Pension reform had a longer shelf life than anticipated, finally winning legislative approval after a number of false steps.The Pension Protection Act of 2006 passed the House by a margin of 279 to 131. Meanwhile, the Senate voted 93 to 5 to approve the bill, clearing it for President Bush's signature.
"I'm pleasantly surprised it was passed," said Richard Hochman, president and chief operating officer of employee benefits consulting firm McKay Hochman Co. Inc. "I was one of those who believed that if it did not get passed by July 4, it wouldn't get done. I was watching C-SPAN on the night of the vote - it was actually heartwarming to see some bipartisanship in this Congress."
The 900-plus-page bill is considered the most comprehensive reform of pension funding laws since 1974. While the original stimulus for the legislation was to strengthen the protection of employee pension plans from corporate malfeasance, the act also adds a number of new retirement tax-saving benefits, makes permanent benefits from the Economic Growth and Tax Relief Reconciliation Act of 2001 that would have disappeared after 2010, and adds new rules on tax-exempt status and charitable giving.
"The automatic enrollment provision for 401(k) plans will enhance participation," said Hochman. "There's a provision that allows vendors to give advice to participants even with regard to products they offer. Before this, we've been asking participants to direct their own investments, even though they don't know how to do it. And for 2010 plan years, we'll have the defined-benefit 401(k) plans coming into existence. This will make it easier for small employers to have both defined-benefit and 401(k) plans, because they will be able to adopt a single plan incorporating features of both plans."
One of the provisions in the law is a back-door slap at tax preparation chains that marketed IRAs to taxpayers, according to Tom Ochsenschlager, vice president of taxation at the American Institute of CPAs. "It's now been codified that you can have a refund contributed automatically to an IRA, so it will be hard for the chains to charge for it," he said.
"The simplified Form 5500 reporting is very important for our membership," he added. "It's been a thorn in every side, because an accountant can't charge much for it. At the end of the day, it's just an information-reporting form, and clients don't understand the requirement. Under the law's new rules for plan years beginning after 2006, many fewer 5500s will have to be filed."
Also, the new law allows employers to reverse the burden on employee participation, making it an "opt out" rather than an "opt in" procedure, said Ochsenschlager. "This is an important provision, and will do a lot to encourage employee participation," he said.
"This will require corporations that have defined-benefit plans to make a decision whether they will continue these plans under the new funding rules," said Susan Lennon, a director in the Human Resource Services Group at Big Four firm PricewaterhouseCoopers.
"The new law requires a significantly higher asset basis than under current rules," she explained. "Sponsors need to look to see how much more they will have to contribute to new plans and whether they can manage the cost. Large plans project their funding over decades, and this will significantly shift that time horizon. So they need to figure where they will get the cash - from current revenue, from bonds or some other source."
Repercussions good and bad
"Overall, the law will be good for the retirement community," said Lennon. "It will make people's retirement more secure. But it raises the question whether corporations will continue to sponsor these plans now that they're more expensive. A lot of companies may decide that it's too expensive, and will move toward a 401(k) plan and nothing else."
There's also the question of what happens to companies that can't get the money in fast enough, said Lennon. "We may see a lot more plans turned over to the [Pension Benefit Guaranty Corp.]. An active employer can still terminate a plan and turn it over to the PBGC."
The legislation also clarifies hybrid cash-balance plans, according to Lennon. "They've been in legal limbo. Individuals' benefits are stated in terms of an account, but in fact, it is a defined-benefit plan and the assets are not set aside for particular individuals," she said. "It's a defined-benefit plan that looks like a defined-contribution plan. The legislation says that these are valid if they meet certain requirements. They're less expensive than the traditional defined-benefit plan, so it's beneficial that the door is now open for employers to consider them."
"This legislation sets the right target for pension plan soundness: 100 percent funding of all promises," said President Bush. "It would allow employers to put more money into their pension plans during good times, building a cushion that can survive lean times. Congress has also acted to make it harder in the future for employers with under-funded pension plans to promise additional benefits to their workers without funding those new promises."
However, it's a "mixed bag" of reforms, according to Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers.
"While the bill likely will increase costs for employers that sponsor traditional defined-benefit plans, it provides sponsors with certainty for future contributions," she said.
"[The new law] makes it easier for employers to provide retirement benefits and for employers to participate in these plans," Coleman continued. "The bill clarifies that the hybrid plans are not inherently age-discriminatory and contain 'no inference' language for plans that made conversions in the past. We also are pleased that the final bill did not contain provisions basing pension contributions on the sponsoring employer's credit rating."
"At the same time," she said, "we are disappointed that the Senate missed another opportunity to extend and strengthen the reseach and development credit and significantly reform the death tax. We applaud the majority of the Senate that supported efforts to bring the Family Prosperity Act of 2006 to the floor, yet are disappointed that 41 senators prevented an up-or-down vote on this important legislation."
Coleman was referring to the "trifecta" legislation, which would have combined pension reform with estate tax cuts and a $2.10-an-hour increase in the minimum wage. The measure fell three votes shy of the 60 votes necessary to limit debate.
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