On August 17, 2006, President Bush signed into law the most comprehensive pension legislation in over 30 years.  The Pension Protection Act of 2006 attempts to improve the financial condition of the traditional pension plans and also extends or improves various other retirement savings options.  Pension legislation and regulations have historically been very complex. The new act is no exception, with over 900 pages in its final version. The more significant aspects of the act are funding of traditional pension plans, participant education, multi-employer plans and other retirement savings options.

We have recently seen numerous, very large long-established public companies (such as General Motors) struggling to improve the funding of their traditional pension plans. Funding of pension plans refers to the amount of assets set aside in the plan to pay the promised benefits. Some of these companies with rather significant funding deficiencies have chosen to bankrupt the company or otherwise demonstrate the employer cannot remain in business unless the plan is terminated. The plan would then be a distressed termination, thereby automatically making the plan, and the funding shortfall, the responsibility of the Pension Benefit Guaranty Corporation (PBGC), the pension provider of last resort. The PBGC is to pension plans what the FDIC is to the banking industry. The act is attempting to avoid a crisis with the PBGC similar to the past crisis with the FDIC.

The new law requires pension plans to increase the funding level to 100 percent during the next seven years. The old funding standard was 90 percent. The Department of Labor estimates that under the new law approximately 30,000 plans are now underfunded and will need to put additional money into their plans. The total underfunding is estimated to be approximately $450 billion.

In the past, companies were limited as to the amount of money they were allowed to set aside in the pension plans. The act provides some relief to those restrictions by allowing companies to set aside additional amounts during the good times.

While it does appear the new law improves the ability of the plans to pay the promised benefits, some pension professionals believe that increasing the funding will accelerate plans into the PBGC. This would include those plans of employers currently struggling to meet the required amounts.

The act also identifies pension plans with funding below 80 percent to be identified as at risk plans. At risk plans are required to put more money into the plans at a faster rate. They are also restricted on increasing benefits and are required to provide additional information to the participants. The restrictions and limitation increase, as a plan’s funding level continues to decline below 80 percent.

While more than half of the 900 pages of the act focuses on traditional pension plans, there are certain improvements to other retirement vehicles such as IRAs and 401(k) plans. It appears that Congress has finally realized that all employees need easy, immediate and consistent access to some type of retirement plan.

Under the new provisions, employers can easily enroll new participants automatically into a 401(k) plan. While employees are automatically enrolled, they can still opt out of the plan if they choose not to put their money into the plan. Along with the automatic enrollment, the percentage of compensation deferred can increase on an automatic basis. Again, employees can opt out of the automatic increase option.

The new law also provides participants with increased access to investment advisers and other professionals. In the past, there has been a significant amount of concern that investment advisers would steer participants to investment vehicles that provide greater commissions to the advisers rather than meeting the needs of the participants. Perhaps the increased access to investment information via the Internet and the overall increased knowledge of investment strategies have lessened these concerns.

For several years now, taxpayers receiving refunds on their federal income tax return could have the refunds automatically deposited into a bank account. The new law now allows the tax refund to be deposited directly into your IRA. The IRS is issuing new forms where taxpayers can split their refunds into as many as three different accounts. If you are funding your prior year IRA contribution with an automatic deposit, consideration should be given to the processing time of the tax return to ensure the contribution is made by the due date of the return.

Certain other provisions for 401(k) plans and IRAs that would expire at the end of 2010 have been made permanent.  One of these provisions is the Roth 401(k) option for employee contributions. The Roth option, which allows participants to pay in after tax now and take the money and earnings out tax-free at retirement, has been available since the beginning of 2006.  However, the Roth option has not been widely implemented. This is because the provision was scheduled to expire in 2010 and there would be considerable amount of expense associated with maintaining both Roth accounts (tax free at retirement) and regular accounts (taxable at retirement) for each participant.

This is only a small portion of the provisions of the new law. Obviously, it will take several months before all the final regulations and interpretations are issued. You should consult your pension and/or tax adviser for additional information.

		David M. Raeck, CPA is a Shareholder and Director of employee benefit plans division of Maner, Costerisan & Ellis, P.C.