President Signs Pension Legislation

On August 17, 2006, President Bush signed the Pension Protection Act of 2006. The bill would tighten controls on companies that fall behind in meeting funding requirements for defined benefit plans, providing generally for a seven-year catch-up requirement. Special provisions apply to multi-employer plans, and breaks are provided to the airline industry and defense contractors. More generous deductions for contributions to defined benefit plans are included. The legislation also promotes alternative retirement vehicles by permitting automatic investment in 401(k) plans and sanctioning certain hybrid defined benefit plans such as cash balance plans. Any company with a defined benefit plan that is less than 80 percent funded or in danger of bankruptcy would have restrictions imposed on increases in benefits and deferred executive compensation. The legislation appears to do little to stem the continuing decline in the number of companies offering defined benefit plans.

The legislation also would permit more latitude in providing investment advice to 401(k) account holders. Other provisions seek to strengthen the Pension Benefit Guaranty Corporation and expand disclosure requirements. The legislation also includes several provisions of benefit to IRA and Roth IRA account holders.

The legislation would permanently extend the pension-related provisions of the 2001 Tax Act that otherwise would have expired by the end of 2010, including increased contributions and benefit limits for retirement plans and IRAs, tax-free distributions from 529 plans, and the Saver's Credit for low income taxpayers.

Among the provisions not directly related to pensions included in the legislation are a group of provisions to update Tax Court procedures and a package focused on tax-exempt entity oversight and charitable giving incentives and reforms, including new reporting restrictions on cash contributions and restrictions on donations of clothing and household items.

The huge 900-page act is expected to cost $73 billion over ten years. August 17, 2006, now becomes the enactment date for the legislation, a date to which the effective date for various provisions is tied.