Overview of the Pension Protection Act of 2006

1
Overview of the Pension Protection Act of 2006

• Brian Graff, Esq., ASPPA Executive Director/CEO

2
Pension Reform Passes

• H.R. 4, the Pension Protection Act of 2006
  (PPA) passed by House on July 28, 2006 (279-131)
  passed by Senate on Aug. 3, 2006 (93-5).
• President Bush signed into law on August 17,
  2006.
• Revenue lost relating to pension and retirement
  savings provisions 66 billion.
• SBJPA of 1996cost of pension provisions was 2
  billion.
• Possibility of technical corrections bill?

3
EGTRRA Retirement Savings Provisions Made
Permanent
4
EGTRRA Permanency

• Provisions were set to expire 12/31/2010.
• Increased contribution limits to 401(k)s and DC
  plans.
• Catch-up contributions for older workers.
• Increased benefit limits for DB plans.
• Increased compensation limit.
• Roth 401(k)s.
• Relaxation of top heavy rules.
• SAVERS credit made permanent.
• Was set to expire in 2006
• Income eligibility brackets indexed beginning in
  2007

5
PPA 06 Summary

• DC plan changes to promote automatic enrollment
  and give participants access to more investment
  advice.
• New benefit statement requirements.
• Increased deduction limits for combination plans.
• Prospectively clarifies age discrimination rules
  for cash balance and other hybrid plans.
• Replaces current funding rules with a single
  minimum funding standard with enhanced funding
  requirements for at-risk plans.
• Various PBGC premium and related changes.

6
Auto Enrollment Safe Harbor

• Effective beginning in 2008, provides 401(k)
  plans with an automatic enrollment safe harbor
  pass on 401(k) and top-heavy testing, where
  certain conditions are met.
• Must cover all eligible employees (employees can
  opt out anytime).
• Applies to new hires and those who did not make
  an affirmative election to participate.
• May make sense to go to existing workers before
  implementing to confirm non-participation
• Automatic enrollment percentage must be between
  3 and 10.
• Employee contributions must automatically
  increase by 1 annually after the first full plan
  year of participation to reach at least 6 (but
  no more than 10) of pay.
• Matching contributions for NCHEs equal to 100 of
  first 1 of pay, plus 50 of the next 5 of pay
  OR at least a 3 nonelective contribution.
• Matches and nonelectives must be 100 vested
  after 2 years.

7
Auto Enrollment Safe Harbor

• Annual notice must be provided within a
  reasonable time period before each plan yearat
  least 30 days if based on current law 401(k) plan
  safe harbor.
• Preemption of State Laws to ERISA-covered plans
  provided notice is givenfirst time preemption
  would be conditionedthis may be changed.
• Default investments must also be invested in
  accordance with DOL guidance
• Allows for permissible withdrawals requested
  within 90 days after first deferral is made.
• Distribution presumably within reasonable period
• Need guidance on impact of permissible withdrawal
  
• All automatic enrollment plans have extended ADP
  testing period to 6 months (e.g., June 30th).
• For all 401(k) plans, excess contributions taxed
  in year distributedgap period income no longer
  required to be calculated.
• Effective in 2008will Treasury waive before
  then?

8
Investment Advice

• Beginning in 2007, provides a new prohibited
  transaction exemption for fiduciary advisers to
  provide advice to participants and beneficiaries
  on their own funds under 2 alternative
  exemptions
• Does not apply to plan level advice
• Joint Tax description indicates this is not
  intended to circumvent existing guidance (e.g.,
  Sun America)
• Fee leveling exemption fees received by
  fiduciary adviser are not dependent on the
  investment selections made.
• Application to individual fiduciary adviser
  versus financial institution?

9
Investment Advice

• Computer Model Exemption advice delivered to be
  generated by computer model certified by
  independent investment expert.
• Computer model must take into account all plan
  investments and must not be biased in favor of
  advisers own investments
• Does not preclude participant from requesting
  other advice
• Unclear whether that allows advice outside of
  computer model

10
Investment Advice

• Detailed disclosures required to be made before
  the initial advice given, as well as annually
  thereafter.
• The relationship between the fiduciary adviser
  and the plan investment options and fees that
  will be received
• The past performance of investment options under
  the plan
• Services provided by the adviser and that the
  adviser is a fiduciary
• That the participant is free to engage an
  independent adviser
• Other disclosures required by securities laws
• Fiduciary adviser defined as an RIA, bank, ins.
  co., broker/dealer, or an affiliate (any
  employee).

11
Investment Advice

• Transactions must be arms length and occur
  solely at participant directionfees must be
  reasonable.
• Employer liable for prudent selection and
  periodic review of adviser, but not responsible
  for monitoring specific advice given to
  participants.
• Both exemptions require independent audit for
  compliance with requirementsneed guidance on
  extent of audit requirement and whether adviser
  can pay for this.
• DOL to determine feasibility of applying computer
  models to IRAs and HSAs.
• May need technical correction to allow class
  exemption for advice for IRAs and HSAsstatute
  would require fee leveling

12
Prohibited Transaction Exemptions

• Block Trades Exemption provided for the
  purchase or sale from a party in interest of a
  block trade transaction (defined as at least
  10,000 shares or market value of 200,000) that
  is allocated across two or more unrelated client
  accounts of a fiduciary (certain conditions
  apply).
• This exemption allows block sales for more than
  one party to secure lower fees and transaction
  prices
• Eases current restrictions on block trades, but
  it is unclear whether it is available where the
  counterparty in the block trade is a plan
  fiduciary

13
Prohibited Transaction Exemptions

• Transactions with Plan Service Providersprovides
  a broad exemption for transactions between a plan
  and party in interest (solely by reason of
  providing services) where the plan receives
  adequate consideration, defined as
• For securities traded on a generally recognized
  market (1) the prevailing price on a national
  exchange or (2) a price not less favorable than
  the offering price established by an independent
  party, or
• In the case of assets other than a security, the
  fair market value of the assets as determined in
  good faith in accordance with DOL regulations
• Exemption does not apply to transactions between
  a plan and fiduciary with discretion over the
  assets involved in the transaction

14
Prohibited Transaction Exemptions

• Correction PeriodPermits a 14-day correction
  period for certain nonfiduciary securities- or
  commodities-prohibited transactions (in general,
  once a transaction has settled, a prohibited
  transaction is deemed to occur).
• Exemption permits correction of transaction
  within the 14-day window from the date discovered
  (or that reasonably should have been discovered)
• Foreign Exchange TransactionsExempts foreign
  exchange transactions between a plan and a bank
  or broker-dealer (or affiliate) in connection
  with the sale, purchase, or holding of foreign
  exchange securities upon certain conditions.
• Many foreign exchange transactions are with a
  plans trustee or custodian, upon which existing
  class exemptions require the need for
  individualized or standing direction
• Exemption does not provide relief for foreign
  exchange transactions between the plan and
  fiduciary who has discretion over the assets in
  the transaction

15
Prohibited Transaction Exemptions

• Regulated electronic communications
  networkProvides an exemption for securities
  transactions (and other property) executed
  through an electronic communications network
  (ECN), an alternative trading system (ATS) or
  similar execution trading system.
• Plans are requesting services through electronic
  systems in which broker-dealers and financial
  institutions have an ownership interest
• Cross Trading for Large PlansProvides an
  exemption for active cross trades (a direct
  purchase or sale of securities with another
  client of an investment manager) of large plans
  with assets of 100 million or more.
• The exemption contains detailed conditions on
  fees and a prohibition on commissions, which is
  not likely to alter reliance on existing cross
  trading exemptions for passive or agency cross
  trades

16
Definition of Plan Assets

• Under prior law, hedge funds and private equity
  funds with more than 25 of their assets from
  public, private and foreign employee benefit
  plans were considered fiduciaries under ERISA
  subject to the PT rules.
• PPA narrows the benefit plan investor
  definition under ERISA for purposes of
  considering what is a plan asset to include only
  
• Plans covered by ERISA
• IRAs and other arrangements subject to IRC Sec.
  4975, and
• Those entities whose assets include plan assets
  by reason of a plans investment in the entity
• Amendment has the effect of excluding some
  non-ERISA plans (e.g., foreign plans), which will
  allow more plan investments in alternative asset
  classes, such as hedge and private equity funds.
• Amendments give DOL legislative authority to
  issue regulations that define when an entity
  holds plan assets, which DOL did not previously
  have under prior law.

17
Changes to Fiduciary Rules

• Gives DOL authority to establish default
  investment that satisfies ERISA section 404(c).
• DOL has 6 months to issue final guidance
• Likely to consider lifestyle and/or balanced
  funds
• Unclear if this will apply for 404(a) purposes
• Will there be interim reliance on proposed rules?
• Requires annual notice of right to invest
• Penalties for coercive interference with
  participants rights.
• Up to 10 years in prison and 100,000 fine
• Directs DOL to issue guidance within 1 year that
  the selection of annuity as a form of
  distribution does not need to meet the safest
  available annuity requirement.

18
Changes to Fiduciary Rules

• 404(c) protection doesn't apply during blackout
  periodDOL directed to issue guidance on how to
  satisfy fiduciary requirements during blackout.
• One-participant plans not required to give
  blackout notice
• Effective in 2008, 404(c) safe harbor where right
  to invest affected by change in investment
  options.
• At least 30-60 days in advance of the change,
  participants are notified and given right to
  direct among new (or remaining) investments
• In the absence of affirmative election,
  investments are mapped to the new options that
  are reasonably similar in terms of risk and
  return
• Unclear when no similar investment
  existspossible use of default option

19
Other DC Reforms

• Beginning in 2007, DC plans invested in publicly
  traded employer securities must give employees
  right to diversify.
• Immediate right with respect to elective
  deferrals
• After 3 years of service with respect to employer
  contributions
• 3-year transition rule for employer contributions
  invested in employer securities as of 12/31/06
  (except for employees who attained age 55 during
  the 2006 plan year)
• Stand-alone ESOPs exempt applies to KSOPs
• No collective fund exceptionmay need technical
  correction
• Notice of right to diversify required 30 days in
  advancefirst notices required by Dec. 1st of
  this yearneed guidance quickly

20
Other DC Reforms

• All DC contributions (not just matching
  contributions) must vest under either a 3-year
  cliff or 6-year graded vesting schedule.
• Applies beginning with contributions attributable
  to the 2007 plan year
• Service prior to 2007 considered
• Beginning in 2007, after-tax contributions can be
  rolled over from a QP to a 403(b) annuity and
  vice versa.
• Note 403(b) regulations effective date delayed
  until 2008
• Should allow rollovers from Roth 401(k) to Roth
  403(b)

21
Other DC Reforms

• Beginning in 2008, rollovers from QPs, 403(b)
  annuities and 457 plans allowed directly to a
  Roth IRA.
• Subject to current law conversion restrictions
  (100,000 AGI limit) until they are eliminated
  after 2009
• Note IRA conversion provision allows
  conversions to Roth IRAs in 2010 with tax spread
  over 3 years
• Treasury directed to revise hardship distribution
  rules to allow for hardship distribution if the
  conditions constituting a hardship or an
  unforeseeable emergency occurs with respect to a
  beneficiary under the plan.

22
Other DC Reforms

• 10 early withdrawal tax does not apply to IRA
  distributions or distributions from a 401(k) or
  403(b) plan (but not 457 plan amount-attributable
  rollovers) attributable to elective deferrals, if
  made to an individual called to active duty for
  at least 180 days (or for an indefinite period)
  if made after the individual is called for duty
  and before the period of duty ends.
• Effective for distributions made after 9/11/01
  for those called to duty after 9/11/01 but before
  12/31/07
• 401(k) and 403(b) plans permitted to make these
  distributions regardless of QP distribution
  restrictions
• Make-up contributions permitted within 2 years
  after end of duty perioddo not impact
  contribution limits
• Claims for refund allowed for at least one year
• Reporting guidance needed quickly

23
Other DC Reforms

• Beginning in 2007, benefits payable under a QP,
  403(b) annuity, or 457 plan to a beneficiary
  other than a surviving spouse may be transferred
  directly to an IRA and treated as an inherited
  IRA.
• Amounts rolled to an IRA generally must be paid
  out within 5 years
• Directs IRS to develop forms allowing income tax
  refunds to be deposited directly to an IRA.
• Special IRA catch-up contributions (up to 3,000
  per year) permitted for 2006-2009 for individuals
  who participated in a 401(k) plan matched with
  employer stock where the employer went bankrupt
  and executives were indicted as a result of
  transactions relating to the bankruptcy.
• Those age 50 and older not also eligible for
  catch-up contributions

24
Miscellaneous QP Provisions

• Beginning in 2007, permits tax-free distributions
  (3,000 annually) from governmental retirement
  plans for health and long-term care insurance
  premiums for retired public safety officers.
• All governmental plans (including CODAs) are
  exempt from the nondiscrimination and
  participation rules.
• Permits governmental plans to allow participants
  to purchase service credits for a period
  regardless of whether service is performed
  (within limits).
• Tribal plans treated as governmental plans for
  all ERISA and Code purposes so long as all
  employees are performing essential government
  services and are not performing commercial
  activities (e.g., casino employees).
• Controversial provision that may be repealed

25
Miscellaneous QP Provisions

• DOL directed to issue within 1 year regulations
  clarifying that a QDRO will not fail because of
  the time it is issued or because it is issued
  after or revises another QDRO.
• Concern that this will allow post-death QDROs
• IRS directed to update EPCRS program, taking into
  account concerns of small employers.
• May lead to EPCRS covering scriveners errors
• Notice and comment period regarding distributions
  expanded to 30-180 days before the distribution
  commences.
• Notice must include language about the
  consequences of a participants failure to defer
  receipt, if applicable
• Effective for distributions in 2007180-day
  period theoretically already in effect

26
Miscellaneous QP Provisions

• DOL directed to provide simplified 5500 Form
  (beginning with 2007 plan years) for plans with
  fewer than 25 participants.
• For plan years beginning in 2007, one-participant
  plans with assets less than 250,000 will be
  exempt from the 5500 Form filing requirement.
• Rollover distributions will no longer result in a
  reduction in unemployment compensation.
• Plan amendments made pursuant to PPA, or
  regulations thereunder, may be retroactively
  effective and will not violate the anti-cutback
  rule, if made by the end of the 2009 plan year.
• IRS permitted to carve out exceptions to the
  anti-cutback reliefguidance on exceptions, if
  any, needed quickly.

27
Benefit Statements

• New benefit statement requirements for all
  planseffective 1/1/07DOL will issue model
  notice.
• Benefit statements required (1) quarterly for
  participant-directed plans (2) annually for
  other DC plans and, (3) every 3 years for DB
  plans (application of effective dates for DB
  plans unclear?).
• Actual DB not required if participant given
  annual notice of right to request statement.
• Statement must on the basis of the latest
  available information show amount of vested
  benefits.
• JCT descriptionvesting need only be updated
  annually if SPD would allow participants to
  determine updated vested amount
• Issue of multiple statements due to brokerage
  accountscan they be delivered separately?

28
Benefit Statements

• Statements must also include explanation of any
  permitted disparity or floor-offset arrangement
  affecting benefits under the plan.
• DC plan statements must show assets as of the
  most recent valuation date (e.g., some plan
  assets are trustee invested and hard-to-value),
  including employer securities.
• Statements for participant-directed plans must
  include (1) an explanation of any restrictions on
  the right to direct an investment (2)
  information on the importance of diversification
  and, (3) a statement about the risk of holding
  more than 20 of a portfolio in the security of
  one entity.

29
Benefit Statements

• All statements may be provided in written,
  electronic, or other appropriate form.
• Interaction with DOL electronic communication
  regulations?
• JCT description suggests benefit statements could
  be provided on a continuous basis through a
  secure plan website for a participant
• Does that require quarterly notification?

30
Deduction Limits

• For 2006/2007, PPA permits maximum deductible
  contributions of up to 150 of current liability
  over the value of plan assetsno change to
  current liability calculation intended.
• After 2007, the maximum deductible contribution
  is equal to the excess of the funding target,
  target normal cost, and a 50 cushion amount
  over the value of the assets.
• Minimum required contributions always deductible.
  
• 50 cushion is 50 of funding target.
• Compensation increases can be assumed
• PBGC-covered plans can assume 401(a)(17)
  compensation limit increases
• Cushion amount cannot reflect HCE benefit
  increases made in the last 2 yearswhat about
  plan adoption?

31
Deduction Limits

• For 2006/2007, combined plan deduction limit
  404(a)(7) does not apply if DC contributions do
  not exceed 6 of compensation.
• 150 of CL deduction limit available
• However, if contribution exceeds 6, combined
  plan deduction limit does apply without regard to
  DC contributions.
• Both plans then limited to DB minimum required
  contribution
• After 2007, combined plan deduction limit does
  not apply to PBGC-covered plans regardless of the
  level of DC contributions.
• Non-PBGC plans still subject to above rules.

32
Cash Balance/Hybrid Plans

• Effective after June 29, 2005, all DB plans
  (including cash balance/hybrid plans) are not age
  discriminatory so long as a participants accrued
  benefit is at least equal to the accrued benefit
  of any similarly situated, younger individual who
  is or could be a participant.
• Similarly situated means the same in every
  respect including service, compensation,
  position, date of hire, work history (except for
  age)
• Accrued benefit may be expressed as a
  hypothetical account
• Beginning in 2008, cash balance/hybrid plans
  interest credits must not exceed market rate
  defined by Treasury does not preclude reasonable
  fixed rates (but how high?)
• At distribution, losses cannot reduce account
  balance below amount of aggregate contributions,
  except for variable annuities

33
Cash Balance/Hybrid Plans

• Eliminates the whipsaw problemlump sum equals
  hypothetical account balance.
• Beginning in 2008, employees with 3 years of
  service must be 100 vestedapplies to prior
  accruals.
• Conversions after June 29, 2005, must use AB
  formulano wear away of early retirement
  subsidies permittedTreasury directed to issue
  regulations for mergers and acquisitions.
• Contains no inference language IBM Cash
  Balance decision confirms legitimacy of cash
  balance plans.
• Possible reissuance of cash balance
  nondiscrimination regulations.

34
DB(k) Proposal

• Applicable for plans with 500 or fewer employees.
• Creates an eligible combined planallows DB and
  401(k) to be treated as a single plan, if utilize
  defined safe harbors.
• Safe harbor design formulas provide pass on
  401(k) test and top heavy.
• 1 of final average pay for up to 20 years
• Cash balance alternative
• 30 and under 2 of pay
• Under 40 4 of pay
• Under 50 6 of pay
• 50 and over 8 of pay
• 100 vested 4-2 match with automatic enrollment
  required

35
DB(k) Proposal

• Otherwise, matching contributions up to 6 of
  pay option to contribute to cash balance
  account.
• 3-year vesting.
• Non-elective contributions allowed.
• Nondiscrimination rulescurrent law.
• 415 Applies to DB and DC portions separately.
• Funding rules apply only to DB portion DB
  portion covered under PBGC.
• Combined deduction limit does not apply.
• Single Form 5500, SPD, plan audit.
• Does not allow for non-safe harbor plansother
  technical corrections needed.
• Effective date beginning in 2010.

36
Basic Funding Requirements

• PPA overhauls the DB minimum funding rules and
  the deficit reduction contribution for
  single-employer defined benefit plans.
• Special Funding Rules for 2006-2007.
• PPA extends 2004-5 funding relief (PFEA) through
  2007
• 2006-7 current liability determined using an
  interest rate within the range 90-100 of the
  4-year weighted average composite corporate bond
  rate
• Effective in 2008, a single-employer DB plans
  contributions are based on a plans funding
  target
• Two targets a 100 funding target for not
  at-risk plans additional contributions required
  for at-risk plans

37
Minimum Required Contribution

• Beginning in 2008, the basic minimum required
  contribution (MRC) for any plan year is the sum
  of
• The plans target normal cost for the plan
  year
• Represents the present value of benefits expected
  to be accrued in the current year
• Includes an increase in benefits attributable to
  services performed in prior years by reason of an
  increase in compensation during the current plan
  year
• Reduced to the extent plan assets exceed the
  funding target (PVAB of the 1st day of plan year)
  
• A shortfall amortization charge necessary to
  amortize the difference between assets and 100
  of liabilities over 7 years
• Phased in over 4 years for well-funded plans
  until 2011, AND
• Any waiver amortization charge (where Treasury
  has waived any minimum required contributions).

38
Interest Rate Assumptions

• Beginning in 2008, the interest rate to determine
  liabilities (and lump sums) would be valued using
  a yield curve based on high-quality corporate
  bond rates of varying maturities.
• Separate interest rates would be established for
  each of 3 segments liabilities due in 5
  years between 5 and 20 years and those longer
  than 20 years.
• Yield curve would be derived from a 2-year
  average of interest rates on investment-grade
  bonds
• Alternatively, a plan can elect to use the full
  yield curve (i.e., non-segmented) without the
  2-year averaging, but only for minimum funding
• Transition Rules.
• For 2008, rate used would be one-third based on
  the new rate and two-thirds based on old rate
  (i.e., corporate bond weighted average)
• For 2009, rate used would be two-thirds based on
  the new rate and one-third based on old rate

.
39
Other Assumptions

• Treasury to revise mortality table at least once
  every 10 years, which should reflect mortality
  improvements.
• Treasury can give permission to use specific
  employer table
• Proposed 2007 table likely to be postponed
• Plan assets can either be market or average
  value.
• No more than 2-year average allowed provided its
  between 90-110 of market value
• Contributions post valuation date must be
  discounted
• Valuation date 1st day of plan year, except plans
  with fewer than 101 participants can use any day
• Quarterly contributions required if funding
  shortfall for the preceding plan year.
• 25 of the lesser of 100 of the prior years MRC
  or 90 of the current years MRC

40
Credit Balances

• Effective in 2008, credit balances utilize a more
  complicated set of rules.
• Creates two separate components of credit
  balance
• A funding standard carryover balance from 2007
• A pre-funding balance based on contributions in
  excess of the minimum required contributions for
  plan years in 2008 and later plan years
• Credit balances may be used toward current years
  minimum funding requirement only if the
  liabilities are at least 80 funded (from the
  prior years valuation date).
• Carryover (but not pre-funding) balance included
  in assets for 80 measurement
• IRS to provide rules for estimation for 2007
  funded status for purpose of determining whether
  the credit balance may be used in 2008 plan year
• Credit balances would reflect the investment
  performance of plan assets and would be
  subtracted from assets for most determinations
  under the bill (e.g. at-risk rules).

41
Rules for At-Risk Plans

• Plans defined as at-risk plans would be subject
  to additional funding requirements (based on
  additional required actuarial assumptions).
• Additional mandated assumptions for at-risk
  plans
• Participants eligible to retire in current or
  next 10 years will start benefits at their
  earliest eligibility date
• Assumes benefits will be paid in lump sums (or in
  whatever form results in the largest liability
  for the plan)
• If the plan has been at-risk for at least 2 of 4
  plan years, applies a loading factor equal to
  700 per participant plus 4 of funding target
  and target normal cost for the plan year
• Exempts plans with 500 or fewer participants on
  every day of the preceding year (treating all
  defined benefit plans of an employer as a single
  plan).

42
Rules for At-Risk Plans

• A plan is at-risk if it meets the following
  70/80 percent test for the prior plan year
• Less than 80 funded at not-at-risk funding
  target minus credit balance
• 80 threshold is phased in over 4 years 65 in
  2008 70 in 2009 75 in 2010 80 in 2011 and
  later), AND
• Less than 70 funded using the at-risk
  liability funding target and subtracting credit
  balance
• At-risk funding rules effective for plan years
  beginning in 2008guidance needed on application
  of look-back rules for 2007.

43
Benefit Restrictions

• Benefit restrictions are applicable to all DB
  plans that are underfunded or have liquidity
  problems.
• The adjusted funding target attainment
  percentage (AFTAP) must be calculated to
  determine whether the benefit restrictions apply
• Based on plans ratio of plan assets (reduced by
  credit balances) to the plans funding target
• With the exception of accelerated benefit
  distributions
• Plan sponsors may make additional contributions
  or provide security to avoid the limitations
• Restrictions do not apply to new plans for the
  first 5 years of the plan
• Small plans not exempt from these rules even
  though they are exempt from at-risk rules.

44
Benefit Restrictions

• Restrictions do not apply if a plans funding
  target percentage (no reduction for credit
  balance) is at least 92 in 2008 94 in 2009
  96 in 2010 and 100 thereafter.
• Plan participants must be notified within 30 days
  after the plan has become subject to a
  restriction.
• Guidance needed for benefit explanations in such
  cases
• Restrictions triggered on certification of AFTAP
  by Enrolled Actuaryimplementation guidance
  needed since restrictions apply as of plan
  valuation date.
• If certification not done by October 1, AFTAP
  deemed to be less than 60 effective October 1

45
Benefit Restrictions

• For plans less than 80 funded, plan amendments
  increasing benefits are prohibited (permits
  increases in flat dollar plans that do not exceed
  rate of pay increases).
• For plans between 60 and 80 funded, lump sum
  payments (and other accelerated benefit
  distributions) are limited to
• 50 of the original amount, or
• The present value of the maximum PBGC benefit at
  the participants age
• For plans less than 60 funded
• Plan accruals are frozen (participants continue
  to earn vesting and eligibility service)
• Shutdown benefits could not be triggered unless
  immediately funded, AND
• Lump sum payouts (and other accelerated benefits)
  are prohibited
• Questions about application of previous
  restrictions when plan no longer subject to them.

46
Benefit Limitations NQDC

• Adverse tax consequences would result if amounts
  are set aside for a nonqualified deferred
  compensation plan (NQDC) where
• A plan is in at-risk status (does not apply to
  plans 500 or less)
• The employer is in bankruptcy, or
• The period that begins 6 months before and ends 6
  months after (12-month period) the date any DB
  plan is terminated in an involuntary or distress
  termination
• Applies to NQDC for the top five covered
  employees under IRC Sec. 162(m) or any executive
  officer subject to Sec. 16(a) of the Securities
  Exchange Act of 1934.
• Need relief for mergers and acquisitions.

47
PBGC Premiums

• Makes no change to increased flat-rate
  per-participant premium from the current 19 to
  30 (changed in Deficit Reduction Act of 2005).
• For 2006/2007, VRP calculated using 85 of the
  corporate bond rate.
• After 2007, VRP computed using the three-segment
  yield curve unfunded vested benefits equal the
  funding target (only vested benefits) in excess
  of market assets for the plan yearfull funding
  exemption repealed.
• VRP for each participant is capped for small
  plans (i.e., 25 or fewer employees) to be no more
  than 5 multiplied by the number of plan
  participants.
• Plans terminated with insufficient assets subject
  to 1250 per participant termination premium.

48
Other PBGC Changes

• Expands PBGC missing participants program to
  terminating DB plans not subject to Title IV and
  DC plans.
• Effective after PBGC regulations issued
• Needs to be coordinated with DOL missing
  participants guidance to relieve fiduciary
  liability
• Changes phase-in of PBGC guarantee for
  substantial owners effective in 2006.
• Guarantee phased in over 5 years for substantial
  owners with less than a 50 ownership interest
  (i.e., between 10-50 ownership)
• Guarantee phased in over 10 years for substantial
  owners with a 50 or more interest in the sponsor
• PBGC now authorized (but not required) to pay
  interest on premium overpayment refunds.

49
Lump Sum Distributions

• IRC Sec. 417 (e)PPA replaces the current minimum
  lump sum rules under IRC Sec 417(e) (30-year
  Treasury rates) to require the three-segment
  yield curve approach.
• Phase-in of the segmented yield curve of 20 a
  year from 2008-2012
• Treasury to develop mortality table based on
  table used for funding purposes
• Current rules remain in effect for 2006 and 2007

50
Section 415 Benefit Limitations

• Retroactive to January 1, 2006, when calculating
  415 limit for lump sums, interest rate must be
  the greater of
• 5.5
• Rate that would provide a benefit of not more
  than 105 of the benefit that would be provided
  if IRC 417(e)(3) rate were used, or
• The plans rate
• Need Treasury relief for lump sums paid out in
  2006 based on 30-year Treasuries after PFEA
  expired.
• Impact on 2006 required PFEA amendments?
• In calculating 415 limit for DB plans, average
  compensation includes years of service when
  participant was not an active participant in
  plan.
• Corrects problem with recently issued regulations
• Beginning in 2007, benefits from DB plans
  maintained by churches not subject to 100 of
  compensation 415 limit, except for benefits of
  HCEs.

51
Other DB Changes

• Beginning in 2007, permits in-service
  distributions from DB plans to participants who
  have reached age 62.
• Broader than phased retirement proposed
  regulationsregulations may still be finalized
  for other workers who are 59½
• Beginning with 2008 plan years, plans subject to
  JS rules will need to offer an additional
  option.
• If QJSA is less than 75, the additional option
  must be 75
• If QJSA is greater than or equal to 75, the
  additional option must be 50
• So, you could have a QJSA of 100 with an
  additional option of 50or a QJSA of 74 and an
  additional option of 75
• 10 early withdrawal tax no longer applies to
  early distributions from pension plans for public
  safety officers that retire after age 50.

52
New Disclosure Requirements

• Beginning 2008, plan sponsors must furnish a new
  detailed funding notice to all participants and
  the PBGC within 120 days after the end of the
  plan year.
• Must include whether plans funding target
  percentage is less than 100 the plans assets
  and liabilities as of the last day of the prior
  plan year breakdown of active participants
  versus retirees the plans funding policy and
  asset allocation and an explanation of any
  amendments affecting plan liabilities
• Need guidance on doing estimates, if actual data
  not available
• Small plans (100 or fewer participants) allowed
  to provide notice when Form 5500 due
• DB SARs repealed (needs technical correction)
• DOL to provide model notice

53
New Disclosure Requirements

• Electronic display of Form 5500 information
  required to be posted on plan sponsor intranet
  web site and DOL web site.
• Effective in 2008unclear what information must
  be included
• 5500 will require disclosure of assumptions used
  to project future retirements and forms of
  distribution
• Plan sponsors required to file an ERISA 4010
  notice if funding target percentage below 80 for
  preceding year.
• Participants have right to get access to
  information filed with the PBGC upon a plan
  termination.