As you probably already know, President Bush signed the Pension Protection Act of 2006 (the “PPA”) into law on August 17, 2006. Some PPA provisions became effective as of the date of enactment; others preserve existing laws that were set to expire in 2010; and still others are not effective until mid-2007 or 2008. This article summarizes some of the important provisions of the PPA that are effective as of plan years beginning on or after January 1, 2007 – or which apply to distributions, notices, or other events that will occur on or after that date.
Some of these changes are required; and some of them will, in turn, require plan amendments. In many cases, plans must comply in operation with the new rules well before the PPA requires the plan to adopt a corresponding plan amendment. (Plan sponsors, however, should avoid the trap of complying in operation and forgetting to adopt the required amendment.) Still other changes are permissive, but plan sponsors who wish to implement them may have to act quickly in order to do so. Here are a few of the significant changes that will take effect on January 1, 2007.
Accelerated vesting for non-elective employer contributions. In a change affecting a great many plans and requiring immediate attention, the PPA requires faster vesting for non-elective employer contributions to defined contribution plans that are subject to ERISA. Such contributions will have to vest at least as rapidly as they would under either a three-year cliff or a six-year graded vesting schedule (i.e., at the same rate as employer matching contributions). These new vesting rules generally apply to employer contributions for plan years beginning on or after January 1, 2007, with respect to employees who have an hour of service after 2006. Because this change will affect payments made during 2007, sponsors of defined contribution plans that do not meet the new minimum vesting standards should act quickly to ensure timely compliance.
Quarterly participant benefit statements for defined contribution plans. Under this required change, ERISA-governed defined contribution plans that include participant-directed investments must provide quarterly statements to participants and beneficiaries. These notices must include an explanation of the importance of a well-balanced portfolio and a notice directing the participant to the Department of Labor’s (“DOL”) website for additional information, as well as more familiar components such as the value of assets in the participant’s account as of the most recent valuation date (with a separate report on company stock), an explanation of the participant’s vested status, and an explanation of any restrictions on the participant’s right to direct an investment under the plan. Violations of this rule could result in a penalty of $110 per day per affected individual.
Expanded participant benefit statements for defined benefit plans. For plan years beginning on or after January 1, 2007, administrators of single or multi-employer defined benefit plans must provide benefit statements to all actively employed participants with non-forfeitable benefits. The administrator must either provide these notices at least once every three years or advise participants annually how to request the statement. Any participant or beneficiary may request such a statement, and the administrator must provide it (though it need not do so more than once every 12 months). The benefit statement must include the participant or beneficiary’s total accrued benefit, his or her vesting percentage (or earliest vesting date), and certain technical explanations affecting the benefit. The PPA directs the DOL to develop model benefit statements before August 16, 2006. Until the DOL provides these model statements, however, plan administrators will need to craft their own statements “from scratch.”
Expanded notice and election period for plan distributions. For distributions made on or after January 1, 2007, the familiar notice and election period for benefit distributions increases from 90 to 180 days. This change affects both defined benefit and defined contribution plans.
Expanded rollover rights for non-spouse beneficiaries. Effective for distributions made on or after January 1, 2007, qualified plans, governmental 457(b) plans, and 403(b) plans must permit non-spouse beneficiaries (e.g., domestic partners) to transfer death benefit distributions to IRAs in a direct rollover.
After-tax rollovers. The PPA also allows direct rollovers of participant after-tax contribution from a qualified plan to any other qualified plan (defined benefit or defined contribution), as well as to IRAs and 403(b) plans. While plans are not required to accept such contributions, any plans that elect to do so will eventually need to be amended to permit the necessary transfers. All plans, however, must permit these new rollover distributions.
Phased retirement. For plan years beginning on or after January 1, 2007, defined benefit and money purchase pension plans may make in-service “working retirement” distributions to employees who have attained age 62.
Expanded ERISA Section 404(c) protection. For plan years beginning on or after January 1, 2007, the PPA expands fiduciary protection to cover default investments made on behalf of participants who fail to direct the investment of their own accounts. This protection is available only if the default investment satisfies new DOL regulations (currently in proposed form and discussed in depth on page 2 of this issue of Benefits in Brief), as well as notice and other administrative requirements.
New diversification requirement. Effective January 1, 2007, most defined contribution plans holding publicly traded employer securities must provide at least three investment vehicles other than employer stock, each of which must be diversified and have materially different risk and return characteristics. All participants in affected plans must be allowed to diversify both pre-tax and after-tax employee contribution accounts; participants who have completed three years of vesting service must also be permitted to diversify the investment of employer contributions (a transition rule applies to employer contributions invested in company stock before the new rule’s effective date). Investment changes under affected plans must also be permitted at least quarterly. These (and several other) new diversification rules apply to most defined contribution plans, including ESOPs with 401(k) or matching features, but do not apply to, e.g., one-participant plans and ESOPs that do not hold employee or matching contributions.
Notice of participant freedom to divest employer securities. For plan years beginning on or after January 1, 2007, plans holding publicly traded company stock must provide participants with notice of their right to divest themselves of that stock. This notice must be provided at least 30 days before the first date the participant is eligible to exercise this right. Failure to provide timely notice could result in a penalty of $100 per day, per participant.
Prohibited transaction exemption for investment advice. With respect to advice given on or after January 1, 2007, fiduciary advisors (including banks, insurance companies, broker/dealers, and registered investment advisors, or any affiliate thereof) may obtain fiduciary protection if the advice at issue is provided through an “eligible investment advice” arrangement. Such an arrangement is subject to fee limitations and the express approval of a plan fiduciary. Disclosure and audit requirements apply, as well.
These are merely highlights of some of the PPA’s many changes to the retirement plan landscape. Now is the time for plan sponsors to review their plans and the new rules – as well as their employee benefits goals – to address the many PPA changes that will be in effect when we all return from the holiday season.