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by Thomas M. Christina, Ogletree Deakins, Greenville, S.C.

In August, President Bush signed the Pension Protection Act of 2006, which includes many benefits-related amendments to the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA).

Among other things, the new law will:

  • Result in broad-ranging changes in the funding requirements for defined-benefit pension plans.
  • Impose potentially heavy new financial obligations on employers with multi-employer pension plans.
  • Change important aspects of plan administration for many 401(k) and other defined contribution plans.

Pension-plan funding

The law will bring about significant changes in how single employer and multi-employer defined-benefit plans are funded. For single-employer plans, pensions must predict when liabilities will occur: those that will come due within five years, between five years and 20 years or after 20 years.

Most single-employer pension managers may assume investment returns based on corporate bond rates. However, plans that are less than 80 percent funded will not be permitted to take these into account. Stricter funding provisions will be phased in through 2011.

Additionally, the new law establishes funding thresholds for multi-employer plans.

Trustees of “critical” status multi-employer plans—those plans that are funded below 65 percent—must develop a rehabilitation plan designed to bring the multi-employer pension plan out of critical status in 10 years.

The act empowers trustees of “critical” status plans to reduce certain retirement benefits, impose a 5 percent surcharge on contributions (rising to 10 percent), and propose additional measures to the bargaining parties, including a “default proposal” that will take effect unless an alternative is adopted by the parties.

Investment education

Recognizing the value of a better-informed investor, Congress eased restrictions on plan managers who offer investment advice to plan participants under defined-contribution plans. Under certain conditions, managers may receive a fee or other compensation for the investment advice.

Diversification requirements

In light of scandals in which funds were over-invested in company stock, Congress imposed new diversification requirements on most qualified plans.

In plans containing employer company stock as one of the investment options, participants must be permitted to divest employer securities and to reinvest in any one or more of at least three other diversified options.

The same rule applies to employer contribution accounts of participants with three or more years of service.

Auto-enrollment plans

Section 902 of the Act resolves any doubts regarding the state law validity of so-called “negative election” plans. Under such plans, the default option for participants who don’t choose an investment option is a predetermined rate for elective deferral contributions.

Plan administrators may now legally develop default-investment options where funds (both employee and employer contributions) are allocated if the plan participant fails to specify another investment option.

Withdrawal liability

Section 204(b) of the act adds a new circumstance of “partial withdrawal” from multi-employer plans. “Partial withdrawal” occurs when an employer permanently ceases to have an obligation to contribute under one or more (but fewer than all) collective-bargaining agreements that require contributions to a particular plan, if the employer “transfers such work ... to an entity or entities owned or controlled by the employer.”

Cash balance/pension equity plans

Through this legislation, Congress finally put to rest the long-running legal battle over the legality of cash-balance conversions.

Under the Act, a plan generally will not be treated as violating federal age-discrimination law. As long as benefits for older workers accrue at a minimum Treasury Department determined rate, the plan is deemed nondiscriminatory.

Bottom line: Plan now

Most of the Act’s provisions take effect in the 2008 tax year, but don’t wait. Now is the time to structure any changes mandated by the legislation. Plan administrators should assess the plan’s funding status and schedule any contribution changes necessary to bring the plan into compliance.

Those looking to convert pension funds to cash-balance accounts now have the green light to do so. Next year is a good time to execute this conversion so that it is in place by the time 2008 arrives.

Thomas M. Christina is an employment law attorney with Ogletree Deakins in the firm’s Greenville, S.C., office. He can be reached at thomas.christina@ogletreedeakins.com.

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