Relief at Last: The Pension Protection Act of 2006

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Relief at Last The Pension Protection Act of
2006
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Peter A. Susserpsusser_at_littler.com Kevin L.
Wrightkwright_at_littler.com Michelle I.
Pretlowmpretlow_at_littler.com
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Agenda

• Funding Provisions
• Single Employer
• Multiemployer
• Notices
• Hybrid Plans
• Deferred Comp Plans
• Defined Contribution Plans

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Single Employer Plan Funding

• Minimum Required Contribution
• The new legislation generally requires that
  contributions in a given year be the full value
  of the normal cost (the full value of new
  benefit accruals in that year).
• Any previous funding shortfalls and waivers are
  amortized over seven years.

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Treatment of Credit Balances

• Under prior law, a plan sponsor could use credit
  balances in the funding standard account against
  future contribution obligations.
• New law more stringent
• Credit balances must be marked to market
• Restricts extent to which plans below 80 funded
  can use credit balances to satisfy minimum
  funding.

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Interest Rates

• Interest rate used to determine current
  liabilities.
• Under prior law, 30-year Treasury security rate
  (artificially low) exception for 2004 and 2005
  expired 12/31/05.
• New legislation reinstates a corporate bond rate
  for 2006 and 2007.
• For 2008 and following, yield curve based on a
  24-month average of corporate bond rates.

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Restrictions on Benefit Increases

• Prior law restrictions applied only if plan was
  less than 60 funded.
• No benefit increase with a value of greater than
  10M.
• New legislation much more restrictive.

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Restrictions on Benefit Increases

• Plans less than 60 funded.
• Plan sponsor must freeze plan (no new accruals)
• Plant shutdown benefits may not be paid (unless
  immediately funded such to bring the plan up to
  60 funding)
• Lump sum benefits are prohibited.

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Restrictions on Benefits

• Less than 80 funded
• Partial lump sums only (generally, no more than
  50 of a participants accrued benefit).
• Benefit increases prohibited unless immediately
  funded to the extent necessary to bring the plan
  to at least 80 funded.

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PBGC Premiums

• Previous legislation recently increased flat rate
  premiums to 30 per participant per year (from
  19).
• PBGC variable rate premiums now applicable to a
  larger universe of plans.

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Multiemployer Funding

• Amortization Periods
• Under prior law, many funding obligations (past
  service and actuarial gains and losses) were
  amortized over 30 years.
• Under the new legislation, most amortization
  periods are shortened to 15 years.

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Multiemployer Funding

• Extensions of Amortization Periods
• Previous law permitted for plans in financial
  distress, upon application to the IRS.
• IRS retains discretion to grant or deny.
• New law requires IRS to grant the application for
  five year extension if certain requirements are
  met, with discretion to grant another five years
  upon request.

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Multiemployer Funding

• Funding requirements and benefit restrictions
  based on funding status.
• New legislation introduces concepts of
  endangered (yellow zone) and critical (red
  zone) plans.

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Multiemployer Funding

• Yellow zone plans (endangered)
• Requires plan to adopt a funding improvement plan
  that would improve the plans funded status by
  one-third within a 10-year period.
• Plan must provide bargaining parties with options
  that either (1) reduce future accruals or (2)
  increase contributions or (3) a combination of
  both.

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Multiemployer Funding

• Red zone Plans (Critical)
• New legislation requires that the Trustees adopt
  a rehabilitation plan that includes an immediate
  5 increase in employer contributions.
• In subsequent years, this surcharge increases to
  10.
• The surcharge cannot be the basis for any
  contribution increases.
• Surcharge ceases at the time a new CBA is
  negotiated which incorporates a rehabilitation
  plan.

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Multiemployer Funding

• Red Zone Plans (continued)
• Trustees may reduce some previously accrued
  benefits.
• No benefit increases during critical status
  without certification by the plan actuary that
  the plan can afford the increases.

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Withdrawal Liability Reforms

• Limits on withdrawal liability in the event of
  liquidation or sale of assets.
• Partial cessation (partial withdrawal) where
  work is contracted out to a third party owned or
  controlled by the employer.
• Free look provisions can apply to construction
  industry plans.

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Notices

• Current law already requires annual notice of
  funding status to participants for multiemployer
  plans (just started this year).
• New legislation requires this for single-employer
  plans as well.

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Hybrid Plans

• Cash Balance Plans Under Legal Cloud
• IBM and other cases
• Legislation largely removes age discrimination
  concerns.
• Amends ERISA, IRC and ADEA to provide that such
  plans are not age discriminatory if, as of
  certain date, participants accrued benefit is
  same or greater than younger similarly situated
  participant.

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Hybrid Plans

• Interest rate for crediting must be no greater
  than market rate.
• Vesting required after three years (no graduated
  vesting).
• Effective for existing plans as of June 29, 2005.

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Deferred Compensation

• Defined benefit plan sponsors who set aside
  assets for non-qualified plan benefits for a
  covered employee during a restricted period
• Transferred assets will be taxed upon vesting
• 20 tax and interest penalties under 409A will
  apply
• Applies to assets transferred or set-aside after
  8/17/2006

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Deferred Compensation cont.

• Covered Employee
• Current Employee
• Listed in the proxy statements compensation
  disclosure schedule or
• Qualifies as an insider under 16(a) of the
  Securities Exchange Act of 1934
• A former employee who was a Covered Employee at
  time of termination

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Deferred Compensation cont.

• Restricted Period
• Qualified plan is in At-Risk status
• Plan sponsor is in bankruptcy
• 12-month period beginning 6 months before the
  termination of an under funded qualified plan

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Defined Contribution Provisions

• EGTRRA Provisions Permanent
• Automatic Enrollment
• Default Investments
• Investment Advice
• Other Defined Contribution Issues
• COLI Contracts

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EGTRRA

• Economic Growth Tax Relief Reconciliation Act
  of 2001
• Scheduled to sunset on 12/31/2010
• PPA makes EGTRRA changes permanent
• Included Provisions
• Increased contribution limits
• Catch-up contributions
• Roth contributions to 401(k) and 403(b) plans

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Automatic Enrollment

• Provides a safe harbor
• Plans that meet the safe harbor requirements
• Satisfy ADP and ACP tests
• Not subject to top-heavy plan rules

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Automatic Enrollment cont.

• Safe Harbor Requirements
• Default deferral rate must not be less than
• 3 for 1st year of participation
• 4 for 2nd year of participation
• 5 for 3rd year of participation
• 6 for 4th year and thereafter
• At no time may the default percentage exceed 10

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Automatic Enrollment cont.

• Current employees exempt if election made to
  participate or not to participate
• Matching or Non-elective Contributions
• Non-elective contribution of 3 of compensation
  for all eligible NHCEs or
• 100 match on deferrals up to 1 of compensation
  and a 50 match on deferrals exceeding 1 up to a
  maximum of 6 of compensation for NHCEs.

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Automatic Enrollment cont.

• Corrective Distributions Plan may allow
  participants to elect distributions within 3
  months after automatic contributions begin
• Employer contributions forfeited
• Taxed in the year paid
• Not subject to ADP
• Exempt from 10 early distribution tax
• Vesting on Employer Contributions 2 years
• Notice Annual notice required
• Effective Date Plan years beginning after 2007.
  

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ERISA Preemption

• To facilitate automatic enrollment provisions
• ERISA preempts any state law that prohibits or
  restricts the inclusion of an automatic
  enrollment feature
• The Plan must provide employees notice including
• Right to opt out of automatic enrollment
• Explanation of how contributions will be invested

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Default Investments

• DOL safe harbor regulations due February 2007
• Investments must include a mix of asset classes
  consistent with capital preservation or long-term
  capital appreciation or a blend of both

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Default Investments cont.

• 404(c) Relief Requires Each Participant To
  Receive
• Notice describing right to make investment
  elections within a reasonable time before plan
  year
• Reasonable period after receiving notice and
  before plan year to make investment elections
• Notice of default investments if no elections made

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Investment Advice Exemption

• Two Prohibited Transaction Exemptions
• Compensation-Based Exemption
• Computer-Based Exemption
• Effective for Plan Years beginning after December
  31, 2006

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Investment Advice cont.

• Plan fiduciary must select the investment adviser
• Independent audits of investment advisers
  performance to ensure compliance with PTE
  requirements
• Required disclosures must be given to advised
  participants
• Investment transactions must be solely at the
  direction of the advised participant

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Investment Advice cont.

• Advice provided must be
• Formatted to be reasonably understood by the
  average investor
• Updated annually for no additional charge upon a
  material change
• Compensation received must meet a reasonable
  compensation standard and be at least as
  favorable as any other arms length transaction
  for similar securities sales or purchases

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Investment Advice cont.

• Fiduciary Adviser
• Registered broker-dealer
• Investment adviser
• Bank or similar financial institution
• Insurance company
• An affiliate, employee, agent or registered
  representative of any of the above

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Investment Advice cont.

• Compensation-Based Exemption
• Direct or indirect receipt of compensation by the
  adviser may not vary based on investment
  decisions made pursuant to the advice given.

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Investment Advice cont.

• Computer-Based Exemption
• Computer model must take into account certain
  parameters
• May not be biased in favor of investment options
  provided by the adviser or its affiliates
• An independent investment expert must certify
  that the model is appropriate
• Only investment advice provided under the program
  is provided by the computer model

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Other Defined Contribution Issues

• Diversification Rights
• Deferrals Must be immediate
• Employer Contributions After 3 years of service
• Exceptions for privately-held companies,
  stand-alone ESOPs and one-participant plans
• Generally effective for plan years beginning
  1/1/2007 with exceptions for collectively
  bargained plans and existing amounts held in
  plans
• Notice requirement

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Other DC Issues cont.

• Periodic Benefit Statements
• Quarterly statements for participants who
  self-direct investments
• Annual statements for participants who do not
  direct investments
• Defined Benefit Plans- Statements required every
  3 years and upon request or alternatively annual
  notice of the availability of a benefit statement
• Effective for plan years beginning 1/1/2007
  except collectively-bargained plans.

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Other DC Issues cont.

• Faster Vesting
• 100 vested in non-elective contributions after 3
  years of service or
• At least 20 vested in matching contributions for
  each year of service beginning after 2 YOS and
  ending after 6 YOS

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Other DC Issues cont.

• Rollovers by Non-spouse beneficiaries
• Benefits received by a non-spouse beneficiary
  from a retirement plan may be directly rolled
  into an IRA
• Plans affected
• Qualified retirement plan
• Governmental 457(b) plan
• 403(b) annuity
• Effective for distributions after 12/31/2006

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Other DC Issues cont.

• Withdrawals by Individuals called to Active Duty
• Reservists called up for active duty between
  9/11/2001 and 12/31/2007 for a period greater
  than 179 days
• Distributions from employer plan without 10
  early distribution tax
• Distribution must be made after 9/11/2001
• Amounts may be re-contributed to IRA within 2
  years after the later of the end of the service
  or 8/17/2006

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Company-Owned Life Insurance

• General Rule Employers taxed on death benefits
  received from COLI contract that is in excess of
  the premiums paid.
• Exceptions
• Insured employee is an employee at any time
  during the 12-month period before death or is a
  director or other HCE at time the policy is
  issued
• Insured employee receives notice before the COLI
  contract is issued and
• Insured employee consents to being covered by the
  policy

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COLI cont.

• Exceptions cont.
• If death benefit paid to insureds heirs or
  beneficiary designated by insured and the notice
  and consent requirements are met.
• New Reporting and recordkeeping requirements
• Apply to COLI contracts issued after 8/17/2006.

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Questions and Answers
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Peter A. Susserpsusser_at_littler.com Kevin L.
Wrightkwright_at_littler.com Michelle I.
Pretlowmpretlow_at_littler.com