Pension Protection Act of 2006
Summary
The Pension Protection Act of 2006 focuses on six key reforms to fix outdated pension laws, strengthen workers’ retirement security, and reduce the prospect of a future multi-billion dollar taxpayer bailout. A variety of benefits are provided within the law, including the permanency of Roth IRAs [and Roth 403(b)s], new non-spousal provisions as related to retirement assets, and the extension of money held in a flexible savings account. |
On August 17, 2006, President Bush signed the Pension Protection Act, which focuses on six key reforms to fix outdated pension laws, strengthen workers’ retirement security, and reduce the prospect of a future multi-billion dollar taxpayer bailout. The focus of the law is to fortify the federal pension insurance system by:
- Requiring companies that under-fund their pension plans to pay additional premiums;
- Extending a requirement that companies that terminate their pension plans provide extra funding for the pension insurance system;
- Requiring that companies measure the obligations of their pension plans more accurately;
- Closing loopholes that allow under-funded plans to skip pension payments;
- Raising caps on the amount that employers can put into their pension plans, so they can add more money during good times and build a cushion that can keep their pensions solvent in lean times; and
- Preventing companies with under-funded pension plans from digging the hole deeper by promising extra benefits to their workers without paying for those promises up front.
This Financial Awareness Bulletin also provides information about various changes that will benefit a wide variety of NEA members, as detailed below.
Increasing Access to High-Quality, Professional Investment Advice
The Pension Protection Act allows employers to provide rank-and-file workers with access to a qualified investment adviser who can inform them of the need to diversify and help them choose appropriate investments. The law also includes stringent fiduciary and disclosure safeguards to ensure that advice provided to employees is solely in their best interest.
Automatic Enrollment in Defined Contribution Plans
Under current law, workers who have access to a defined contribution pension plan through their employer must elect to participate by enrolling in the plan and making investment choices. Studies show that many employees who have access to employer pension plans never enroll. Many pension experts believe that pension participation would increase if employees were automatically enrolled in the plan and given the option to opt out.
The Pension Protection Act encourages employers to offer automatic enrollment arrangements by establishing several non-discrimination rules and requirements for vesting and matching contributions that employers must meet to offer an automatic enrollment arrangement. These rules include: (1) employee contributions must equal three percent of pay in the first year, increasing annually by one percentage point until reaching six percent of pay (up to a maximum of 10 percent); (2) employer matching contributions must be at least 50 percent (alternatively, employers may contribute two percent of pay on behalf of all employees regardless of whether employee contributions are made); and (3) employer contributions must fully vest after two years.
Enhancing Retirement Savings in IRAs
The Pension Protection Act extends a number of retirement benefits. Individual Retirement Account (IRA) contributions will be $4,000 in 2006 and 2007, $5,000 in 2008, and adjusted for inflation after 2008. Catch-up contributions for individuals age 50 or older will be $1,000 for IRAs, $2,500 for SIMPLE-IRAs, and $5,000 for 401(k), 403(b), and 457 plans. IRA catch-up contribution limits, however, will not be adjusted for inflation. SIMPLE, 401(k), 403(b), and 457 catch-up contributions will be adjusted in $500 increments based on inflation.
The new law permanently allows for Roth 401(k) and Roth 403(b) plans. Like a Roth IRA, an individual makes post-tax contributions to a Roth 401(k) or Roth 403(b) plan, up to the plan limits. The assets grow tax-deferred and may be withdrawn tax-free in retirement.
Savers’ Credit
Eligible individuals who make contributions to an IRA or qualified pension plan receive a federal “match” in the form of an income tax credit for the first $2,000 of annual contributions. The credit – known as the “Savers’ Credit” – equals 50 percent of the contribution for individuals with adjusted gross incomes (AGI) of $15,000 or less ($30,000 or less for married couples). The credit phases down to zero for individuals with AGI of $25,000 or less ($50,000 or less for married couples).
IRA Contribution from Tax Refund
The law directs the Internal Revenue Service (IRS) to provide for “split tax refunds.” In other words, taxpayers who are due a federal income tax refund may choose to have the IRS deposit a portion of that refund directly to an IRA chosen by the taxpayer. The option would be made when the individual files his or her tax return.
Non-Spouse Benefits
The new law allows non-spouse beneficiaries to roll over assets inherited from a qualified retirement plan into an IRA. The beneficiary will avoid tax on the rollover, and will be taxed only when the assets are withdrawn. Previously, this tax treatment was available only for people who inherited retirement assets from a deceased spouse. The new law will mean more flexible retirement and estate planning for non-spouse beneficiaries, such as domestic partners.
529 Plans
The favorable federal tax treatment of qualified distributions and other benefits of 529 college saving plans are permanently extended.
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