if participant given annual notice of right to request statement.
  • Statement must “on the basis of the latest available information” show amount of vested benefits.
    • JCT description—vesting need only be updated annually if SPD would allow participants to determine updated vested amount
    • Issue of multiple statements due to brokerage accounts—can they be delivered separately?
benefit statements28
Benefit Statements
  • Statements must also include explanation of any permitted disparity or floor-offset arrangement affecting benefits under the plan.
  • DC plan statements must show assets as of the most recent valuation date (e.g., some plan assets are trustee invested and “hard-to-value”), including employer securities.
  • Statements for participant-directed plans must include (1) an explanation of any restrictions on the right to direct an investment; (2) information on the importance of diversification; and, (3) a statement about the risk of holding more than 20% of a portfolio in the security of one entity.
benefit statements29
Benefit Statements
  • All statements may be provided in written, electronic, or other appropriate form.
    • Interaction with DOL electronic communication regulations?
    • JCT description suggests benefit statements could be “provided on a continuous basis through a secure plan website for a participant”
    • Does that require quarterly notification?
deduction limits
Deduction Limits
  • For 2006/2007, PPA permits maximum deductible contributions of up to 150% of current liability over the value of plan assets—no change to current liability calculation intended.
  • After 2007, the maximum deductible contribution is equal to the excess of the funding target, target normal cost, and a “50% cushion amount” over the value of the assets.
  • Minimum required contributions always deductible.
  • 50% cushion is 50% of funding target.
    • Compensation increases can be assumed
    • PBGC-covered plans can assume 401(a)(17) compensation limit increases
    • Cushion amount cannot reflect HCE benefit increases made in the last 2 years—what about plan adoption?
deduction limits31
Deduction Limits
  • For 2006/2007, combined plan deduction limit 404(a)(7) does not apply if DC contributions do not exceed 6% of compensation.
    • 150% of CL deduction limit available
  • However, if contribution exceeds 6%, combined plan deduction limit does apply without regard to DC contributions.
    • Both plans then limited to DB minimum required contribution
  • After 2007, combined plan deduction limit does not apply to PBGC-covered plans regardless of the level of DC contributions.
  • Non-PBGC plans still subject to above rules.
cash balance hybrid plans
Cash Balance/Hybrid Plans
  • Effective after June 29, 2005, all DB plans (including cash balance/hybrid plans) are not age discriminatory so long as a participant’s accrued benefit is at least equal to the accrued benefit of any similarly situated, younger individual who is or could be a participant.
    • “Similarly situated” means the same in every respect including service, compensation, position, date of hire, work history (except for age)
    • Accrued benefit may be expressed as a hypothetical account
    • Beginning in 2008, cash balance/hybrid plans interest credits must not exceed market rate defined by Treasury; does not preclude reasonable fixed rates (but how high?)
    • At distribution, losses cannot reduce account balance below amount of aggregate contributions, except for variable annuities
cash balance hybrid plans33
Cash Balance/Hybrid Plans
  • Eliminates the “whipsaw” problem—lump sum equals hypothetical account balance.
  • Beginning in 2008, employees with 3 years of service must be 100% vested—applies to prior accruals.
  • Conversions after June 29, 2005, must use “A+B” formula—no wear away of early retirement subsidies permitted—Treasury directed to issue regulations for mergers and acquisitions.
  • Contains “no inference” language; IBM Cash Balance decision confirms legitimacy of cash balance plans.
  • Possible reissuance of cash balance nondiscrimination regulations.
slide34

DB(k) Proposal

  • Applicable for plans with 500 or fewer employees.
  • Creates an “eligible combined plan”—allows DB and 401(k) to be treated as a single plan, if utilize defined safe harbors.
  • Safe harbor design formulas provide pass on 401(k) test and top heavy.
    • 1% of final average pay for up to 20 years
    • Cash balance alternative :
      • 30 and under 2% of pay
      • Under 40 4% of pay
      • Under 50 6% of pay
      • 50 and over 8% of pay
    • 100% vested 4-2 match with automatic enrollment required
db k proposal
DB(k) Proposal
  • Otherwise, matching contributions up to 6% of pay; option to contribute to cash balance account.
  • 3-year vesting.
  • Non-elective contributions allowed.
  • Nondiscrimination rules—current law.
  • 415 Applies to DB and DC portions separately.
  • Funding rules apply only to DB portion; DB portion covered under PBGC.
  • Combined deduction limit does not apply.
  • Single Form 5500, SPD, plan audit.
  • Does not allow for non-safe harbor plans—other technical corrections needed.
  • Effective date beginning in 2010.
basic funding requirements
Basic Funding Requirements
  • PPA overhauls the DB minimum funding rules and the deficit reduction contribution for single-employer defined benefit plans.
  • Special Funding Rules for 2006-2007.
    • PPA extends 2004-5 funding relief (PFEA) through 2007
    • 2006-7 current liability determined using an interest rate within the range 90-100% of the 4-year weighted average composite corporate bond rate
  • Effective in 2008, a single-employer DB plan’s contributions are based on a plan’s funding target:
    • Two targets: a 100% funding target for “not at-risk” plans; additional contributions required for “at-risk” plans
minimum required contribution
Minimum Required Contribution
  • Beginning in 2008, the basic “minimum required contribution” (MRC) for any plan year is the sum of:
  • The plan’s “target normal cost” for the plan year;
    • Represents the present value of benefits expected to be accrued in the current year
    • Includes an increase in benefits attributable to services performed in prior years by reason of an increase in compensation during the current plan year
    • Reduced to the extent plan assets exceed the funding target (PVAB of the 1st day of plan year)
  • A “shortfall amortization charge” necessary to amortize the difference between assets and 100% of liabilities over 7 years;
    • Phased in over 4 years for well-funded plans until 2011, AND
  • Any waiver amortization charge (where Treasury has waived any minimum required contributions).
interest rate assumptions
Interest Rate Assumptions
  • Beginning in 2008, the interest rate to determine liabilities (and lump sums) would be valued using a “yield curve” based on high-quality corporate bond rates of varying maturities.
  • Separate interest rates would be established for each of 3 “segments” – liabilities due in 5 years; between 5 and 20 years; and those longer than 20 years.
    • Yield curve would be derived from a 2-year average of interest rates on investment-grade bonds
    • Alternatively, a plan can elect to use the full yield curve (i.e., non-segmented) without the 2-year averaging, but only for minimum funding
  • Transition Rules.
    • For 2008, rate used would be one-third based on the new rate and two-thirds based on old rate (i.e., corporate bond weighted average)
    • For 2009, rate used would be two-thirds based on the new rate and one-third based on old rate

.

other assumptions
Other Assumptions
  • Treasury to revise mortality table at least once every 10 years, which should reflect mortality improvements.
    • Treasury can give permission to use specific employer table
    • Proposed 2007 table likely to be postponed
  • Plan assets can either be market or average value.
    • No more than 2-year average allowed provided it’s between 90-110% of market value
    • Contributions post valuation date must be discounted
    • Valuation date 1st day of plan year, except plans with fewer than 101 participants can use any day
  • Quarterly contributions required if funding shortfall for the preceding plan year.
    • 25% of the lesser of 100% of the prior year’s MRC or 90% of the current year’s MRC
credit balances
Credit Balances
  • Effective in 2008, credit balances utilize a more complicated set of rules.
  • Creates two separate components of credit balance:
    • A funding standard carryover balance from 2007
    • A pre-funding balance based on contributions in excess of the minimum required contributions for plan years in 2008 and later plan years
  • Credit balances may be used toward current year’s minimum funding requirement only if the liabilities are at least 80% funded (from the prior year’s valuation date).
    • Carryover (but not pre-funding) balance included in assets for 80% measurement
    • IRS to provide rules for estimation for 2007 funded status for purpose of determining whether the credit balance may be used in 2008 plan year
  • Credit balances would reflect the investment performance of plan assets and would be subtracted from assets for most determinations under the bill (e.g. at-risk rules).
rules for at risk plans
Rules for “At-Risk” Plans
  • Plans defined as “at-risk” plans would be subject to additional funding requirements (based on additional required actuarial assumptions).
  • Additional mandated assumptions for “at-risk” plans:
    • Participants eligible to retire in current or next 10 years will start benefits at their earliest eligibility date
    • Assumes benefits will be paid in lump sums (or in whatever form results in the largest liability for the plan)
    • If the plan has been at-risk for at least 2 of 4 plan years, applies a “loading factor” equal to $700 per participant plus 4% of funding target and target normal cost for the plan year
  • Exempts plans with 500 or fewer participants on every day of the preceding year (treating all defined benefit plans of an employer as a single plan).
rules for at risk plans42
Rules for “At-Risk” Plans
  • A plan is “at-risk” if it meets the following “70/80 percent” test for the prior plan year:
    • Less than 80% funded at “not-at-risk” funding target minus credit balance
      • 80% threshold is phased in over 4 years: 65% in 2008; 70% in 2009; 75% in 2010; 80% in 2011 and later), AND
    • Less than 70% funded using the “at-risk” liability funding target and subtracting credit balance
  • At-risk funding rules effective for plan years beginning in 2008—guidance needed on application of look-back rules for 2007.
benefit restrictions
Benefit Restrictions
  • Benefit restrictions are applicable to all DB plans that are underfunded or have liquidity problems.
  • The “adjusted funding target attainment percentage” (AFTAP) must be calculated to determine whether the benefit restrictions apply:
    • Based on plan’s ratio of plan assets (reduced by credit balances) to the plan’s funding target
  • With the exception of accelerated benefit distributions:
    • Plan sponsors may make additional contributions or provide security to avoid the limitations
    • Restrictions do not apply to new plans for the first 5 years of the plan
  • Small plans not exempt from these rules even though they are exempt from at-risk rules.
benefit restrictions44
Benefit Restrictions
  • Restrictions do not apply if a plan’s funding target percentage (no reduction for credit balance) is at least 92% in 2008; 94% in 2009; 96% in 2010; and 100% thereafter.
  • Plan participants must be notified within 30 days after the plan has become subject to a restriction.
    • Guidance needed for benefit explanations in such cases
  • Restrictions triggered on certification of AFTAP by Enrolled Actuary—implementation guidance needed since restrictions apply as of plan valuation date.
    • If certification not done by October 1, AFTAP deemed to be less than 60% effective October 1
benefit restrictions45
Benefit Restrictions
  • For plans less than 80% funded, plan amendments increasing benefits are prohibited (permits increases in flat dollar plans that do not exceed rate of pay increases).
  • For plans between 60% and 80% funded, lump sum payments (and other accelerated benefit distributions) are limited to:
    • 50% of the original amount, or
    • The present value of the maximum PBGC benefit at the participant’s age
  • For plans less than 60% funded:
    • Plan accruals are frozen (participants continue to earn vesting and eligibility service)
    • Shutdown benefits could not be triggered unless immediately funded, AND
    • Lump sum payouts (and other accelerated benefits) are prohibited
  • Questions about application of previous restrictions when plan no longer subject to them.
benefit limitations nqdc
Benefit Limitations – NQDC
  • Adverse tax consequences would result if amounts are set aside for a nonqualified deferred compensation plan (NQDC) where:
    • A plan is in at-risk status (does not apply to plans 500 or less)
    • The employer is in bankruptcy, or
    • The period that begins 6 months before and ends 6 months after (12-month period) the date any DB plan is terminated in an involuntary or distress termination
  • Applies to NQDC for the top five “covered employees” under IRC Sec. 162(m) or any executive officer subject to Sec. 16(a) of the Securities Exchange Act of 1934.
  • Need relief for mergers and acquisitions.
pbgc premiums
PBGC Premiums
  • Makes no change to increased flat-rate per-participant premium from the current $19 to $30 (changed in Deficit Reduction Act of 2005).
  • For 2006/2007, VRP calculated using 85% of the corporate bond rate.
  • After 2007, VRP computed using the three-segment yield curve; unfunded vested benefits equal the funding target (only vested benefits) in excess of market assets for the plan year—full funding exemption repealed.
  • VRP for each participant is capped for small plans (i.e., 25 or fewer employees) to be no more than $5 multiplied by the number of plan participants.
  • Plans terminated with insufficient assets subject to $1250 per participant termination premium.
other pbgc changes
Other PBGC Changes
  • Expands PBGC missing participants program to terminating DB plans not subject to Title IV and DC plans.
    • Effective after PBGC regulations issued
    • Needs to be coordinated with DOL missing participants guidance to relieve fiduciary liability
  • Changes phase-in of PBGC guarantee for substantial owners effective in 2006.
    • Guarantee phased in over 5 years for substantial owners with less than a 50% ownership interest (i.e., between 10-50% ownership)
    • Guarantee phased in over 10 years for substantial owners with a 50% or more interest in the sponsor
  • PBGC now authorized (but not required) to pay interest on premium overpayment refunds.
lump sum distributions
Lump Sum Distributions
  • IRC Sec. 417 (e)—PPA replaces the current minimum lump sum rules under IRC Sec 417(e) (30-year Treasury rates) to require the three-segment yield curve approach.
    • Phase-in of the segmented yield curve of 20% a year from 2008-2012
    • Treasury to develop mortality table based on table used for funding purposes
    • Current rules remain in effect for 2006 and 2007
section 415 benefit limitations
Section 415 Benefit Limitations
  • Retroactive to January 1, 2006, when calculating 415 limit for lump sums, interest rate must be the greater of:
    • 5.5%
    • Rate that would provide a benefit of not more than 105% of the benefit that would be provided if IRC 417(e)(3) rate were used, or
    • The plan’s rate
  • Need Treasury relief for lump sums paid out in 2006 based on 30-year Treasuries after PFEA expired.
  • Impact on 2006 required PFEA amendments?
  • In calculating 415 limit for DB plans, average compensation includes years of service when participant was not an active participant in plan.
    • Corrects problem with recently issued regulations
  • Beginning in 2007, benefits from DB plans maintained by churches not subject to 100% of compensation 415 limit, except for benefits of HCEs.
other db changes
Other DB Changes
  • Beginning in 2007, permits in-service distributions from DB plans to participants who have reached age 62.
    • Broader than phased retirement proposed regulations—regulations may still be finalized for other workers who are 59½
  • Beginning with 2008 plan years, plans subject to J&S rules will need to offer an additional option.
    • If QJSA is less than 75%, the additional option must be 75%
    • If QJSA is greater than or equal to 75%, the additional option must be 50%
    • So, you could have a QJSA of 100% with an additional option of 50%—or a QJSA of 74% and an additional option of 75%
  • 10% early withdrawal tax no longer applies to early distributions from pension plans for public safety officers that retire after age 50.
new disclosure requirements
New Disclosure Requirements
  • Beginning 2008, plan sponsors must furnish a new detailed funding notice to all participants and the PBGC within 120 days after the end of the plan year.
    • Must include whether plan’s funding target percentage is less than 100%; the plan’s assets and liabilities as of the last day of the prior plan year; breakdown of active participants versus retirees; the plan’s funding policy and asset allocation and an explanation of any amendments affecting plan liabilities
    • Need guidance on doing estimates, if actual data not available
    • Small plans (100 or fewer participants) allowed to provide notice when Form 5500 due
    • DB SARs repealed (needs technical correction)
    • DOL to provide model notice
new disclosure requirements53
New Disclosure Requirements
  • Electronic display of Form 5500 information required to be posted on plan sponsor “intranet” web site and DOL web site.
    • Effective in 2008—unclear what information must be included
    • 5500 will require disclosure of assumptions used to project future retirements and forms of distribution
  • Plan sponsors required to file an ERISA 4010 notice if funding target percentage below 80% for preceding year.
  • Participants have right to get access to information filed with the PBGC upon a plan termination.