The Pension Protection Act of 2006 is passed by the House and sent to the Senate
. If enacted, the Pension Protection Act of 2006 will make extensive changes in the rules governing defined benefit pension plans and will also affect defined contribution plans. Some of the highlights of the House bill include:- Clearing the way for companies legally to convert employees from traditional defined benefit pension plans to cash balance pension plans without triggering age discrimination rules. Retroactive relief is not provided for previous conversions.
- Permitting investment advisors to offer advice to plan participants and IRA clients.
- Facilitating automatic enrollment in 401(k) plans.
- Requiring larger and faster employer contributions to pension plans to close the $313 billion funding gap in employersponsored defined benefit plans.
- Restricting certain payments of deferred compensation to executives at companies with failing pensions.
- Charging companies that terminate pension plans and transfer their liabilities to the PBGC an additional fee of $1,250 per participant ($2,500 if plan terminates and transfers liabilities to PBGC in its first 5 years).
- Providing extended funding periods to some airline pension programs.
Senate consideration may be concluded by the beginning of its August recess on Friday, August 4th, although that is unknown at this time.
When a beneficiary spouse, under age 59 ½, rolled over the proceeds of her deceased husband’s IRA to her own IRA, and then later, while still under age 59 ½, took a distribution, the Tax Court ruled that the distribution was subject to the 10% premature distribution penalty under Code Section 72(t).
The same distribution, if made from the husband’s IRA directly to the spouse beneficiary, would have been exempt from the 10% penalty tax. The Tax Court found that the funds, once rolled over to the surviving spouse’s IRA, lost their character as funds from the decedent’s IRA.IRS has provided guidance on how to calculate the excise tax on an employer’s failure to pay 401(k) deferrals to the employer’s plan on a timely basis
. Revenue Ruling 2006-38 indicates that the amount involved for purposes of determining the excise tax under Code Section 4975 is based on the interest on the late elective deferrals. The interest rate for tax underpayments described in Code Section 6621(a) should be used for this purpose.IRS has finalized regulations allowing a tax-exempt 501(c)(3) organization to exclude its employeeparticipants in Code Section 403(b) plans when the organization tests its 401(k) plan for compliance with Code Section 410(b) coverage rules
. (T. D. 9275, July 20, 2006; Treas. Reg. 1.410(b)-6).Some interesting 401(k) benchmarking survey findings are released by Deloitte Consulting and the International Foundation of Employee Benefit Plans
. In this survey 830 401(k) plan sponsors responded:- 23% use automatic enrollment of members (up from 14% the year before).
- The most typical default deferral rate is 3%.
- The most common default investment option is some form of balanced fund (53%), lifestyle fund (38%), or traditional balanced fund (15%).
- 49% of plans permit immediate participation in the 401(k) plan.
- 12% of employers match using employer stock (down from 15% the year before).
- The number of investment choices available on average is 17 (up from 14 the year before).
- Most plans use the following factors to evaluate their third party vendors: accuracy of data, turnaround time on reports, call center performance, and processing time on plan loans and withdrawals.
- 80% believe their 401(k) plans are effective tools in recruiting.
- Only 13% think their employees will be financially prepared for retirement.
EMPLOYEE WELFARE BENEFIT PLANS: JULY 2006 DEVELOPMENTS
IRS loosens rules for use of payment card reimbursement under FSAs, HRAs, and DCAPs
. IRS has made it easier for employers to make payments under health flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), and dependent care assistance programs (DCAPs). (Notice 2006- 69). The approach taken is to treat more types of reimbursements via debit cards as being "fully substantiated."EXECUTIVE COMPENSATION: JULY 2006 DEVELOPMENTS
IRS Chief Counsel Office representative Stephen Tackney reported on possible approaches to certain equity compensation issues that are the subject of the Code Section 409A final rules expected to be issued later this year
. He reported that some of the most fluid equity compensation issues under consideration as part of preparation of final regulations include what is service recipient stock, what is a sufficient nexus between the employer and the employee, how to value stock, and how to treat modifications of stock options, including extensions. He did not indicate when the final Code Section 409A regulations are expected to be released. The final regulations will require most existing nonqualified deferred compensation arrangements and many employment contracts to be amended. The delay in publishing the final regulations may also cause the IRS to extend the December 31, 2006, compliance deadline.IRS officials comment on Code Section 409A guidance at a late June session
. Dan Hogans, Treasury Department attorney advisor, and William Schmidt, Senior Counsel, Executive Compensation, IRS Chief Counsel’s Office, provided an update on the Code Section 409A guidance that is needed to finalize compliance with the new rules regarding nonqualified deferred compensation. Some of their points were:- Late summer publication of the next round of guidance remains the target but the deadline might be pushed back to the early fall. The guidance is expected to take the form of final regulations but some other format is possible.
- Providing additional transitional relief is under active consideration because it would be difficult to expect people to comply with the forthcoming guidance by year end.
- The requirement of the proposed regulations that the service recipient’s common stock be used when issuing stock options exempt under Code Section 409A has generated the most commentary.
- The requirement that extending the exercise date of out-of-the-money options caused the option to be subject to Code Section 409A from the date of grant caught people by surprise. The IRS officials insisted that, in some cases, the extension of stock options can be regarded as deferred compensation but acknowledged that more guidance in this area would be helpful.
- The IRS is looking at ways to limit the amount of 409A documentation that is needed, but Code Section 409A(a)(1)(A)(i)(I) includes a documentation requirement that cannot be waived.
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