THE PENSION
PROTECTION
ACT OF 2006
New law strengthens
retirement savings,
but is it a panacea for
traditional pensions?

By JUDY ALEXANDER

Worried about whether or not your pension will be ready and waiting for you when you retire? If so, you are like millions of Americans who have nervously monitored the problems of some high-profile companies that underfunded or mismanaged
their pension plans, leaving retirees without the income they had counted on for their retirement.

Or you may have already watched your own company freeze pension benefits — effectively stopping the buildup of benefits that you could have earned in the future.

The worries are legitimate. A recent survey from the Employee Benefit Research Institute found that a majority of workers 45 and older have less than $50,000 in savings. Clearly, Americans are not saving nearly enough for the future, and fewer are covered by a defined-benefit pension every year. Even employees who participate in a pension plan are on edge with concerns that their promised pensions may not be what they expected, or worse yet, may be nonexistent at retirement.

To force employers to bolster their pension plans, Congress spent its summer working on and enacting the Pension Protection Act of 2006, hailed as one of the most sweeping reforms of America’s pension laws in more than 30 years. The 900-page statute, signed into law on Aug. 17, creates new requirements for employers who offer pension plans in an effort to protect the 44 million Americans still covered by the plans.

Specifically, legislation changes pension accounting rules, increases employers’ contribution limits to their plans, and changes the rules about required premiums paid to the Pension Benefit Guaranty Corp., the federal pension insurance system.

No one actually expects these measures to solve the problem of underfunded pension plans immediately, but the legislation sets some standards for putting pension plans on a more solid footing. Even so, many analysts predict that the more stringent requirements could push more companies to freeze — or even eliminate — their pension plans and switch all workers to a defined-benefit plan, such as a 401(k).

But there are bright spots in the Pension Protection Act for the millions of American workers who already contribute to a 401(k), an IRA or other defined-benefit plan, with changes that have made saving for retirement much more attractive. More than 20 tax benefits for retirement saving are included in the new law. Of most interest to those already working on their retirement nest egg are permanent increases in contribution limits for IRAs and defined contribution plans — 401(k)s, 403(b)s, 457s, SIMPLE plans andCASARSEPs (increased contribution limits were set to expire in 2010 before the legislation was enacted).

IRA contribution limits and catch-up contributions for taxpayers at least 50 years old are now permanent.

Contributions and catch-up contributions for taxpayers at least 50 years old or defined benefit plans are now permanent as well.

These permanent increases in contribution limits for IRAs and other defined-contribution plans should make saving for retirement more desirable for the millions of individuals who could be contributing to a retirement plan but aren’t for some reason. (As many as 40 percent of workers older than age 40, for example, don’t participate in a 401(k) plan even though their employer offers it.)

And to make 401(k) plan participation even easier, the new legislation encourages companies to automatically enroll 401(k)-eligible employees and to automatically increase their 401(k) contributions each year.CAIn other words, workers will be required to “opt out” of a 401(k) plan, if offered, and will not need to make the effort to sign up for the plan.

Predictions have future 401(k) participation at as much as 90 percent because of the automatic enrollment feature. Another new benefit that many workers should like: The provider of an employer’s 401(k) plan can offer in-person investment advice to participants as long as it is based on a computer model or offered by a financial adviser who charges a flat fee.

A new provision for the non-spouse beneficiaries of a retirement plan also broadens the appeal of these plans. The new law allows non-spouse beneficiaries to roll over assets inherited from a qualified plan, such as a 401(k), into an IRA. The beneficiary avoids tax on the rollover and is taxed only when assets are withdrawn. Before the Pension Protection Act, this tax benefit was available only to someone who had inherited retirement assets from a deceased spouse. New tax treatment is good news for non-spouse beneficiaries, such as a domestic partner, a child or other relative of a retirement plan participant.

Also included in the new law is a provision for members of the military services who are called to active duty between Sept. 11, 2001, and Dec. 31, 2007. These individuals can take a penalty-free withdrawal from their 401(k) or IRA, and if they redeposit the withdrawal no later than two years after the end of their active duty, they avoid income tax on the withdrawal.

Other provisions of the law include faster vesting for 401(k) plans and less stringent requirements for hardship withdrawals from the plans. The new law also permanently allows for Roth 401(k) and Roth 403(b) plans (which previously were set to expire after 2010). As with a Roth IRA, an individual may make post-tax contributions to a Roth 401(k) or 403(b) plan, up to plan limits. The assets grow tax-deferred and may be withdrawn in retirement.

Also extended permanently is the Saver’s Tax Credit that would have expired at the end of this year. The provision gives low- and moderate-income workers a tax credit of up to $1,000 for contribution to either an IRA or a 401(k).

With so many changes that can affect where, when and how much you can save for retirement, it’s worth stating the obvious: Everyone’s circumstances are a little different. Before you make a decision about your finances, consult a trusted tax adviser — your CPA, a tax attorney or a financial planner.