The Pension Protection Act of 2006, signed by President Bush in August, swept in big changes for employer retirement plans. In many cases, it will place more responsibility on employees to save for their retirement.
Educating employees about the law will likely fall to you. Here are five key points you should explain to employees long before the major provisions take effect in 2008:
1. Automatic enrollment changes. To encourage more people to save, the act gives employers more freedom to automatically enroll employees in the 401(k) plan. Employees who don't want to participate must opt out. Alert new hires and existing staff if you establish an auto-enrollment feature.
2. Keep funding IRAs and 401(k)s. The new law allows employees to continue contributing to their IRAs and 401(k)s at current high levels. Those contribution thresholds were scheduled to expire after 2010, but the new law makes permanent those favorable levels.
Employees can deposit up to $4,000 into an IRA, and that level increases to $5,000 in 2008. Those with 401(k) plans can pour in as much as $15,000.
3. Older employees can contribute more. The law makes permanent a temporary perk that allows "catch up" contributions. People 50 or older can add an extra $1,000 to their IRAs or an additional $5,000 to their 401(k) plans each year.
4. Tax break for lower-income workers. The "saver's tax credit," due to expire this year, is here to stay. It rewards lower-income employees with a tax credit of up to $1,000 for contributing to an IRA or 401(k). The credit is $2,000 for married couples.
5. Roth rollover allowed. Beginning after 2007, participants can roll over funds directly from a qualified retirement plan to a Roth IRA. Currently, that takes two steps: (1.) rolling over from a qualified plan to a traditional IRA and then (2.) rolling that IRA into a Roth.
Online resources on pension law:
- SHRM: www.shrm.org/issues/pension
- ASPPA: www.aspa.org/government/comment08-17-06.htm
- Congress: www.house.gov/jct/x-38-06.pdf