The Pension Protection Act of 2006 (the Act)
was passed by Congress on August 3, 2006 and
signed into law by President Bush on August 17,
2006. This bill represents the first comprehensive
pension legislation since the Employee Retirement
Income Security Act (ERISA) was signed into law
more than 30 years ago in 1974.
Automatic 401(k) Enrollment
The Act makes it easier for companies to
automatically enroll employees into their 401(k)
plans by explicitly protecting automatic
enrollment against state interference. With
automatic enrollment, employees' salary is
automatically reduced to fund their 401(k)
contributions unless or until an employee takes
steps to opt-out of participating.
Diversification Requirements It has not
been uncommon for 401(k) plans to require that
employer contributions to the plan be invested in
employer stock. With the collapse of Enron
illustrating the risks that employees run by being
substantially invested in their employer's stock,
the Act requires that any defined contribution
plan holding publicly-traded employer securities
allow plan participants to diversify their account
balances invested in those securities. At least
three materially different investment alternatives
must be available to plan participants.
Simplified Rollovers Currently, certain
rollovers are either prohibited or require use of
a conduit traditional IRA. The Act simplifies
rollovers in these situations: 1. Currently, a
spouse beneficiary may roll over his or her
spouse's interest in a qualified retirement plan,
government plan or 403(b) plan into an IRA and not
be taxed until distributions are actually taken.
Beginning in 2007, the Act extends this special
rollover treatment to non-spouse beneficiaries as
well. 2. A temporary rule allowing after-tax
contributions to employer plans to be rolled over
into IRAs has been made permanent. 3. Direct
rollovers will be allowed from retirement plans to
Roth IRAs, beginning in 2008, assuming all
conversion qualifications are met (e.g., income
requirements). 4. The IRS is granted the permanent
authority to extend the 60-day rollover period
when failure to roll funds over within 60 days is
due to events beyond the reasonable control of the
individual.
Roth 401(k) and 403(b) Plans Originally
set to expire after 2010, the availability of a
Roth feature in 401(k) and 403(b) plans, which
first became available in 2006, has been made
permanent.
Higher IRA Contributions The higher
dollar contributions to IRAs have been made
permanent ($4,000 in 2006 - 2007, $5,000 in 2008
and inflation adjusted thereafter). In addition,
the additional $1,000 "catch-up" IRA contribution
available to older workers (over age 50) is made
permanent. Also, beginning in 2007, taxpayers will
be allowed to direct the IRS to deposit all or a
portion of their tax refund into an IRA.
Higher Defined Contribution Plan Limits
The higher dollar contributions to defined
contribution plans, 401(k)/403(b) plan elective
deferrals, 457 plan deferrals and SIMPLE plans, as
well as the catch-up contributions that can be
made by older workers, have been made permanent.
2006 Contribution Limit (as adjusted for
inflation) Defined Contribution $44,000
401(k)/403(b)/457 Deferrals $15,000 401(k)
Catch-Up Contributions (age 50+) $5,000 SIMPLE
(IRA and 401(k)) $10,000 SIMPLE Catch-Up
Contributions (age 50+) $2,500
Giving to Charity: The Pension
Protection Act giveth and it taketh away:
IRAs: In 2006 and 2007 only, taxpayers
who are at least age 70-1/2 can make tax-free
distributions of up to $100,000 from traditional
or Roth IRAs directly to charities. The charitable
donation must be made directly by the IRA trustee
to a qualified public charity. Distributions,
however, cannot be made to donor-advised funds or
to supporting private foundations.
Donations of Clothing and Household Goods:
Effective for donations after August 17, 2006,
clothing and household goods to charity must be in
"good condition" or better for the donor to
receive a tax deduction. The Act, however, does
not define what "good condition" is. A limited
exception allows a deduction for single items in
"less than good" condition if the item is
appraised at more than $500 It's interesting to
note that individuals claimed $36.9 billion in
noncash donations on Form 8283 in 2003, some 48%
of which was represented by clothing.
Cash contributions Beginning in the 2007
tax year, cash contributions regardless of amount
are not deductible unless the donor can
substantiate the contribution, either through a
bank record, cancelled check or a statement from
the charity showing the name of the charity, the
amount of the contribution and the date the
contribution was made.
These are just a few of the highlights from
the new Act. If you would like more information,
please contact our office, and we will gladly go
into more detail with you.
