On August 17, 2006, President Bush signed the Pension Protection Act of 2006 (PPA-06), a comprehensive pension reform bill that has been the subject of negotiations between the House of Representatives and the Senate since early in 2006. Certain provisions of the PPA-06 take effect immediately. Other provisions will become effective in 2007 or later.

The PPA-06 makes the following changes for defined contribution plans.

• Makes permanent the EGTRRA provisions, catch-up contributions (including SEP and SIMPLE IRA plans), portability provisions, and the qualified Roth contribution program for 401(k) and 403(b) plans
• Makes permanent the EGTRRA Saver's Tax Credit, allowing up to $2,000 in tax credits to qualifying taxpayers who make contributions to deferral-type employer plans
• Encourages participation in 401(k), 403(b), and governmental 457 plans through automatic enrollment. Introduces actual deferral percentage (ADP), actual contribution percentage (ACP), and top-heavy safe harbors for 401(k) and 403(b) plans with automatic enrollment and automatic deferral increases (effective for plan years after December, 31, 2007)
• Provides guidance on employer-provided investment advice with employer protection from fiduciary liability, and mandates use of a computer model or direct advice (effective after December 31, 2006)
• Mandates participant's ability to immediately divest elective deferrals invested in company stock and mandates participants' ability to divest employer contributions invested in company stock after three years of service
• Mandates defined contribution plans (excluding one-person plans) to provide benefit statements quarterly to plan participants in participant-directed accounts, and annually to participants of other types of accounts
• Simplifies Form 5500 filing (raises Form 5500-EZ threshold from $100,000 to $250,000 effective in 2007, and simplifies Form 5500 reporting for plans with fewer than 25 participants)
• Allows for 401(k)/defined benefit combo plans for small employers after the 2009 plan year
• Modifies hardship distribution definition to include a hardship of a participant's beneficiary even if a nonspouse or nondependent beneficiary (effective on date of enactment)
• Gives the IRS more authority to modify sanctions under the Employee Plans Compliance Resolution System (EPCRS) and create programs for small employers
• Allows certain guardsmen or reservists called to active duty for 180-plus days to take penalty-free distributions of deferral assets from 401(k) and 403(b) plans, and to repay those amounts to IRAs over a two-year period (distributions after September 11, 2001, and before December 31, 2007)
• Allows nonspouse beneficiaries of deceased plan participants in qualified retirement plans (QRPs), governmental 457(b) plans, 403(a), and 403(b) plans to directly roll plan assets to an inherited IRA (effective for distributions after December 31, 2006)
• Provides greater portability of after-tax assets between employer-sponsored plans (401(k) and 403(b)) (effective after December 31, 2007)
• Accelerates vesting in defined contribution plans for certain employer contributions
• Extends the deadline for qualified retirement plans to provide certain distribution notices (e.g., 402(f) notices) to no more than 180 days before the distribution is made

Read more about the Pension Protection Act of 2006:

IRAs  |   Defined contribution retirement plans

This information is general in nature and is not meant as tax advice. Consult a tax professional as to how this information applies to your situation.

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