News: What Business Owners Should Know About the Pension Protection Act of 2006

Employee Benefit News, Indianapolis, Indiana: Business Owners, Pension Protection Act 2006

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As a part of its commitment to provide clients with the most up-to-date information about employee benefits, Russell Benefit Consulting offers a look at the Pension Protection Act of 2006 (PPA) and the changes it brings to federal retirement plan regulations.

The new PPA goes further than defined employee benefits. It encompasses areas from charitable donations to college savings plans.

The Pension Protection Act Clarifies Issues and Provides More Employee Benefit Options

The act is the result of efforts to clarify ambiguously defined benefit plans and offer employees greater personal savings options.

Some of the features and changes of the PPA for 2006 include:

• Individuals age 70-1/2 and older who are required to take minimum distributions from IRAs can combine 2006 and 2007 disbursements to redeposit (rollover) IRA funds to a charitable organization, up to $100,000 for each year
   
  • While the distributions are tax free, no charitable contribution deduction are allowed
     
  • As an additional advantage, the rollover minimizes adjusted gross income (AGI); this offers further tax benefits, as AGI is the benchmark to determine eligibility for other tax breaks
     
  • For example, qualifications to convert a traditional IRA to a Roth IRA and deduct up to $25,000 of rental losses on residential realty is based on your AGI
     
  • The rollover is credited to your required minimum distributions
     
• Restaurants, hotels, food markets, farms, etc. can contribute food inventory to tax-exempt organizations to obtain larger charitable deduction than normally permitted
   
  • Food must be “apparently wholesome”
     
  • Partnerships, S corporations or any other business entity may qualify
     
  • Donations made in both 2006 and 2007 qualify for the tax break
     
  • Donations of book inventory to public schools, grades K through 12, (by C corporations only!) qualify for enhanced charitable deductions in 2006 and 2007
  
   

The Pension Protection Act: More Employee Benefit Tax Breaks to Come

Additional changes for 2007 include:

• Companies with 401k employee benefit plans may obtain a "Guarantee of Nondiscrimination" by the utilization of automatic employee enrollment
   
  • Allows owners and highly-paid employees to maximize their elective benefits contributions
     
  • For automatic enrollment to work:
    • employers must make certain mandatory contributions for employees
    • Employees must be given the opportunity to opt out of participation without making contributions to the plan
       
• Qualified employee benefit retirement plans must allow non-spouse beneficiaries to roll over inherited benefits to an IRA
   
  • Prior to the PPA of 2006, only surviving spouses could make a rollover to their own IRAs
     
  • Non-spouse beneficiaries did not have the same capability; non-spouse beneficiaries were required to accept distributions from the IRA immediately
     
  • However, funds not withdrawn immediately would continue tax-deferred growth
     
  • This change will benefit plan participants who do not have spouses named as their beneficiaries
     
• Mutual funds and other fiduciaries may now offer plan participants and beneficiaries personalized investment advice
   
  • Previously, only generic advice was permissible
     
  • Customized advice was penalized as a prohibited transaction
     

The Pension Protection Act Makes Filing IRS & Department of Labor Reports Easier

Reports to the government will become easier for some businesses. For plan years that began on or after January 1, 2007:

• Annual return filing requirements for one-participant plans, such as profit-sharing plans for sole practitioners, will be eased
   
• The IRS is directed to increase the exemption of plan reporting to plans that do not exceed $250,000 at the end of the year
   
• Previously, only plans with assets that did not exceed $100,000 in any year after 1993 were exempt from reporting
   
• Additionally, the U.S. Department of Labor was required to simplify its reporting requirements for plans with fewer than 25 participants for plan years beginning after December 31, 2006
   

The Pension Protection Act: More Changes to Come

Future pension plan changes include:

• As of 2008, funds in qualified retirement plans can be rolled over directly to Roth IRAs
   
  • Currently, employee benefit rollover contributions must go through traditional IRAs
     
  • Transfers will be allowed in 2008 and 2009 only for individuals eligible to convert to Roth IRAs, for instance, those with modified adjusted gross income of $100,000 or less
     
  • There will be no income limit as of 2010
     

The Pension Protection Act Keeps Favorable Employee Retirement Plan Benefit Rules, Roth 401k, from Expiring

Many favorable retirement plan rules, such as increased contributions limits to 401k and other qualified plans, the existence of Roth 401k plans, and the tax credit for small employers to start retirement plans, were scheduled to expire at the end of 2010.

The Pension Protection Act eliminated the expiration and made the changes permanent, meaning:

• Companies that were reluctant to adopt Roth 401(k)s as an employee benefit option because they were temporary should reconsider offering this product to employees
   
• The change allows employees to contribute funds on an after-tax basis; these earnings can become entirely tax free later on
   
• Owners and other individuals able to fully utilize these new contribution limits will be allowed to contribute additional funds on a tax-advantaged basis in qualified retirement plans and IRAs
   
• Contribution limits will be adjusted annually for inflation; this includes limits to catch-up contributions by those age 50 and older
   
• One exception is that catch-up contributions for traditional and Roth IRAs, currently $1,000, will not be adjusted each year
   

Learn More to Make the Most of Your Employee Benefit Plan and The Pension Protection Act

While this article covers many key points of the new Pension Protection Act, business owners would be wise to educate themselves to the new law, especially as it pertains to their employee benefits package.

Schedule a meeting with your Russell Benefits agent or other financial advisor to learn which provisions are the most important to your specific company, and how the PPA can benefit not only you and your business, but your employees as well.
 

For more information about the Pension Protection Act of 2006 and its new provisions, visit the U.S. Department of Labor web site for complete details, http://www.dol.gov/EBSA/pensionreform.html. (Opens in new window)

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