Lawyers.com > Understand Your Legal Issue > Employee Benefits > Pension and Profit Sharing Plans > The Pension Protection Act Of 2006

The Pension Protection Act of 2006 (PPA), signed into law on August 17, 2006, is the most sweeping pension legislation in over 30 years and includes a number of significant tax incentives to enhance and protect retirement savings for millions of Americans.

The PPA created an insurance system for businesses offering private pensions. The insurance is funded by premiums collected from these employers.

Highlights of the PPA Legislation

The legislation:

• Requires companies that under-fund their pension plans to pay additional premiums
• Extends a requirement that companies that terminate their pensions provide extra funding for the pension insurance system
• Requires that companies measure the obligations of their pension plans more accurately
• Closes loopholes that allow under-funded plans to skip pension payments
• Raises caps on the amount that employers can put into their pension plans, so they can add more money during good times and build a cushion that can keep their pensions solvent in lean times
• Prevents companies with under-funded pension plans from digging the hole deeper by promising extra benefits to their workers without paying for those promises up front

Which Retirement Plans Does the PPA Affect?

The PPA affects defined benefit and defined contribution pension plans, as well as individual retirement accounts (IRAs). Further, the PPA changes various rules applicable to nonqualified deferred compensation, retiree health benefits, and health and welfare benefits. Many of the changes are designed to encourage retirement savings by individuals. Congress is placing primary responsibility for retirement planning and funding not on the employer, but on the individual. The Act also contains special provisions that affect only certain industries and sectors, such as airlines, state and local governments, defense contractors and churches.

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

• The ability of plan fiduciaries to be compensated for providing participants with investment advice under certain circumstances
• Mandatory diversification provisions for defined contribution plans (except stand alone employee stock option plans (ESOPs)) that contain publicly-traded employer securities
• Various provisions to encourage the use of automatic enrollment in 401(k) plans
• Accelerated minimum vesting schedules (3 year cliff or 2-6 year graded) for all non-elective employer contributions to most defined contribution plans
• Increased communications to participants, including a new annual funding notice for all defined benefit plans, a summary of defined benefit plan benefits once every three years, and quarterly account statements for defined contribution plans that provide for participant directed investments
• Allowance of tax-free distributions from an annuity to be used for long-term care, and employer use of excess pension assets to fund future retiree health expenses

Will the PPA Make a Significant Difference in My Life?

Even with the changes made by the PPA, it is doubtful that many people would say the United States retirement system for the private sector is in better shape than it was 20 years ago. The corporate world has trimmed back on the costs of defined benefit pension plans, with the savings often directed into gold-plated bonuses and retirement funds for the most senior executives. This movement of money to the top rungs of the economic ladder parallels what has occurred in the last 20 years with respect to wages and salaries. The PPA alters none of this.

Instead, it provides further inducements for individual savings in the form of 401(k) plans and cash balance plans. It is not clear whether Congress will provide sufficient financial incentives for defined benefit and defined contribution pension plans to enable the next generations of working and middle class Americans to avoid hard times during retirement.

Questions for Your Attorney

• Is the PPA going to insure that my pension is available to me when I retire?
• What is cliff vesting and graded vesting?
• What impact does the PPA have on me?

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