By DEBORAH CROWE
It’s enough to make even the most seasoned human resources professional dizzy.
The Pension Protection Act of 2006 that was signed into law last month not only amends the Employee Retirement Income Security Act but the U.S. tax code,all to establish new minimum funding standards for employer pension plans.
The act also seeks to clear up murkiness in how retirement plans can be structured, a gray area that has left companies open to lawsuits.
Employer groups have applauded the changes to the ERISA law. But there’s still plenty of room for confusion.
Under the new law, companies are expected to fund all of their pension commitments, up from 90% before. To shore up worker safety nets, the law encourages employers to strengthen 401(k) plans.
In return, the legislation gives employers time to do so: Most have seven years to fully fund their obligations.
Airlines in bankruptcy proceedings that have frozen their pensions get an additional 10 years. Airlines with active plans also get 10 years instead of seven.
Companies are required to give workers more details about their pensions. The law also puts worker pension obligations before other compensation promises.
That means underfunded companies will have a harder time fulfilling any “golden parachute” clauses in an executive’s employment contract that promise generous benefits if a company is acquired and the executive ends up out of a job.
The restrictions will apply to the rank and file as well: Employers and unions won’t be able to promise higher benefits when a pension is underfunded.
Employer groups received a big benefit in the legislation when “cash balance” hybrid plans, which have grown in popularity and are similar to a 401(k) but with some traditional pension features. They were given greater protection from age-discrimination and other liability challenges.
A key change regarding defined contribution plans encourages employers to automatically enroll workers in a 401(k) plan, with the onus on the employee to opt out of the program. Currently, it is up to employees to opt in. At least a third of workers don’t enroll.
There also is a process for gradually increasing the amount saved, and employers get incentives to match some of the money that workers put in the plan.
The law allows plan providers chosen by the employer to offer investment advice to workers, with safeguards against conflicts of interest. Any manager who recommends financial products and receives commissions must rely on computer-generated recommendations.
The law also:
Enables people to put more money in their IRA and 401(k) accounts. That includes a new option, Roth 401(k)s, which became available this year. Similar to a Roth Individual Retirement Account, the plans have workers pay tax on their earnings before saving, but the money accumulates and can be spent tax free in retirement.
Makes permanent higher annual contribution limits that were set to expire in the next decade, and allows future adjustments for inflation. IRAs and Simple IRA plans (which allow employer contributions and are often used by small businesses) are included. For 401(k)s the limits are $15,000, for Simple plans $10,000 and for IRAs $4,000, and up to $5,000 in 2008.
Makes permanent additional contributions, known as catch-up contributions, for employees age 50 and older. The catch-ups are $1,000 for IRAs, $2,500 for Simple IRA plans and $5,000 for 401(k)s in 2006. The law provides for potential inflation adjustments to the Simple IRA and 401(k) limits in future years.
Employers with 100 or fewer employees that offer new plans can take a tax credit of up to $500 a year per employee for each of the first three years for pension plan startup costs.
There’s also clarification of the “safest available annuity” standard, which makes it easier for a 401(k) or other retirement plan to offer an annuity distribution option for retirees who have limited time to monitor their account asset allocation.
Allows workers to leave benefits to a domestic partner or dependent, not just a spouse. And workers could draw on retirement funds for medical or financial emergencies involving domestic partners or other beneficiaries.
Prevents employers from forcing workers to invest too heavily in company stock rather than in more diversified holdings.
Crowe is a staff writer with the Los Angeles Business Journal.
_________________________________________________________
Pension Act Provisions
Requires companies that underfund pensions to pay additional premiums
Requires companies that nix pensions to pay more to the federal pension insurance system
Requires companies more accurately measure obligations of their pensions
Closes loopholes allowing underfunded plans to skip pension payments
Raises caps on what employers can put into pension plans to add more during good times and keep plans solvent in lean times
Prevents companies with underfunded plans from promising extra benefits to workers without paying for them upfront
Source: www.whitehouse.gov
