Modifications to Limits on IRAs

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Modifications to Limits on IRAs Powered By Docstoc
					     Overview of the Pension
      Protection Act of 2006
Brian Graff, Esq., ASPPA Executive Director/CEO
          Pension Reform Passes
• H.R. 4, the ―Pension Protection Act of 2006‖ (PPA)
  passed by House on July 28, 2006 (279-131); passed by
  Senate on Aug. 3, 2006 (93-5).

• President Bush signed into law on August 17, 2006.

• Revenue lost relating to pension and retirement savings
  provisions: $66 billion.
   – SBJPA of 1996—cost of pension provisions was $2

• Possibility of technical corrections bill?

EGTRRA Retirement Savings Provisions
         Made Permanent

           EGTRRA Permanency
• Provisions were set to expire 12/31/2010.
• Increased contribution limits to 401(k)s and DC plans.
• Catch-up contributions for older workers.
• Increased benefit limits for DB plans.
• Increased compensation limit.
• Roth 401(k)s.
• Relaxation of top heavy rules.
• SAVER’S credit made permanent.
   – Was set to expire in 2006
   – Income eligibility brackets indexed beginning in 2007

              PPA ’06 Summary
• DC plan changes to promote automatic enrollment and
  give participants access to more investment advice.

• New benefit statement requirements.

• Increased deduction limits for combination plans.

• Prospectively clarifies age discrimination rules for cash
  balance and other hybrid plans.

• Replaces current funding rules with a single minimum
  funding standard with enhanced funding requirements
  for ―at-risk‖ plans.

• Various PBGC premium and related changes.
       Auto Enrollment Safe Harbor
• Effective beginning in 2008, provides 401(k) plans with an
  automatic enrollment ―safe harbor‖ pass on 401(k) and
  top-heavy testing, where certain conditions are met.
• Must cover all eligible employees (employees can opt out
• Applies to new hires and those who did not make an
  affirmative election to participate.
   – May make sense to go to existing workers before
      implementing to confirm non-participation
• Automatic enrollment percentage must be between 3%
  and 10%.
• Employee contributions must automatically increase by 1%
  annually after the first full plan year of participation to
  reach at least 6% (but no more than 10%) of pay.
• Matching contributions for NCHEs equal to 100% of first
  1% of pay, plus 50% of the next 5% of pay OR at least a
  3% nonelective contribution.
• Matches and nonelectives must be 100% vested after 26
      Auto Enrollment Safe Harbor
• Annual notice must be provided within a reasonable time
  period before each plan year—at least 30 days if based on
  current law 401(k) plan safe harbor.
• Preemption of State Laws to ERISA-covered plans
  provided notice is given—first time preemption would be
  conditioned—this may be changed.
   – Default investments must also be invested in
      accordance with DOL guidance
• Allows for permissible withdrawals requested within 90
  days after first deferral is made.
   – Distribution presumably within reasonable period
   – Need guidance on impact of permissible withdrawal
• All automatic enrollment plans have extended ADP testing
  period to 6 months (e.g., June 30th).
• For all 401(k) plans, excess contributions taxed in year
  distributed—gap period income no longer required to be
   – Effective in 2008—will Treasury waive before then? 7
            Investment Advice

• Beginning in 2007, provides a new prohibited transaction
  exemption for ―fiduciary advisers‖ to provide advice to
  participants and beneficiaries on their own funds under 2
  alternative exemptions:
   – Does not apply to plan level advice
   – Joint Tax description indicates this is not intended to
     circumvent existing guidance (e.g., Sun America)

• Fee leveling exemption: fees received by fiduciary
  adviser are not dependent on the investment selections
   – Application to individual fiduciary adviser versus
     financial institution?

           Investment Advice
• Computer Model Exemption: advice delivered to be
  generated by computer model certified by independent
  investment expert.
   – Computer model must take into account all plan
     investments and must not be biased in favor of
     adviser’s own investments
   – Does not preclude participant from requesting other
       • Unclear whether that allows advice outside of
         computer model

            Investment Advice
• Detailed disclosures required to be made before the
  initial advice given, as well as annually thereafter.
   – The relationship between the fiduciary adviser and
      the plan investment options and fees that will be
   – The past performance of investment options under
      the plan
   – Services provided by the adviser and that the
      adviser is a fiduciary
   – That the participant is free to engage an
      independent adviser
   – Other disclosures required by securities laws

• ―Fiduciary adviser‖ defined as an RIA, bank, ins. co.,
  broker/dealer, or an affiliate (any employee).
           Investment Advice
• Transactions must be ―arm’s length‖ and occur solely at
  participant direction—fees must be reasonable.

• Employer liable for prudent selection and periodic review
  of adviser, but not responsible for monitoring specific
  advice given to participants.

• Both exemptions require independent audit for
  compliance with requirements—need guidance on extent
  of audit requirement and whether adviser can pay for

• DOL to determine feasibility of applying computer models
  to IRAs and HSAs.
   – May need technical correction to allow class
     exemption for advice for IRAs and HSAs—statute
     would require fee leveling
Prohibited Transaction Exemptions
• Block Trades – Exemption provided for the purchase or
  sale from a party in interest of a ―block trade‖ transaction
  (defined as at least 10,000 shares or market value of
  $200,000) that is allocated across two or more unrelated
  client accounts of a fiduciary (certain conditions apply).
   – This exemption allows ―block‖ sales for more than one
      party to secure lower fees and transaction prices
   – Eases current restrictions on block trades, but it is
      unclear whether it is available where the counterparty
      in the block trade is a plan fiduciary

Prohibited Transaction Exemptions
• Transactions with Plan Service Providers—provides a
  broad exemption for transactions between a plan and
  party in interest (solely by reason of providing
  services) where the plan receives ―adequate
  consideration,‖ defined as:
   – For securities traded on a generally recognized
     market: (1) the prevailing price on a national
     exchange; or (2) a price not less favorable than
     the offering price established by an independent
     party, or
   – In the case of assets other than a security, the fair
     market value of the assets as determined in good
     faith in accordance with DOL regulations
   – Exemption does not apply to transactions between
     a plan and fiduciary with discretion over the assets
     involved in the transaction
 Prohibited Transaction Exemptions
• Correction Period—Permits a 14-day correction period for
  certain nonfiduciary securities- or commodities-prohibited
  transactions (in general, once a transaction has settled, a
  prohibited transaction is deemed to occur).
   – Exemption permits correction of transaction within the
      14-day window from the date discovered (or that
      reasonably should have been discovered)
• Foreign Exchange Transactions—Exempts foreign exchange
  transactions between a plan and a bank or broker-dealer (or
  affiliate) in connection with the sale, purchase, or holding of
  foreign exchange securities upon certain conditions.
   – Many foreign exchange transactions are with a plan’s
      trustee or custodian, upon which existing class
      exemptions require the need for individualized or standing
   – Exemption does not provide relief for foreign exchange
      transactions between the plan and fiduciary who has14
      discretion over the assets in the transaction
Prohibited Transaction Exemptions
• Regulated electronic communications network—Provides an
  exemption for securities transactions (and other property)
  executed through an electronic communications network
  (ECN), an alternative trading system (ATS) or similar
  execution trading system.
   – Plans are requesting services through electronic systems
     in which broker-dealers and financial institutions have an
     ownership interest
• Cross Trading for Large Plans—Provides an exemption for
  active cross trades (a direct purchase or sale of securities
  with another client of an investment manager) of large
  plans with assets of $100 million or more.
   – The exemption contains detailed conditions on fees and a
     prohibition on commissions, which is not likely to alter
     reliance on existing cross trading exemptions for passive
     or agency cross trades
       Definition of Plan Assets
• Under prior law, hedge funds and private equity funds with
  more than 25% of their assets from public, private and
  foreign employee benefit plans were considered fiduciaries
  under ERISA subject to the PT rules.
• PPA narrows the ―benefit plan investor‖ definition under
  ERISA for purposes of considering what is a plan asset to
  include only:
   – Plans covered by ERISA
   – IRAs and other arrangements subject to IRC Sec. 4975,
   – Those entities whose assets include plan assets by
     reason of a plan’s investment in the entity
• Amendment has the effect of excluding some non-ERISA
  plans (e.g., foreign plans), which will allow more plan
  investments in alternative asset classes, such as hedge and
  private equity funds.
• Amendments give DOL legislative authority to issue
  regulations that define when an entity holds ―plan assets,‖
  which DOL did not previously have under prior law.      16
      Changes to Fiduciary Rules
• Gives DOL authority to establish default investment
  that satisfies ERISA section 404(c).
   – DOL has 6 months to issue final guidance
   – Likely to consider lifestyle and/or balanced funds
   – Unclear if this will apply for 404(a) purposes
   – Will there be interim reliance on proposed rules?
   – Requires annual notice of right to invest

• Penalties for coercive interference with participant’s
   – Up to 10 years in prison and $100,000 fine

• Directs DOL to issue guidance within 1 year that the
  selection of annuity as a form of distribution does not
  need to meet the safest available annuity
      Changes to Fiduciary Rules
• 404(c) protection doesn't apply during blackout
  period—DOL directed to issue guidance on how to
  satisfy fiduciary requirements during blackout.
   – One-participant plans not required to give
     blackout notice
• Effective in 2008, 404(c) safe harbor where right to
  invest affected by change in investment options.
   – At least 30-60 days in advance of the change,
     participants are notified and given right to direct
     among new (or remaining) investments
   – In the absence of affirmative election, investments
     are mapped to the new options that are
     reasonably similar in terms of risk and return
   – Unclear when no similar investment exists—
     possible use of default option                      18
             Other DC Reforms
• Beginning in 2007, DC plans invested in publicly
  traded employer securities must give employees right
  to diversify.
   – Immediate right with respect to elective deferrals
   – After 3 years of service with respect to employer
   – 3-year transition rule for employer contributions
     invested in employer securities as of 12/31/06
     (except for employees who attained age 55 during
     the 2006 plan year)
   – Stand-alone ESOPs exempt; applies to KSOPs
   – No collective fund exception—may need technical
   – Notice of right to diversify required 30 days in
     advance—first notices required by Dec. 1st of this
     year—need guidance quickly
             Other DC Reforms
• All DC contributions (not just matching contributions)
  must vest under either a 3-year cliff or 6-year graded
  vesting schedule.
   – Applies beginning with contributions attributable
      to the 2007 plan year
   – Service prior to 2007 considered
• Beginning in 2007, after-tax contributions can be
  rolled over from a QP to a 403(b) annuity and vice
   – Note: 403(b) regulations effective date delayed
      until 2008
   – Should allow rollovers from Roth 401(k) to Roth

             Other DC Reforms
• Beginning in 2008, rollovers from QPs, 403(b)
  annuities and 457 plans allowed directly to a Roth
   – Subject to current law conversion restrictions
     ($100,000 AGI limit) until they are eliminated after
   – Note: IRA conversion provision allows
     conversions to Roth IRAs in 2010 with tax spread
     over 3 years
• Treasury directed to revise hardship distribution rules
  to allow for hardship distribution if the conditions
  constituting a hardship or an unforeseeable
  emergency occurs with respect to a beneficiary under
  the plan.

              Other DC Reforms
• 10% early withdrawal tax does not apply to IRA
  distributions or distributions from a 401(k) or 403(b)
  plan (but not 457 plan amount-attributable rollovers)
  attributable to elective deferrals, if made to an individual
  called to active duty for at least 180 days (or for an
  indefinite period) if made after the individual is called for
  duty and before the period of duty ends.
   – Effective for distributions made after 9/11/01 for
     those called to duty after 9/11/01 but before
   – 401(k) and 403(b) plans permitted to make these
     distributions regardless of QP distribution restrictions
   – Make-up contributions permitted within 2 years after
     end of duty period—do not impact contribution limits
   – Claims for refund allowed for at least one year
   – Reporting guidance needed quickly
             Other DC Reforms
• Beginning in 2007, benefits payable under a QP,
  403(b) annuity, or 457 plan to a beneficiary other
  than a surviving spouse may be transferred directly
  to an IRA and treated as an inherited IRA.
   – Amounts rolled to an IRA generally must be paid
     out within 5 years
• Directs IRS to develop forms allowing income tax
  refunds to be deposited directly to an IRA.
• Special IRA catch-up contributions (up to $3,000 per
  year) permitted for 2006-2009 for individuals who
  participated in a 401(k) plan matched with employer
  stock where the employer went bankrupt and
  executives were indicted as a result of transactions
  relating to the bankruptcy.
   – Those age 50 and older not also eligible for catch-
     up contributions
      Miscellaneous QP Provisions
• Beginning in 2007, permits tax-free distributions
  ($3,000 annually) from governmental retirement
  plans for health and long-term care insurance
  premiums for retired public safety officers.
• All governmental plans (including CODAs) are exempt
  from the nondiscrimination and participation rules.
• Permits governmental plans to allow participants to
  purchase service credits for a period regardless of
  whether service is performed (within limits).
• Tribal plans treated as governmental plans for all
  ERISA and Code purposes so long as all employees
  are performing essential government services and
  are not performing commercial activities (e.g., casino
   – Controversial provision that may be repealed        24
    Miscellaneous QP Provisions
• DOL directed to issue within 1 year regulations clarifying
  that a QDRO will not fail because of the time it is issued
  or because it is issued after or revises another QDRO.
   – Concern that this will allow post-death QDROs

• IRS directed to update EPCRS program, taking into
  account concerns of small employers.
   – May lead to EPCRS covering scrivener’s errors

• Notice and comment period regarding distributions
  expanded to 30-180 days before the distribution
   – Notice must include language about the consequences
     of a participant’s failure to defer receipt, if applicable
   – Effective for distributions in 2007—180-day period
     theoretically already in effect                         25
     Miscellaneous QP Provisions
• DOL directed to provide simplified 5500 Form
  (beginning with 2007 plan years) for plans with fewer
  than 25 participants.
• For plan years beginning in 2007, one-participant plans
  with assets less than $250,000 will be exempt from the
  5500 Form filing requirement.
• Rollover distributions will no longer result in a reduction
  in unemployment compensation.
• Plan amendments made pursuant to PPA, or regulations
  thereunder, may be retroactively effective and will not
  violate the anti-cutback rule, if made by the end of the
  2009 plan year.
   – IRS permitted to carve out exceptions to the anti-
     cutback relief—guidance on exceptions, if any,
     needed quickly.

           Benefit Statements
• New benefit statement requirements for all plans—
  effective 1/1/07—DOL will issue model notice.
• Benefit statements required (1) quarterly for participant-
  directed plans; (2) annually for other DC plans; and, (3)
  every 3 years for DB plans (application of effective dates
  for DB plans unclear?).
• Actual DB not required if participant given annual notice
  of right to request statement.
• Statement must ―on the basis of the latest available
  information‖ show amount of vested benefits.
   – JCT description—vesting need only be updated
      annually if SPD would allow participants to determine
      updated vested amount
   – Issue of multiple statements due to brokerage
      accounts—can they be delivered separately?
            Benefit Statements
• Statements must also include explanation of any
  permitted disparity or floor-offset arrangement
  affecting benefits under the plan.

• DC plan statements must show assets as of the most
  recent valuation date (e.g., some plan assets are
  trustee invested and ―hard-to-value‖), including
  employer securities.

• Statements for participant-directed plans must
  include (1) an explanation of any restrictions on the
  right to direct an investment; (2) information on the
  importance of diversification; and, (3) a statement
  about the risk of holding more than 20% of a
  portfolio in the security of one entity.
           Benefit Statements
• All statements may be provided in written, electronic,
  or other appropriate form.
   – Interaction with DOL electronic communication
   – JCT description suggests benefit statements could
      be ―provided on a continuous basis through a secure
      plan website for a participant‖
   – Does that require quarterly notification?

              Deduction Limits
• For 2006/2007, PPA permits maximum deductible
  contributions of up to 150% of current liability over the
  value of plan assets—no change to current liability
  calculation intended.

• After 2007, the maximum deductible contribution is equal
  to the excess of the funding target, target normal cost,
  and a ―50% cushion amount‖ over the value of the assets.

• Minimum required contributions always deductible.

• 50% cushion is 50% of funding target.
   – Compensation increases can be assumed
   – PBGC-covered plans can assume 401(a)(17)
     compensation limit increases
   – Cushion amount cannot reflect HCE benefit increases
     made in the last 2 years—what about plan adoption?
            Deduction Limits
• For 2006/2007, combined plan deduction limit 404(a)(7)
  does not apply if DC contributions do not exceed 6% of
   – 150% of CL deduction limit available

• However, if contribution exceeds 6%, combined plan
  deduction limit does apply without regard to DC
   – Both plans then limited to DB minimum required

• After 2007, combined plan deduction limit does not apply
  to PBGC-covered plans regardless of the level of DC

• Non-PBGC plans still subject to above rules.
      Cash Balance/Hybrid Plans
• Effective after June 29, 2005, all DB plans (including cash
  balance/hybrid plans) are not age discriminatory so long
  as a participant’s accrued benefit is at least equal to the
  accrued benefit of any similarly situated, younger
  individual who is or could be a participant.
   – ―Similarly situated‖ means the same in every respect
     including service, compensation, position, date of hire,
     work history (except for age)
   – Accrued benefit may be expressed as a hypothetical
   – Beginning in 2008, cash balance/hybrid plans interest
     credits must not exceed market rate defined by
     Treasury; does not preclude reasonable fixed rates
     (but how high?)
   – At distribution, losses cannot reduce account balance
     below amount of aggregate contributions, except for
     variable annuities                                     32
       Cash Balance/Hybrid Plans
• Eliminates the ―whipsaw‖ problem—lump sum equals
  hypothetical account balance.

• Beginning in 2008, employees with 3 years of service
  must be 100% vested—applies to prior accruals.

• Conversions after June 29, 2005, must use ―A+B‖
  formula—no wear away of early retirement subsidies
  permitted—Treasury directed to issue regulations for
  mergers and acquisitions.

• Contains ―no inference‖ language; IBM Cash Balance
  decision confirms legitimacy of cash balance plans.

• Possible reissuance of cash balance nondiscrimination
               DB(k) Proposal

• Applicable for plans with 500 or fewer employees.
• Creates an ―eligible combined plan‖—allows DB and
  401(k) to be treated as a single plan, if utilize defined
  safe harbors.
• Safe harbor design formulas provide pass on 401(k) test
  and top heavy.
   – 1% of final average pay for up to 20 years
   – Cash balance alternative :
      • 30 and under       2% of pay
      • Under 40           4% of pay
      • Under 50           6% of pay
      • 50 and over        8% of pay
   – 100% vested 4-2 match with automatic enrollment
              DB(k) Proposal
• Otherwise, matching contributions up to 6% of pay;
  option to contribute to cash balance account.
• 3-year vesting.
• Non-elective contributions allowed.
• Nondiscrimination rules—current law.
• 415 Applies to DB and DC portions separately.
• Funding rules apply only to DB portion; DB portion
  covered under PBGC.
• Combined deduction limit does not apply.
• Single Form 5500, SPD, plan audit.
• Does not allow for non-safe harbor plans—other technical
  corrections needed.
• Effective date beginning in 2010.

      Basic Funding Requirements
• PPA overhauls the DB minimum funding rules and
  the deficit reduction contribution for single-employer
  defined benefit plans.
• Special Funding Rules for 2006-2007.
   – PPA extends 2004-5 funding relief (PFEA) through
   – 2006-7 current liability determined using an
     interest rate within the range 90-100% of the 4-
     year weighted average composite corporate bond
• Effective in 2008, a single-employer DB plan’s
  contributions are based on a plan’s funding target:
   – Two targets: a 100% funding target for ―not at-
     risk‖ plans; additional contributions required for
     ―at-risk‖ plans
  Minimum Required Contribution
• Beginning in 2008, the basic ―minimum required
  contribution‖ (MRC) for any plan year is the sum of:
• The plan’s ―target normal cost‖ for the plan year;
   – Represents the present value of benefits expected
     to be accrued in the current year
   – Includes an increase in benefits attributable to
     services performed in prior years by reason of an
     increase in compensation during the current plan
   – Reduced to the extent plan assets exceed the
     funding target (PVAB of the 1st day of plan year)
• A ―shortfall amortization charge‖ necessary to amortize
  the difference between assets and 100% of liabilities
  over 7 years;
   – Phased in over 4 years for well-funded plans until
     2011, AND
• Any waiver amortization charge (where Treasury has
  waived any minimum required contributions).            37
      Interest Rate Assumptions
• Beginning in 2008, the interest rate to determine
  liabilities (and lump sums) would be valued using a
  ―yield curve‖ based on high-quality corporate bond rates
  of varying maturities.
• Separate interest rates would be established for each of
  3 ―segments‖ – liabilities due in 5 years; between 5 and
  20 years; and those longer than 20 years.
    – Yield curve would be derived from a 2-year average
      of interest rates on investment-grade bonds
    – Alternatively, a plan can elect to use the full yield
      curve (i.e., non-segmented) without the 2-year

      averaging, but only for minimum funding
• Transition Rules.
    – For 2008, rate used would be one-third based on the
      new rate and two-thirds based on old rate (i.e.,
      corporate bond weighted average)
    – For 2009, rate used would be two-thirds based on the
      new rate and one-third based on old rate              38
           Other Assumptions
• Treasury to revise mortality table at least once every 10
  years, which should reflect mortality improvements.
   – Treasury can give permission to use specific
     employer table
   – Proposed 2007 table likely to be postponed
• Plan assets can either be market or average value.
   – No more than 2-year average allowed provided it’s
     between 90-110% of market value
   – Contributions post valuation date must be discounted
   – Valuation date 1st day of plan year, except plans with
     fewer than 101 participants can use any day
• Quarterly contributions required if funding shortfall for
  the preceding plan year.
   – 25% of the lesser of 100% of the prior year’s MRC or
     90% of the current year’s MRC
              Credit Balances
• Effective in 2008, credit balances utilize a more complicated
  set of rules.
• Creates two separate components of credit balance:
   – A funding standard carryover balance from 2007
   – A pre-funding balance based on contributions in excess
     of the minimum required contributions for plan years in
     2008 and later plan years
• Credit balances may be used toward current year’s
  minimum funding requirement only if the liabilities are at
  least 80% funded (from the prior year’s valuation date).
   – Carryover (but not pre-funding) balance included in
     assets for 80% measurement
   – IRS to provide rules for estimation for 2007 funded
     status for purpose of determining whether the credit
     balance may be used in 2008 plan year
• Credit balances would reflect the investment performance
  of plan assets and would be subtracted from assets for
  most determinations under the bill (e.g. at-risk rules). 40
        Rules for ―At-Risk‖ Plans
• Plans defined as ―at-risk‖ plans would be subject to
  additional funding requirements (based on additional
  required actuarial assumptions).
• Additional mandated assumptions for ―at-risk‖ plans:
   – Participants eligible to retire in current or next 10 years
      will start benefits at their earliest eligibility date
   – Assumes benefits will be paid in lump sums (or in
      whatever form results in the largest liability for the plan)
   – If the plan has been at-risk for at least 2 of 4 plan years,
      applies a ―loading factor‖ equal to $700 per participant
      plus 4% of funding target and target normal cost for
      the plan year
• Exempts plans with 500 or fewer participants on every day
  of the preceding year (treating all defined benefit plans of
  an employer as a single plan).                             41
       Rules for ―At-Risk‖ Plans
• A plan is ―at-risk‖ if it meets the following ―70/80 percent‖
  test for the prior plan year:

   – Less than 80% funded at ―not-at-risk‖ funding target
     minus credit balance
      • 80% threshold is phased in over 4 years: 65% in
        2008; 70% in 2009; 75% in 2010; 80% in 2011 and
        later), AND
   – Less than 70% funded using the ―at-risk‖ liability
     funding target and subtracting credit balance

• At-risk funding rules effective for plan years beginning in
  2008—guidance needed on application of look-back rules
  for 2007.

            Benefit Restrictions
• Benefit restrictions are applicable to all DB plans that are
  underfunded or have liquidity problems.
• The ―adjusted funding target attainment percentage‖
  (AFTAP) must be calculated to determine whether the
  benefit restrictions apply:
   – Based on plan’s ratio of plan assets (reduced by credit
     balances) to the plan’s funding target
• With the exception of accelerated benefit distributions:
   – Plan sponsors may make additional contributions or
     provide security to avoid the limitations
   – Restrictions do not apply to new plans for the first 5
     years of the plan
• Small plans not exempt from these rules even though
  they are exempt from at-risk rules.

          Benefit Restrictions
• Restrictions do not apply if a plan’s funding target
  percentage (no reduction for credit balance) is at
  least 92% in 2008; 94% in 2009; 96% in 2010; and
  100% thereafter.

• Plan participants must be notified within 30 days
  after the plan has become subject to a restriction.
   – Guidance needed for benefit explanations in such

• Restrictions triggered on certification of AFTAP by
  Enrolled Actuary—implementation guidance needed
  since restrictions apply as of plan valuation date.
   – If certification not done by October 1, AFTAP
     deemed to be less than 60% effective October 1
           Benefit Restrictions
• For plans less than 80% funded, plan amendments
  increasing benefits are prohibited (permits increases in
  flat dollar plans that do not exceed rate of pay
• For plans between 60% and 80% funded, lump sum
  payments (and other accelerated benefit distributions)
  are limited to:
   – 50% of the original amount, or
   – The present value of the maximum PBGC benefit at
      the participant’s age
• For plans less than 60% funded:
   – Plan accruals are frozen (participants continue to earn
      vesting and eligibility service)
   – Shutdown benefits could not be triggered unless
      immediately funded, AND
   – Lump sum payouts (and other accelerated benefits)
      are prohibited
• Questions about application of previous restrictions when45
  plan no longer subject to them.
     Benefit Limitations – NQDC
• Adverse tax consequences would result if amounts are set
  aside for a nonqualified deferred compensation plan
  (NQDC) where:
   – A plan is in at-risk status (does not apply to plans 500
     or less)
   – The employer is in bankruptcy, or
   – The period that begins 6 months before and ends 6
     months after (12-month period) the date any DB plan is
     terminated in an involuntary or distress termination
• Applies to NQDC for the top five ―covered employees‖
  under IRC Sec. 162(m) or any executive officer subject to
  Sec. 16(a) of the Securities Exchange Act of 1934.
• Need relief for mergers and acquisitions.

              PBGC Premiums
• Makes no change to increased flat-rate per-participant
  premium from the current $19 to $30 (changed in Deficit
  Reduction Act of 2005).
• For 2006/2007, VRP calculated using 85% of the
  corporate bond rate.
• After 2007, VRP computed using the three-segment yield
  curve; unfunded vested benefits equal the funding target
  (only vested benefits) in excess of market assets for the
  plan year—full funding exemption repealed.
• VRP for each participant is capped for small plans (i.e.,
  25 or fewer employees) to be no more than $5 multiplied
  by the number of plan participants.
• Plans terminated with insufficient assets subject to $1250
  per participant termination premium.
           Other PBGC Changes
• Expands PBGC missing participants program to
  terminating DB plans not subject to Title IV and DC plans.
   – Effective after PBGC regulations issued
   – Needs to be coordinated with DOL missing participants
     guidance to relieve fiduciary liability
• Changes phase-in of PBGC guarantee for substantial
  owners effective in 2006.
   – Guarantee phased in over 5 years for substantial
     owners with less than a 50% ownership interest (i.e.,
     between 10-50% ownership)
   – Guarantee phased in over 10 years for substantial
     owners with a 50% or more interest in the sponsor
• PBGC now authorized (but not required) to pay interest
  on premium overpayment refunds.
         Lump Sum Distributions

• IRC Sec. 417 (e)—PPA replaces the current minimum
  lump sum rules under IRC Sec 417(e) (30-year Treasury
  rates) to require the three-segment yield curve approach.
   – Phase-in of the segmented yield curve of 20% a year
     from 2008-2012
   – Treasury to develop mortality table based on table
     used for funding purposes
   – Current rules remain in effect for 2006 and 2007

    Section 415 Benefit Limitations
• Retroactive to January 1, 2006, when calculating 415
  limit for lump sums, interest rate must be the greater
    – 5.5%
    – Rate that would provide a benefit of not more than
      105% of the benefit that would be provided if IRC
      417(e)(3) rate were used, or
    – The plan’s rate
• Need Treasury relief for lump sums paid out in 2006
  based on 30-year Treasuries after PFEA expired.
• Impact on 2006 required PFEA amendments?
• In calculating 415 limit for DB plans, average
  compensation includes years of service when
  participant was not an active participant in plan.
    – Corrects problem with recently issued regulations
• Beginning in 2007, benefits from DB plans maintained
  by churches not subject to 100% of compensation 415
  limit, except for benefits of HCEs.                    50
            Other DB Changes
• Beginning in 2007, permits in-service distributions
  from DB plans to participants who have reached age
   – Broader than phased retirement proposed
      regulations—regulations may still be finalized for
      other workers who are 59½
• Beginning with 2008 plan years, plans subject to J&S
  rules will need to offer an additional option.
   – If QJSA is less than 75%, the additional option
      must be 75%
   – If QJSA is greater than or equal to 75%, the
      additional option must be 50%
   – So, you could have a QJSA of 100% with an
      additional option of 50%—or a QJSA of 74% and
      an additional option of 75%
• 10% early withdrawal tax no longer applies to early
  distributions from pension plans for public safety
  officers that retire after age 50.                       51
     New Disclosure Requirements
• Beginning 2008, plan sponsors must furnish a new
  detailed funding notice to all participants and the PBGC
  within 120 days after the end of the plan year.
   – Must include whether plan’s funding target percentage
     is less than 100%; the plan’s assets and liabilities as of
     the last day of the prior plan year; breakdown of active
     participants versus retirees; the plan’s funding policy
     and asset allocation and an explanation of any
     amendments affecting plan liabilities
   – Need guidance on doing estimates, if actual data not
   – Small plans (100 or fewer participants) allowed to
     provide notice when Form 5500 due
   – DB SARs repealed (needs technical correction)
   – DOL to provide model notice
     New Disclosure Requirements
• Electronic display of Form 5500 information required to be
  posted on plan sponsor ―intranet‖ web site and DOL web
   – Effective in 2008—unclear what information must be
   – 5500 will require disclosure of assumptions used to
      project future retirements and forms of distribution

• Plan sponsors required to file an ERISA 4010 notice if
  funding target percentage below 80% for preceding year.

• Participants have right to get access to information filed
  with the PBGC upon a plan termination.