The Pension Protection Act of 2006 (the "PPA," the "Act") was signed by President Bush on August 17, 2006.  The Employee Benefits practice group of Thelen Reid & Priest LLP has issued a series of reports that summarize selected provisions of the Act.  The following is the first in the series and provides an overview of the major changes.

Overview

A few of the major changes made by the Act include:

  • The permanence of the pension provisions included in the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA").  Prior to the PPA, certain changes made by EGTRRA were set to "sunset" in 2010.  Now, these EGTRRA pension provisions are permanent, including increased limits on annual additions, deductible contributions, ROTH 401(k) plans, catch-up contributions to 401(k) plans, and increased pension portability.
  • Sweeping changes to the determination of minimum required funding for defined benefit plans, including the calculation of benefit obligations, the measurement of plan assets, and special rules for "at risk" defined benefit plans.
  • Clarification of the rules surrounding cash balance and hybrid plans, including the issues related to age discrimination, conversion of existing defined benefit plans to a cash balance or hybrid plan, and the determination of lump sum distributions from such plans.
  • The ability of plan fiduciaries to be compensated for providing participants with investment advice under certain circumstances.
  • Mandatory diversification provisions for defined contribution plans (other than stand alone ESOPs) that contain publicly traded employer securities.
  • Various provisions to encourage the use of automatic enrollment in 401(k) plans, including the introduction of a nondiscrimination safe harbor for certain automatic enrollment plans, and the explicit protection of automatic enrollment features from state law impediments.
  • Accelerated minimum vesting schedules (three-year cliff or six-year graded) for most defined contribution plans.

The PPA also includes provisions related to phased retirement, the calculation of PBGC premiums, prohibited transactions, plan asset rules, pension portability, required disclosures to participants, executive compensation arrangements, health and welfare arrangements, and many more changes.

Given the comprehensive nature of the Act, plan sponsors and pension practitioners will need to familiarize themselves with the many new requirements and opportunities created by the new law.  Although the new funding requirements apply only to plan years beginning after 2007, many provisions take effect in 2006 and 2007.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.