At long last, Congress has passed the biggest pension reform law in years!

The massive new Pension Protection Act of 2006 extends more than 20 retirement planning provisions, adds tough restrictions for charitable deductions and impacts literally dozens of vital tax rules.

Here’s a roundup of the key changes in the new law:

Funding defined-benefit plans. The new law requires employers—beginning in 2008—to fund defined-benefit plans to cover 100 percent of the liability instead of the current 90 percent. Plans that aren’t fully funded at the beginning of 2008 may gradually increase funding over a seven-year period.

Strategy: Weigh the extra cost against the benefits. This new rule could force your company to revamp its defined-benefit plan or switch to another type of plan.

Plan deduction limits. The new law also encourages employers to create a funding cushion through higher deduction limits. For plan years beginning in 2006 and 2007, the maximum deduction amount increases from 100 percent to 150 percent of plan liabilities.

After 2007, deductible contributions may equal the funding target, normal costs and a “cushion account” of 50 percent of target liability plus accountability for projected compensation increases over the value of plan assets.

Hybrid plans. The new law provides legal protection to employers who want to convert a traditional pension plan into a hybrid “cash balance”plan. The new law insulates employers from age-discrimination lawsuits by employees who could claim such a switch harms older employees.

Auto-enrollment plans. It will now be easier for employers to establish an automatic employee-contribution feature for their 401(k) plans. You can also automatically increase the percentage of your employees’ contributions.

Strategy: Switch your 401(k) to an automatic salary-deferral contribution setup for your employees. That can help you and other execs in your company boost their contributions without violating nondiscrimination rules because your lower-paid employees will be contributing more under the automatic setup.

Investment advice. In a controversial provision, the law permits providers of IRAs, 401 (k) plans and other plans to offer personalized investment advice to participants. Generally, any fees that advisers receive for those services—including commissions—can’t be based on the investment options that the participants select.

Roth IRA rollovers. Beginning after 2007, you’ll be able to roll over funds directly from a qualified retirement plan to a Roth IRA (assuming you meet other requirements). Currently, it takes a two step process: First, you have to roll over from a qualified plan to a traditional IRA; then, roll over from the traditional IRA to a Roth.

Qualified plan incentives. The new law extends many favorable retirement plan provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that were scheduled to expire after 2010.

Retirement-saver’s credit. The new law also extends, with minor modifications, the special retirement saver’s credit available to certain low to middle-income employees, which would have expired after 2006.

Charitable donations. The new law enhances benefits for food and book donations by business entities but tightens deductions for donations of clothing and household items. It also permits—for the first time—tax-free distributions of IRA proceeds for charitable purposes, through the 2007 tax year.

Significantly, the law flat out denies deductions for cash contributions unless the donor has written proof (the charity’s name and the contribution date) of the contribution amount.

Strategy: Make sure you toe the line. Starting next year, you must substantiate cash donations of less than $250 with a cancelled check, bank record, credit or debit card statement or a receipt from the charity. Otherwise, no deduction. The existing rule requiring a receipt from the charity for donations of $250 or more still applies. The new law affects only small cash contributions.

Conservation easements. The law raises—for 2006 and 2007—the deduction limit for qualified conservation easements from 30 percent to 50 percent of adjusted gross income (AGI), if certain conditions are met.

S corporations. Effective for contributions made through 2007, the reduction of a shareholder’s basis in the stock resulting from a corporate charitable donation will equal the shareholder’s pro rata share of the donated property’s basis.

Section 529 plans. A late addition to the new law preserves tax breaks for Section 529 plans that were scheduled to expire after 2010. Besides allowing tax-free distributions for qualified higher education expenses, you can continue to roll over funds to a different state plan each year without changing the beneficiary.

Also, you can still use a Coverdell Education Savings Account and 529 plan for the same beneficiary in the same year.

Strategy: If you’ve stayed away from Section 529 plans due to uncertainty about future tax rules, it's now safe to proceed.

Tax breaks preserved in the new law

The retirement planning provisions made permanent by the new law include: Higher contribution amounts for IRAs, defined-contribution plans and SIMPLE plans. Higher elective deferral amounts for 401(k) and 457 plans. Increases in the annual benefit limit for defined-benefit plans. Catch-up contributions for IRA, SIMPLE and 401(k) participants age 50 and older. Faster vesting of employer-matching contributions. Greater portability for 403(b) and 457 plans. Use of Roth 401(k) and Roth 403(b) plans. Start-up tax credit for new small employer-sponsored plans. Availability of “deemed IRAs” set up by employer plans.