Senate Passes Pension Protection Act of 2006 (HR 4), EGTRRA Made Permanent

The Senate approved the Pension Protection Act (H.R. 4) on a vote of 93 to 5 with no amendments, Thursday, Aug. 3. The Senators voting no were Barbara Boxer (D-CA), Richard Burr (R-NC), Tom Coburn (R-OK), John Cornyn (R-TX), and Russ Feingold (D-WI). The House passed the legislation Friday, July 29.

Because the Senate approved H.R. 4 with no amendments, it will now be sent to the President for signature. The White House has indicated that the President will sign the bill.

The contents of the bill represent the compromises reached by key House and Senate pension conference negotiators and the key defined contribution/deferred compensation provisions are generally effective after Dec. 31, 2006. The major provisions that impact defined contribution/deferred compensation plans appear to be as agreed upon by the conferees.

EGTRRA Permanency

For ICMA-RC, one of the most important provisions in the bill is permanency for the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (Title VIII section 811, p. 597). This provision was approved by the conferees and included in HR 4. Instead of expiring in 2010, the provisions in EGTRRA, such as portability, increased contributions limits, catch-up contributions and greater flexibility in plan designs, are all made permanent.

Retirement Plan Provisions Impacting Governmental Plans

Other key defined contribution/deferred compensation related provisions included in the bill:

• waive the 10 percent penalty tax for early distributions from a defined benefit plan for public safety employees (lowers allowable age from 55 to age 50). However, they still have to pay tax on distribution unless rolled over into a 401(a) or 457 plan;
• Allow for up to $3,000 in annual distributions (reduced from the original $5,000) from retirement plans for health and long term care insurance premiums for public safety officers who retire or are disabled;
• clarify the purchase of service credits - this provision allows participants to purchase "air-time" type credits regardless of whether service has been performed, subject to limits on nonqualified service, such as the 5-year rule (Section 821);
• allow for direct rollovers from plans to Roth IRAs instead of the current two-step process;
• clarify minimum distribution rules for governmental plans by allowing for reasonable good faith in complying with section 401(a)(9). This approach is supported by the entire public sector pension community;
• allow penalty-free "qualified reservist distributions" from an IRA, 401(k) or 403(b) plan for individuals called to active duty for at least 179 days between 9/11/01 and 12/31/07 (The individual is allowed two years from the time they return from active duty to re-contribute to an IRA, but not to a retirement plan.);
• allow plans to distribute small account balances (within 90 days of enrollment) to employees who decide not to participate in automatic enrollment arrangements. This is the one automatic enrollment provision that is applicable to governmental plans, and
• make permanent and index the eligibility levels for the Savers Credit, which provides a tax credit for qualified (lower-income) employees participating in their employer plan.

401(k) Plans

The bill does not include a provision to allow for 401(k) plans for public sector employees (beyond those currently grandfathered). The provision was strongly opposed by public sector groups and had a significant revenue impact.

Investment Advice

The bill also allows retirement plan providers to offer investment advice to 401(k) and 403(b) participants and IRA clients and adds disclosure requirements to protect against investment companies' selling their own products to gain commissions. Advice on 401(k) plans would have to come through a computer model approved by an independent entity or the compensation of the advisor could not vary based on the employee's investment selections. With respect to IRAs, only the option where the compensation does not vary is initially made available. This IRA advice option would be available in the context of the IRAs offered through ICMA-RC plan sponsors (Section 601).

Resources for more information on HR 4, The Pension Protection Act of 2006:

• Search the Full text of the bill online at Thomas Web site of the Library of Congress
• Download the PDF version of the bill from the Government Printing Office
• Read the full technical explanation of the bill prepared by the Joint Committee on Taxation
• Read the House Committee on Education and the Workforce summary of the provisions of HR 4