ICMA-RC Analyzes Key Aspects of Pension Protection Act; Summary Available Online

December 2006

Since the passage of the Pension Protection Act of 2006, ICMA-RC - a major supporter of the extensive pension reform - has worked with outside and internal legislative experts to review details of the Act, to develop guidelines for plan sponsors.

Over the past few months, ICMA-RC has received many questions about the implementation and scope of a few of the key defined contribution/deferred compensation related provisions.

To better field these inquiries, the provisions are being analyzed by a multidisciplinary task force within ICMA-RC. We are also seeking additional guidance from outside counsel, the U.S. Department of the Treasury, and the Internal Revenue Service.

Public Safety Provisions

One of these provisions in particular, is the public safety provision that waives the 10 percent penalty tax for early distributions from a defined benefit plan for public safety employees.

Upon the effective date of the provision, there would be no 10 percent early withdrawal penalty on distributions from a governmental defined benefit plan made to a public safety employee (i.e. a police officer, firefighter, or emergency medical services employee) who separates from service after age 50.

There is no indication that an amount rolled over from a defined benefit plan to a defined contribution plan (whether 457 or 401(a)) then distributed from the defined contribution plan would continue to be eligible for the 10 percent waiver for public safety employees.

In general, the 10 percent tax exceptions are governed by the plan that is making the distribution. The only current exception is for rolled over 401(a) amounts into a governmental 457 plan, which are still subject to the 10 percent penalty tax.

Another public safety provision that has caused some confusion, is one that allows up to $3,000 in annual distributions from retirement plans for health and long term care insurance premiums for public safety officers who retire or are disabled.

This provision allows a retired public safety officer, who has separated from service due to a disability or reaching retirement age, to elect an amount of up to $3,000 from a qualified governmental plan distributed directly to an insurer to pay for qualifying health care of long term care coverage. The deduction is excludable from the participant’s taxable income.

Non-Spouse Beneficiary Rollovers

The Pension Protection Act also includes a provision that permits a non-spouse beneficiary of a 457 plan to rollover the funds to an inherited individual retirement account (IRA). This provision is optional, so an employer will need to amend the plan document prior to this option becoming available to plan beneficiaries.

Non-spousal beneficiaries of a 457 account do not have the option of postponing receipt of payments until age 70¼. Generally, distributions must begin by Dec. 31 of the year following the participant’s death. If distributions do not begin by that date, the beneficiary must deplete the account by the fifth anniversary of the participant’s death.

The new law also allows a non-spouse beneficiary to name a beneficiary on an inherited IRA account. This feature, however, is not currently available in ICMA-RC’s 457 plans.

Learn More

A summary of the Pension Protection Act, prepared by ICMA-RC, is now available online. It features the key PPA provisions impacting 457(b) and 401 governmental plans.

• Pension Protection Act of 2006: Summary of Plan Provisions Impacting 457(b) and 401 Plans (138K PDF)

Additional PPA background and resources are available in ICMA-RC’s Legislative Report Web site.