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Pension Act promotes savings, protects retirement accountsPosted by solo 401k on: 2006-12-07 18:09:44 in category:
Retirement Headlines [ Print | Permalink / 0 Comment(s) ] Pension Act promotes savings, protects retirement accounts Financial By Andy Barkate We've read many times over the past few years about corporate pension fund problems, remember Enron and both United and Delta Airlines. One can find countless articles and studies that indicate that we Americans aren't saving nearly enough. Well, this new tax and pension law is aimed squarely at these issues. It's been described as the most sweeping pension legislation in more than thirty years. The new Pension Protection Act of 2006 (PPA), which was signed into law by President Bush on August 17, includes provisions designed to strengthen traditional pension plans that now represent some 44 million American workers and retirees. The new law also does much to promote savings: it makes permanent increased IRA, retirement plan, and catch-up contribution limits, and the tax-advantaged benefits of all 529 college savings and prepaid tuition plans. Here's a summary of some of the major provisions of the new law that directly affect financial advisors and Americans: Traditional Pension Plans The new law overhauls the funding and disclosure rules for defined benefit pension plans, changes the rules for conversions of pension plans to cash balance plans, and makes many other changes relating to pension plans and their beneficiaries. For instance, the new law requires most pension plans to become fully funded over a seven-year period. The new law increased the deduction limits for single- and multi-employer plans, under certain circumstances. And the new law restricts plans from offering any lump sum benefit payments when the plan is less than 60 percent funded. In addition, payouts under nonqualified deferred compensation and special pension plans for executives are restricted if employee pensions are severely under funded. With respect to valuing pension liabilities, the new law extends the use of a long-term corporate bond interest rate instead of the 30-year Treasury rate. And the new law revises the rules for calculating the amount of a lump-sum distribution from a defined benefit plan. The new law also provides legal protection to employers who now provide traditional pension plans but want to convert those plans into hybrid “cash balance” plans, which are part traditional pension and part defined contribution plan. PPA clarifies that this is legal. Under current law, the ambiguity allowed employee lawsuits to emerge challenging the switch. Retirement Savings Incentives The PPA allows employers to automatically enroll workers in defined-contribution retirement plans. And it provides employers with a safe harbor for automatic enrollment, default investment selection for automatic enrollment, and automatic escalation of contributions, as well as 404(c) protection for default elections. The new law also gives workers the right to sell publicly-traded company stock received as a matching contribution in their retirement plan account after three years of service for original matching contributions, and immediately for employee contributions. The new law prohibits companies from forcing employees to invest any of their own retirement savings contributions in company stock. And the new law permanently extends “Saver's Credit” for low-income taxpayers who contribute to an IRA. The Saver's credit was set to expire Dec. 31, 2006, and indexes the credit to inflation. Investment Advice The new law will also enable qualified fiduciary advisers to deliver personally-tailored investment advice face-to-face, by phone, or electronically for 401(k)s and IRAs, including HSAs, Archer MSAs, and Coverdell education savings accounts. Under the new law, fiduciary advisers for employer-sponsored plans must base their recommendations on a computer model certified and audited by an independent third party. Advisers who don't use a computer model can charge a fee for their investment advice to 401(k) plan participants, but the fees may not vary based on the investments selected. The Department of Labor and Treasury will develop guidelines regarding computer models “as soon as practicable after the date of enactment”. IRAs The new law makes permanent the IRA and pension provisions enacted in the 2001 tax cut legislation that were scheduled to sunset after 2010. The 2001 law increased annual contribution limits for IRAs and workplace plans such as the 401(k); created additional catch-up contributions for individuals age 50 and older; and created incentives for small employers to offer workers retirement savings options. Under the new law, the current contribution limit for IRAs of $4,000 rises to $5,000 in 2008 and is adjusted for inflation after that. The Pension Protection Act of 2006 liberalizes a number of qualified plan and IRA payout and rollover rules. For instance, after 2007, taxpayers who plan to do a Roth conversion would be permitted to make direct rollovers from qualified plans to Roth IRAs vs having to go to a regular IRA. Although technically called a “rollover,” it is not. For inherited retirement accounts the non-spouse beneficiaries must use a trustee-to-trustee transfer to avoid immediate taxation. In other words, a check cannot be issued directly to the non-spouse beneficiary and then deposited into his/her IRA. If it's done this way, this opportunity to keep the money tax deferred is lost for good and the IRS will want their pound of flesh. And non-spouse designated beneficiaries can make rollovers of inherited amounts in qualified plans or IRAs to their own IRAs after 2006. PPA also gives taxpayers the option of depositing a portion of their federal tax refund directly into an IRA and other accounts. And, in what will surely help older workers continue working on a part-time basis for former employers, defined benefit plans could make in-service distributions to age-62-or-older participants. Currently many plans allow in-service distributions at 591/2 years of age. To determine how these changes will affect you contact a qualified financial advisor. Andy Barkate CCPS, CRPS is the President of California Retirement Plans, a local Retirement and Investment Planning firm, with offices in Bakersfield, Lancaster and Ridgecrest.. Your questions and comments are welcome at, 661-631-4355, 760-371-2115, 800-914-6837 or e-mail abarkate@calfinancial.com. |
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