SHRMA – legislative update 9/20/2006
Federal
Tax and Benefits
The Pension Protection Act of 2006 Signed by President Bush – UPDATE FROM LAST
UPDATE:
The Act sets out rules requiring defined benefit pension plans to become fully funded within
seven years. The Act also encourages individuals to increase savings through defined benefit
plans by removing obstacles to automatic enrollment and investment advice and making
permanent a set of tax incentives for defined contribution plans that would have expired in 2011.
The Act contains many provisions of interest to human resource professionals including:
Employers must make sufficient contributions to plans in order to meet a 100-percent funding
target.
If the plan is less than 100- percent funded, the shortfall must be made up incrementally over seven
years. The Act requires full funding by 2011, but provides transition relief leading to full funding by
requiring a ratio of 92 percent in 2008; 94 percent in 2009, and 96 percent in 2010.
Employers must make sufficient contributions to plans in order to meet a 100-percent funding target.
If the plan is less than 100- percent funded, the shortfall must be made up incrementally over seven
years. The Act requires full funding by 2011, but provides transition relief leading to full funding by
requiring a ratio of 92 percent in 2008; 94 percent in 2009, and 96 percent in 2010.
Modified Yield Curve
The act replaces the corporate bond index rate--which is used to calculate a plan’s required
contributions, and which expired on December 31, 2005--with a modified yield curve rate. The rate is
prescribed by the Secretary of the Treasury and reflects the average, for the 24-month period, of
monthly yields on investment grade corporate bonds with varying maturities that are in the top three
quality levels available. Plans are required to value benefit obligations using different interest rate
assumptions, depending on when the benefit is expected to be paid: (1) within five years, (2) after
five years but within 20 years, and (3) payable after 20 years. The new rate would be phased in over
three years for existing plans. During the transition period, the new rates will be blended with those
calculated under the current method.
At risk designations fore single employers plans
A plan is deemed at-risk if it fails to meet two tests:
(1) It falls below 70-percent funded status using the worst-case scenario assumptions (e.g., employers
cannot count credit balances and must assume the employees take the most expensive benefits and
retire at the earliest possible date), and
(2) It is less than 80-percent funded using standard assumptions phased in over three years (65% in
2008; 70% in 2009; 75% in 2010; and 80% in 2011).
If a plan is deemed at-risk, the employer would be subject to accelerated contributions, including an
additional loading factor for plans in at-risk status for at least two of the five preceding plan years.
Cash Balance and Hybrid Plan Clarification
The Act sets out, on a prospective basis, plan designs for hybrids to ensure that they do not violate
age discrimination rules. First, the Act clarifies that if a participant’s benefit is equal to that of any
similarly situated employee, the plan does not violate age discrimination rules. The Act prohibits the
“wear away” of benefits during the conversion process by requiring that the minimum benefit be
equal to at least the benefit prior to conversion plus the benefit earned after conversion. Plans must
provide three-year vesting with respect to the employer contributions. In addition, “no inference”
language is included so no inference is to be drawn with respect to hybrid plans in existence before
the Act.
Phased Retirement
The Act allows defined-benefit pension plans to provide in-service distributions to participants age 62
and older.
Disclosure to Plan Participants
The Act contains several provisions that enhance disclosure to plan participants. It requires that
certain information on Form 5500 be made available on the Internet. It also requires quarterly benefit
statements to defined-contribution plan participants and beneficiaries who can direct the investment
of plan assets and annual statements to those who cannot. Defined-benefit plan participants must be
provided with a benefit statement at least every three years or provided with annual notice of the
availability of such statements. The Act directs the Department of Labor to issue model benefit
statements within one year of enactment.
Investment Advice for DC Plan and IRAs
The act permits qualified fiduciary advisors to offer personally tailored investment advice to help
employees manage their 401(k) and other defined-contribution retirement options. Fiduciary advisors
for employer-sponsored plans, like 401(k)s, must use a fee that does not fluctuate based on the
investment choices made by the participant, or base their recommendations on a computer model that
is certified and audited by an independent party. Fiduciary advisors for non-employer sponsored
plans, like IRAs, must charge a flat rate fee for one year but need not use computer modeling. The
Departments of Labor and Treasury are required to study whether a computer model exists to tailor
professional investment advice, taking into account the full range of investment options, including
IRAs. The act also requires fiduciary and disclosure rules designed to ensure that advice provided to
employees is in their best interest.
Automatic Enrollment
The act allows employers to automatically enroll employees in a 401(k) plan. The act clarifies that
automatic contribution arrangements meeting certain requirements are treated as meeting the
nondiscrimination rules for 401(k) plans and matching contributions, as well as meeting the top-
heavy rules for plans. The requirements include that the plan may provide for automatic elective
contributions of up to 10 percent of compensation, but at least 3 percent in the first year the employee
participates, rising to 6 percent thereafter. The contribution percentage must be applied uniformly to
all employees. Employees must be informed of the ability to opt out of the pension plan. The
provision also preempts any state law that would directly or indirectly prohibit or restrict the
inclusion in a plan of an automatic contribution arrangement.
EGTRRA Provisions
The act makes permanent the pension provisions that were part of the Economic Growth Tax Relief
Reconciliation Act (EGTRRA), and were set to expire in 2011. These provisions:
• Increase the annual contribution limits for IRAs and qualified pension plans;
• Allow additional catch-up contributions for individuals age 50 and older;
• Provide incentives for small employers to offer pension plans; and
• Extend permanently indexing to inflation the “Savers’ Credit,” which would have expired at the end
of 2006. This credit allows eligible low-income individuals who make contributions to an IRA or
pension plan to receive a federal “match” in the form of an income tax credit for the first $2,000 of
annual contributions.
Excess Pension Assets for Retiree Medical
The Act allows single-employer plans to make a transfer of excess pension assets to fund the
estimated retiree medical costs of a period of up to 10 years. The Act also allows multiemployer
collectively bargained plans to make transfers for funding one year of retiree medical costs but not
the expanded funding permitted for single-employer plans under the Act.
Long-Term Care Insurance
Qualified long-tern care insurance coverage is allowed to be offered as part of, or as a rider to, an
annuity or life insurance contract. A charge against the cash value for the qualified long-term care
portion of the coverage will not be includible in gross income.
Regulatory
Proposed Rule on No-Match Letters
An employer is required to send the Social Security Administration (SSA) wage information on an
annual basis. This information includes the employee’s name and social security number. When the
employer’s submission does not match SSA records, SSA will send the employer a “no-match”
letter. This “no-match letter” gives the employer notice, among other things, that the employee may
not be authorized to work in the U.S. pursuant to the federal immigration laws. For the first time, the
Department has proposed guidance on what an employer should do when it receives a no-match letter
and safe-harbor procedures for employers who comply with the guidance. The proposed regulation
provides that: (1) an employer must take “reasonable steps,” within 14 days after receipt of a “no-
match” letter; and (2) the employer must resolve the discrepancy within 60 days of receipt of the no-
match letter. SHRM recommended that the Department: (1) increase the proposed period for an
employer to take “reasonable steps” to a minimum of 60 days; and (2) permit the employer a
minimum of 120 days to resolve any discrepancies after receiving a no-match letter. The Society also
recommended that the Department provide clarification on certain terms and provisions, and work
closely with SSA to coordinate a seamless, uniform process for responding to no-match letters.
Interim Rule on the Electronic Signature and Storage of the Form I-9
The Department of Homeland Security, Bureau of Immigration and Customs Enforcement (ICE)
proposed guidance on the digitization of the Form I-9. Employers are not required to use the
electronic I-9 forms. However, if an employer maintains an electronic record of the Form I-9, the
employer would be required to maintain an audit trail that would show who has accessed the
employer’s electronic I-9 records, and the actions performed within or on the computer system. ICE
has also proposed other documentation requirements for the electronic storage of the I-9 forms.
SHRM recommended that ICE reconsider the effects that the audit trail and documentation
requirements would have on HR professionals, and also, that ICE provide guidance on the electronic
storage of passports, drivers’ licenses, and other ancillary documents for the Form I-9. SHRM also
recommended that ICE apply the current documentation requirements for the paper-based Form I-9 to
the electronic storage rules.
State
There is no new Pennsylvania state legislation
Of interest:
Enacted Legislation
NEW JERSEY
Employer Mandated Health Care
On August 21, New Jersey Governor Jon Corzine (D) signed into law Senate Bill 539 (Companion
Assembly Bill 932), requiring the Commissioner of Health Services to prepare an annual report to be
entitled, “Access to Employer-Based Health Insurance.” The new law, which becomes effective
immediately and supplements current law P.L. 2005, c.156, will result in the comprehensive
compilation of certain data on employers with an aggregate of 50 or more employees who are
enrolled in FamilyCare or Medicaid recipients, as well as employers of individuals who receive
“charity care” throughout New Jersey. Similar bills, which have been nicknamed “Name & Shame”
health care bills, have been introduced in various state legislatures this year.
SHRM requested support: Please vote Nov 7th.