By Paul N. Gada, CCH Toolkit Staff Writer
It appears that the legislative logjam found in Washington this year has partially broken through. The House of Representatives and the Senate recently passed the Pension Protection Act of 2006 (Pension Act), an extremely comprehensive pension reform measure. In fact, House Majority Leader John Boehner (R-Ohio) refers to the new legislation as "the most sweeping overhaul to U.S. pension laws in more than 30 years."
The new legislation was approved by the House on July 28, 2006, and by the Senate on August 3. The bill, one of the largest to come out of the 109th Congress, was signed into law on August 17 by President George W. Bush.
The bill is aptly named because it contains a variety of provisions intended to strengthen the funding rules for defined-benefit pension plans. By tightening the funding rules, the bill seeks to ensure that employers make greater contributions to their pension funds, ensuring their solvency, and avoiding a potential multi-billion dollar taxpayer bailout of the Pension Benefit Guaranty Corporation's (PBGC) insurance program.
The PBGC program has been progressively hemorrhaging more and more money over the years. In 2004, for example, the PBGC's fiscal year deficit increased to $23.3 billion from $11.2 billion a year earlier. In addition, an estimated 30,000 pension plans are now underfunded to the tune of $450 billion according to Labor Department estimates. These are very disturbing statistics if you are one of the 44 million Americans currently covered by traditional (defined-benefit) pension plans who risk getting paid pennies on the dollar if their pension plan fails.
In order to avoid a meltdown of the system and the costs of a taxpayer bailout, the Pension Act law is supposed to identify troubled private pension plans, help stabilize them before employers resort to bankruptcy, and strengthen the PBGC, which should only be the pension provider of last resort. To achieve these goals, the Pension Act uses the tax laws in a carrot-and-stick style approach: allowing a higher limit on the amount of employer contributions that are tax deductible (i.e., the "carrot") while generally requiring higher funding levels in order to continue qualified plan tax status (i.e., the "stick").
Whether the pension reform changes will achieve the desired ends remains to be seen. There have already been several voices forecasting doom and gloom under the provisions of the Pension Act.
"This pension reform is the worst of every possible world," said Rep. George Miller (D-Calif.). "By driving up the PBGC's deficit it will increase the risk of an eventual taxpayer bailout of that agency. By increasing pension underfunding, it will put more Americans' pension benefits at risk. And to top it all off, it will encourage more companies to drop their traditional pension plans altogether, stripping millions of Americans of a secure retirement. These changes could be devastating for American workers and retirees."
Lynn Dudley of the American Benefits Council echoes these sentiments. "I think that the new funding provisions fail to give any incentive to stay in the system, first and foremost," said Dudley.
Although new rules for defined benefit plans account for more than half of the Pension Act and while their potential impact is debated, the new law also addresses retirement savings held in IRAs, as well as 401(k)s and other defined-contribution plans. These provisions affect tens of millions more taxpayers than do the pension rules.
The highlight of the new retirement savings provisions is the permanent extension of the enhanced retirement savings incentives enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Like most of EGTRRA's provisions, the enhanced retirement savings incentives were temporary and would have ended after December 31, 2010.
The new law repeals the sunset provisions in EGTRRA that apply to retirement savings. Now, long-range retirement planning is enhanced by making these provisions permanent, while taxpayers continue to be coaxed into saving for their retirement.
The major EGTRRA retirement provisions that are now permanent include:
- Permanent higher dollar amount for IRA contributions ($4,000 starting in 2006, $5,000 in 2008, inflation-adjusted thereafter)
- Permanent higher dollar limits on defined contribution plans ($44,000 in 2006), elective deferrals (including $15,000 in 2006 for 401(k) plan deferrals), 457 plan deferrals ($15,000 in 2006), SIMPLE plan contributions ($10,000 in 2006) and compensation that may be taken into account under a plan
- Permanent increases in the annual benefit limit under a defined-benefit plan ($175,000 for 2006)
- Permanent catch-up contributions for older workers ($1,000 after 2005 for IRAs, $2,500 for SIMPLE plans, $5,000 for 401(k) plans)
- Permanent faster vesting of employer matching contributions (full vesting under three- or six-year schedules)
- Permanent greater portability for 403(b) and 457 plans
- Permanent Roth 401(k)s and 403(b)s
- Permanent start-up tax credit for new small employer-sponsored plans (maximum $500/year for each of the first three years)
- Permanent enhanced rollover rules (including qualified plan rollovers of distributions of after-tax contributions, direct rollovers from IRAs to employer plans, and rollovers of distributions from governmental 457 plans, 403(b) plans, or cash-outs)
The new law also contains a number of provisions that impact charities and charitable donations, technical corrections, and a handful of miscellaneous provisions. Among the provisions included:
- New recordkeeping requirements for cash donations
- Federal oversight of charitable organizations
- Tax-free distributions from IRAs for charitable purposes
- Stricter rules for donations of used clothing and household goods
- New treatment of donations of fractional interests
- Special contribution rules for buildings in registered historical districts
- A permanent extension of the rules allowing for Section 529 qualified tuition programs
Unfortunately, the above highlights barely scratch the surface of the 900-plus pages of the Pension Act. There are many new variables to consider as far as retirement benefits and charitable contributions go. While the IRS and the public digest this legislation, check back frequently to stay on top of the most current developments in this area.
- Related items:
- Introducing the New Roth 401(k) Retirement Plan
- Estate Tax/Minimum Wage Bill Falls in Senate; Pension Legislation Approved
- Congress's Legislative Agenda Takes Shape
Added to the news on August 23, 2006.
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