Pension Protection Act of 2006
Encyclopedia
The Pension Protection Act of 2006 (Pub. L. 109–280), 120 Stat. 780, was signed into law by U.S. President George W. Bush
on August 17, 2006.
s to pay higher premiums to the Pension Benefit Guaranty Corporation (PBGC) and extends the requirement of providing extra funding to the pension systems of companies that terminate their pension plans. It also requires companies to analyze their pension plans' obligations more accurately, closes loophole
s that previously allowed some companies to underfund their plans by skipping payments, and raises the cap
on the amount employers are allowed to invest in their own plans. This will allow employers to deduct more money using the pension tax shield
in times of high profits.
It requires actuaries to use the equivalent of the projected accrued benefit cost method for determining annual normal cost.
Other elements:
, private foundations
, and supporting organizations
.
Public safety officers include Police, Firefighters, ambulance workers, and many types of federal and state employees dealing with criminals.
Some of the provisions of the PPA of 2006 that affect the PBGC include:
Worker, Retiree, and Employer Recovery Act of 2008, was signed into law by the President. The Act makes technical corrections related to the PPA of 2006.
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
on August 17, 2006.
Pension reform
This legislation requires companies who have underfunded their pension planPension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
s to pay higher premiums to the Pension Benefit Guaranty Corporation (PBGC) and extends the requirement of providing extra funding to the pension systems of companies that terminate their pension plans. It also requires companies to analyze their pension plans' obligations more accurately, closes loophole
Loophole
A loophole is a weakness that allows a system to be circumvented.Loophole may also refer to:*Arrowslit, a slit in a castle wall*Loophole , a short science fiction story by Arthur C...
s that previously allowed some companies to underfund their plans by skipping payments, and raises the cap
Tax cap
A tax cap places an upper bound on the amount of government tax a person might be required to pay. In this case the tax is said to be capped. Tax caps typically affect a commercial property, or the commercial portion of a mixed commercial/residential property....
on the amount employers are allowed to invest in their own plans. This will allow employers to deduct more money using the pension tax shield
Tax shield
A tax shield is the reduction in income taxes that results from taking an allowable deduction from taxable income. For example, because interest on debt is a tax-deductible expense, taking on debt creates a tax shield...
in times of high profits.
It requires actuaries to use the equivalent of the projected accrued benefit cost method for determining annual normal cost.
Other elements:
- Provides statutory authority for employers to enroll workers in defined contribution planPensionIn general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
s automatically; formerly, the authority came from DoL rulemaking - Expands disclosure that workers have about the performance of their pensions
- Removes the conflict of interestConflict of interestA conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
fiduciary liability from giving self-interested investment advice for retirement accounts - Gives workers greater control over how their accounts are invested
- Extends the 2001 tax act's contribution limits for IRAIndividual Retirement AccountAn individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
s and 401(k)401(k)A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
s. - Allows automatic contributions to be returned to employees without tax penalties, if employee opts out within 90 days
- Established safe harbor investments, also known as Qualified Default Investment Alternatives, to protect employers from liability of losses suffered by automatically enrolled employees
Charitable organization reform
The Pension Protection Act also reformed several types of tax-exempt charitable organizations including donor-advised fundsDonor advised funds
A donor-advised fund is a charitable giving vehicle administered by a public charity and created for the purpose of managing charitable donations on behalf of an organization, family, or individual...
, private foundations
Foundation (charity)
A foundation is a legal categorization of nonprofit organizations that will typically either donate funds and support to other organizations, or provide the source of funding for its own charitable purposes....
, and supporting organizations
Supporting organization (charity)
A supporting organization, in the United States, is a public charity created by the U.S. Internal Revenue Code in . A supporting organization either makes grants to, or performs the operations of, a public charity similar to a private foundation...
.
Supporting Organizations
The Pension Protection Act cracks down on supporting organizations, particularly type III supporting organizations. This act applies further regulations and penalties that takes away several of the privileges that supporting organizations have over private foundations. This includes applying private foundation law of excess benefit transactions, excess business holding rules, and pay out requirements among others.Public Safety Officers
One tax benefit allowed under the pension protection act is that qualified retired "Public Safety Officers" may exclude from income the cost of health insurance. This exclusion is shown on the tax return as simply subtracting the exclusion from the figure shown on the 1099-R form, and placing the smaller figure on the pension income line on the 1040. The text literal "PSO" must be written on the dotted line to the left of your figure. See IRS Pub 575 for more details.Public safety officers include Police, Firefighters, ambulance workers, and many types of federal and state employees dealing with criminals.
Early withdrawal penalty exceptions
The PPA tells the Secretary of Treasury to provide further exceptions to the 10% penalty on withdrawing from a retirement account before reaching proper retirement age. In particular, some penalty exceptions are narrowly defined to only covering IRA accounts, leaving 401(k) and other plan holders in the cold. Broadening those exceptions to cover any retirement plan is one hoped-for change. Also, relief for taxpayers who use retirement funds to protect their home and mortgage is anticipated, but again not written into law. IRS publications provide little guidance on this topic, if it has been acted on at all.Inherited IRAs
The PPA provides a new mechanism for an IRA to be passed on to a non-spouse beneficiary. Transferring an IRA account this way can allow better control over when to withdraw (and pay taxes on) the IRA funds. An IRA account can only be passed on once, and it is not directly transferred into the beneficiary's account. Instead, a special IRA account with the heading " Deceased Name For the Benefit of Beneficiary Name " is made to keep the transfer. As this is a new rule on a subject with long term financial consequences, approach this cautiously. There are several gotchas that could invalidate the transfer, causing everything to be taxed in one year.Pension Benefit Guaranty Corporation
The Pension Benefit Guaranty Corporation (PBGC) is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in over 29,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by investment returns.Some of the provisions of the PPA of 2006 that affect the PBGC include:
- The methodology for calculating the "variable-rate" PBGC premium is changed.
- The PBGC's guarantee of pension benefits that become payable on a plant shutdown is limited.
- If the PBGC takes over a terminated plan, employees' pension benefits are frozen as of the date of the plan sponsor's bankruptcy filing (which may be months or even years before the plan terminates).
- The complicated rules that govern the PBGC's pension guarantee for business owners are simplified.
- If the PBGC takes over a terminated plan, the plan sponsor is required to pay a "termination premium" of $1,250 per participant per year for three years.
2008 amendment to 2006 Act
On December 23, 2008, P.L. 110-458 (H.R. 7327), theWorker, Retiree, and Employer Recovery Act of 2008, was signed into law by the President. The Act makes technical corrections related to the PPA of 2006.
See also
- Pensions Act 2008Pensions Act 2008The Pensions Act 2008 is an Act of the Parliament of the United Kingdom. The principal change brought about by the Act is that all workers will have to opt out of an occupational pension plan of their employer, rather than opt in...
, UK law concerning automatic enrolment - Pensions in the United States