Senate passes Pension Protection Act: how the new pension and 401(k) plan rules will impact employer sponsored plans
August, 2006
In a somewhat shocking and swift move, the United States Senate passed without revision or amendment, HR 4, the United States House of Representatives Pension Protection Act ("Act") sending the bill to President Bush for signature, which could occur shortly. The Act provides sweeping revisions to Defined Benefit Pension Plans, provides relief and certainty for cash balance plans and allows for some helpful plan design options in the 401(k) marketplace. Generally, the Act will be effective as of January 1, 2008, but certain rules may impact plans as early as 2007, with formal documents amendments required no later than 2009.
Defined Contribution Plan Sponsor Action Steps
Plan sponsors should take the following steps over the next plan year:
- Consider the addition of Roth 401(k) options as the Act provides permanency to this and other EGTRRA provisions;
- Evaluate using automatic enrollment in your 401(k) plan based on the Act's safe harbor and be aware of collateral impact on excess contributions providing 6 month return time without excise tax;
- Review expanded rules for combined DB/K plans using a traditional defined benefit formula or a cash balance formula providing planning opportunities for companies with less than 500 employees;
- Required employee voluntary diversification for public company employer stock;
- Revise plan documents for EGTRRA permanency, QJSA options; direct rollovers to Roth IRAs, non-spouse rollovers to IRA, accelerated vesting provisions; and
- Update QDRO procedures, benefit statement disclosure procedures, and bonding if plan contains employer securities.
Cash Balance Plan Sponsor Action Steps
The Act contains only a few, but critical, provisions relating to cash balance plans:
- Sponsors considering converting or starting a cash balance plan receive certain that plan is not age discriminatory, provided plan meets certain standards, receive wearaway standards and whipsaw relief;
- Sponsors with existing cash balance plans receive no certainty from this bill, however any existing plan should strive to meet the standards contained in this bill for future years;
Defined Benefit Plan Sponsor Action Steps
The Act contains numerous provisions relating to defined benefit plans requiring a comprehensive review of any defined benefit arrangement:
- Understand increased PBGC premiums;
- Revise documents and procedures based on revised contributions standards allowing for 150% of applicable funding target plus target normal cost plus future benefit increase amount less assets;
- Revise minimum funding rules and review impact on funding requirements and targets including interest rate assumptions; PFEA relief extended through 2007;
- If a Plan is less than 80% funded, it will be deemed "at-risk" requiring additional actuarial assumptions and potentially increased funding from the sponsor, plans with less than 500 participants are exempt;
- Nonqualified deferred compensation plan contributions subject to excise tax if sponsor maintains a plan in at-risk status;
- Allows transfer of surplus defined benefit plan assets to fund retiree benefits;
- Revise lump-sum distribution rules based on new legislation standards; and
- Prepare for increase disclosure requirements of plan's funding status.
Investment Advice
The Act contains several miscellaneous provisions important to all plan sponsors. The Act allows the plan's investment platform provider to advise plan sponsors and participants as to particular investment decisions as long as the arrangement meets the requirements of the Act including fee disclosure, fees not varying on the basis on which investment option is chosen, and independent fiduciary approval. Plan sponsors should evaluate any investment provider's potential advice based on these factors to ensure the provider is meeting the Act's prohibited transaction exemption.
What's Next for Plan Sponsors?
We expect the President to sign the bill soon and the bill to become effective as of January 1, 2008. However, because of certain provisions that impact plans in 2007, as well as the planning opportunities available to plan sponsors sooner than 2008, we encourage plan sponsors to begin evaluating the Act's new provisions at the next regularly scheduled Trustee or Committee meeting.