PENSION PROTECTION ACT OF 2006

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1 AN OVERVIEW OF THE IMPACT OF THE PENSION PROTECTION ACT OF 2006 ON QUALIFIED RETIREMENT PLANS Indiana Benefits Conference January 16, 2007 Indianapolis, Indiana E. Van Olson

2 Introduction The Pension Protection Act of 2006 ("PPA") was effective August 17, PPA impacts qualified Code Section 401(a) defined benefit and defined contribution retirement plans. This presentation does not address the impact of the PPA on multi-employer, governmental, church, 403(b) or 457 retirement plans. This presentation also does not address delayed effective dates for collectively bargained plans.

3 Introduction This presentation covers: I. PPA's Impact on DB Plans II. PPA's Impact on DC Plans III. New PPA Rollover Rules IV. New PPA Fiduciary Rules V. Miscellaneous PPA Items VI. IRS/DOL PPA Guidance to Date

4 PPA Impact on DB Plans I. Impact of the PPA on Defined Benefit Plans

5 PPA Impact on DB Plans Primary Impact. The primary impact of the PPA on defined benefit ("DB") plans is with respect to funding. These new funding rules are generally effective for plan years starting in 2008, with certain phasein periods generally starting in In that regard, this presentation focuses on the minimum funding requirement (MFR) for DB Plans. New ERISA 303 and IRC

6 PPA Impact on DB Plans (Cont'd.) Primary Impact (cont'd). Pre-PPA, the general rule is that the annual MFR equals the sum of: The plan's Normal Cost = PV of total of each participant's accrued benefit (A/B) for the current year, plus Amortized unfunded costs for the current year due to past service amendments, actuarial assumption changes, and experience gains/losses o General amortized over periods ranging from 5 to 30 years depending on the unfunded cost involved. Pre-PPA ERISA 302 and IRC 412.

7 PPA Impact on DB Plans (Cont'd.) Primary Impact (cont'd). PPA's general principle is that the MFR is: o The present value (PV) of benefits earned in the current year, plus o The amount necessary to amortize any funding shortfall over, at most 7 years. PPA also increases the funding requirements for severely under-funded "at risk" plans. New ERISA 303 and IRC

8 PPA Impact on DB Plans (Cont'd.) PPA Funding Target. Starting in 2008, PPA replaces (sort of) the existing "Current Liability" concept with a new "Funding Target" concept, but: Funding Target = PV of each participant's accrued benefit (A/B) accrued to 1 st day of plan year, with adjustments for at risk plans. o Funding Target looks a lot like the old Current Liability.

9 PPA Impact on DB Plans (Cont'd.) Funding Target (cont d). The PPA's funding provisions are based on the plan's "Funding Target." PPA increases a plan's Funding Target from 90% to 100% of Current Liability, with a phase-in period from A plan will not have a new "shortfall amortization base" (to be amortized over 7 years) if the plan is funded up to the required phase- in levels: 2008/92%, 2009/94%, 2010/96%, 2011/100%.

10 PPA Impact on DB Plans (Cont'd.) Funding Target (cont'd). These phase-in rules are subject to a reduction in plan assets for "pre-funding balances" and the employer's election to reduce its MFR required by its pre-funding balance. The PPA requires plans to fund the unfunded Funding Target over 7 years, and fund the entire Normal Cost for the current year. Normal Cost = total A/Bs earned by all of the participants in the current year.

11 PPA Impact on DB Plans (Cont'd.) PPA's MFR. The PPA MFR is based on the plan's Funding Target level compared to plan assets. If the plan's assets less the Credit Balance < the Funding Target, the plan's MFR is: o The plan's Target Normal Cost for the plan year, plus o The plan's shortfall amortization and waiver charges for the plan year. If the plan's assets less the plan's Credit Balance > the Funding Target, the plan's MFR for the year is the plan's Target Normal Cost less excess assets, less the plan's Credit Balance.

12 MFR (Cont'd.) PPA Impact on DB Plans (Cont'd.) Target Normal Cost = PV as of the 1 st day of the plan year of the expected A/Bs for all participants for the current year, including increases due to pay increases with respect to prior service. The shortfall and waiver amortization charges are amortized installments of prior funding shortfalls and funding waivers received by the plan.

13 FTIR is based on a 24-month weighted average of high-quality corporate bond rates using a "segmented" yield curve with 3 values, including: o o o PPA Impact on DB Plans (Cont'd.) Funding Target Interest Rates. PPA imposes a new interest rate ("FTIR") for calculating the Funding Target for a plan with a 3-year phase in period ( ). short term (0-5 years), medium term (6-20 years), and long term (over 20 years) rates.

14 FTIR (cont'd): PPA Impact on DB Plans (Cont'd.) The plan sponsor may elect to use the full yield curve of interest rates without averaging, but once elected may be revoked only with IRS approval. Recall that the Funding Target is the sum of the PV of each participant's A/B. The FTIR assumption, therefore, is critical.

15 Pre-2008 Current Liability Rates. PPA extended for 2006 and 2007 the use of certain favorable interest rates, based on a 4-year average yield of investment-grade corporate bonds, originally established for 2004 and This extension also provides certain relief in calculating the PBGC variable rate premiums for 2006 and PPA 301. PPA Impact on DB Plans (Cont'd.)

16 PPA Impact on DB Plans (Cont'd.) Mortality Assumptions. PPA instructs the IRS to develop new "Funding Target" mortality and disability tables. PPA does not specify a particular table, but directs the IRS to consider a recent study recognizing greater life expectancies. Large employer plans may request the IRS for a substitute table. PPA 102 and 112.

17 PPA Impact on DB Plans (Cont'd.) Average Asset Value. The PPA allows smoothing of average asset values starting in 2008 over 24 month, not old 60 months. Final average value must be in the range of 90 to 110% of actual market value (not 80% to 100%). Contributions for the prior year must be discounted back to the 1 st day of the new year. 100-plus participant plans must use 1 st day of plan year for valuation date. New ERISA 303(g) and IRC 430(g).

18 PPA Impact on DB Plans (Cont'd.) Credit Balance = contribution amount in excess of the minimum required for the year. The pre-ppa Credit Balance generally increased based on an assumed rate of return, and generally reduced the MFR. The PPA Credit Balance generally is not taken into account as part of the plan assets for most funding requirements after New ERISA 303(f) and IRC 430(f).

19 PPA Impact on DB Plans (Cont'd.) PPA Credit Balance. Plan assets are reduced by pre-2008 funding standard carryover and post 2007 pre-funding balances for purposes of determining: The amount of the funding shortfall used to determine the minimum required contribution for the year, Whether the plan is "at-risk," and Generally, whether benefit restrictions apply. New ERISA 303(f) and IRC 430(f).

20 PPA Impact on DB Plans (Cont'd.) PPA Credit Balance. The plan's Credit Balance is adjusted annually to reflect market value. For a transition period, there will be a 2-part Credit Balance: o The carryover balance from the 2007 plan year; o The pre-funding balance due to post-2007 contributions in excess of the MFR. The Credit Balance can be used to offset the MFR if the plan is at least 80% funded when the pre-funding balance (generally post-2007 excess) is excluded from assets.

21 PPA Impact on DB Plans (Cont'd.) Funding Target Attainment Percentage ("FTAP"). The PPA imposes certain benefit limitations beginning in 2008 depending on the plan's FTAP. FTAP = ratio of: o The value of plan's assets less the plan's Credit Balance, over o The plan's Funding Target. There are 4-year ( ) phase-in rules where restrictions may not apply. New ERISA 206(g) and IRC 436.

22 PPA Impact on DB Plans (Cont'd.) Plan Benefits Limited with Low FTAP. Starting in 2008, limitations are imposed on increasing benefit levels and payment of lump sums. If FTAP < 80%, the plan cannot increase benefits unless the benefits are funded immediately. If 60% < FTAP < 80%, the plan is restricted on the payment of lump sums. If FTAP < 60%, or the employer is in bankruptcy, the plan can make no lump sum payments, benefits must be frozen, and "plant shutdown" benefits are prohibited.

23 PPA Impact on DB Plans (Cont'd.) Annual Funding Notice. Starting in 2008, an annual funding notice to the PBGC, participants and union is required for all plans. If FTAP < 80%, the plan also must make a "4010 filing" with the PBGC. o The PBGC 4010 filing reports unfunded benefits, failure to make required contributions and/or receipt of a funding waiver. DOL must issue model notice by 08/17/07. PPA 501 and modified ERISA 101(f).

24 PPA Impact on DB Plans (Cont'd.) Benefit Statements. Starting in 2007, plans must provide either: A benefits statement to each participant at least every 3 years; or An annual notice that a benefit statement is available, and how to obtain one. DOL to issue model statements by 8/17/07. New ERISA 508.

25 PPA Impact on DB Plans (Cont'd.) At Risk Plans. PPA introduces concept of "At Risk" plans starting in 2008 (with certain phase-in rules). PPA imposes new funding requirements for At Risk plans with more than 500 participants. At Risk plans have a higher Funding Target and higher Normal Cost. The At Risk plan contribution is never less than the regular contribution.

26 At Risk Plan. PPA Impact on DB Plans (Cont'd.) A Plan is At Risk if: FTAP < 80% [65% in 2008, 70% in 2009 and 75% in 2010], using standard assumptions; and FTAP < 70% assuming all participants within 10 years of retirement retire at the earliest possible date with the most favorable (expensive and current) form of benefit. Credit Balances reduce plan assets for purposes of this test. Certain other rules apply for At Risk plans in this regard.

27 PPA Impact on DB Plans (Cont'd.) Lump Sum Benefit Calculations. Lump sum benefits under a plan must be calculated using the FTIR 3-segment yield curve (noted above) except: A monthly interest rate is used rather than the 24- month weighted average rate. This change is phased in over 5 years ( ). Modified ERISA 205(g) and IRC 417(e).

28 PPA Impact on DB Plans (Cont'd.) Cash Balance Plans. After 6/29/05, a DB plan does not violate the age discrimination provisions under ERISA, the IRC or ADEA if: A participant's A/B is equal to or greater than a similarly situated younger person's A/B. o The A/B may be expressed as an annuity payable at normal retirement age, a hypothetical account balance, or the current value of an accumulated percentage of final average pay. New ERISA 204(b)(5), IRC 411(b)(5), and ADEA 4(i)(10).

29 A participant's A/B after the conversion is no less than prior to the conversion for years of service prior to the conversion, plus o o PPA Impact on DB Plans (Cont'd.) Cash Balance Plans (cont'd). A plan conversion after 6/29/05 will not be age discriminatory if: the participant's A/B under the cash balance plan for years of service after the conversion, and certain pre-conversion "subsidy" benefits (such as early retirement) must be preserved. New ERISA 204(b)(5), IRC 411(b)(5), and ADEA 4(i)(10).

30 PPA Impact on DB Plans (Cont'd.) Cash Balance Plans (cont'd). For DB plans in effect on 6/29/05, plans must provide an interest credit no greater than a "market rate" to be defined by the IRS, which also is directed prescribe methods for crediting interest to a participant's account. New ERISA 204(b)(5), IRC 411(b)(5), and ADEA 4(i)(10). For distributions after 8/17/06, PPA eliminates the "whipsaw" effect where the plan's interest rate exceeded the 30-year Treasury Rate for lump sum calculations. New ERISA 203(f) and IRC 411(a)(13).

31 PPA Impact on DB Plans (Cont'd.) Cash Balance Plans (cont'd). Benefits under a cash balance plan in effect on 6/29/05 generally must be 100% vested after 3 years of service. o This applies to years beginning in 2008, but a plan sponsor may elect early application. o For plans established/converted after 6/29/05, this provision is effective when the plan is established. New ERISA 204(f) and IRC 411(a)(13).

32 PPA Impact on DB Plans (Cont'd.) Cash Balance Plans (cont'd). PPA provides that the PPA amendments shall not be construed to create any inference with regard to whether cash balance or other hybrid plan formulas were age discriminatory prior to 6/29/05. PPA 701.

33 PPA Impact on DB Plans (Cont'd.) PBGC Premiums. The current rules for premiums and calculations apply for Flat rate of $30/participant, plus Variable rate of $9/$1,000 unfunded vested benefits, except o for plans at the "full funding" limit.

34 PPA Impact on DB Plans (Cont'd.) PBGC Premiums. PPA generally increases the PBGC variable premium starting in The variable rate premium calculations is based on the PPA's 3-segment market interest rates for funding. The full funding limit exemption is eliminated. PPA does impose a cap on the variable premium for employers with 25 or fewer employees. Modified ERISA 4006(a).

35 Quarterly Contributions. Plans with a "funding shortfall" in the preceding plan year must make minimum required contribution for the year in quarterly installments. The "funding shortfall" is the excess of the plan s Funding Target over the plan s assets, less the Credit Balance. The contribution is equal to 25% of the lesser of o o PPA Impact on DB Plans (Cont'd.) 90% of the MFR for the plan year, 100% of the MFR for the preceding plan year. Underpayments are charged interest at the plan s rate plus 5%. New ERISA 303(j)(3) and IRC 430(j)(3).

36 PPA Impact on DB Plans (Cont'd.) Deduction Limits for The DB Plan deduction limit is 150% of Current Liability (per pre-ppa rules). For the combined DB/DC deduction limit, the 1 st 6% of employer contributions do not count toward the 25% of covered compensation limit. Modified IRC 404(a)(1) and 404(a)(7).

37 The sum of: PPA Impact on DB Plans (Cont'd.) DB Deduction Limit after Starting in 2008, the deduction limit is the greater of: o 150% (more/less) of the Funding Target; and o Target Normal Cost for the year; o less, unreduced plan assets. The MFR for the year. Modified IRC 404(a) and new 404(o).

38 PPA Impact on DB Plans (Cont'd.) Combined DB/DC Deduction Limits. Where the employer sponsors both a DB and DC Plan. For years after 2005, the 1 st 6% of contributions do not count toward the 25% of covered compensation limit; and For years after 2007, PBGC insured plans are not taken into consideration at all. Modified IRC 404(a)(f).

39 PPA Impact on DB Plans (Cont'd.) Phased Retirement Benefits. Starting in 2007, pension plans may allow active participants to start withdrawing pension benefits once they have attained age 62. This is intended to help "phased retirement" decisions. New IRC 401(a)(36) and modified ERISA 3(2).

40 PPA Impact on DB Plans (Cont'd.) Additional Survivor Annuity. Starting with the 2008 plan year, the PPA amends the QJSA rules to require, in essence, both a 50% and 75% survivor annuity option. If a plan has a less than 75% survivor annuity, the plan must provide a 75% survivor annuity option. If a plan has a 75% or more survivor annuity, the plan must also provide a 50% survivor annuity option. New IRC 417(g) and modified ERISA 205(c) and (d) and IRC 417(a).

41 QJSA; PPA Impact on DB Plans (Cont'd.) Extension of Notice Period. Starting with the 2007 plan year, the 30 to 90-day notice period is extended to 180 days for the: Mandatory (small benefit) cash-outs; and Tax and direct rollover rules. Modified ERISA 205(c)(7)(A), IRC 417(a)(6)(A), and Treas. Reg (f)-1.

42 This is a combined DB pension with employee 401(k) pretax contributions and an employer match. The DB portion must provide at least a 1% of final average pay/20-year formula or a cash balance formula increasing with age, and fully vested after 3 years of service. The 401(k) portion must include automatic enrollment and a fully vested 50% match on the first 4% of deferrals. New IRC 414(x). PPA Impact on DB Plans (Cont'd.) DB-401(k) Plan. PPA adds a new type of plan starting in 2010 for employers with 2 to 500 employees.

43 II. Impact of the PPA on Defined Contribution Plans

44 PPA Impact on DC Plans Extension of EGTRRA Benefits. The PPA made the enhanced DC plan benefits added by the Economic Growth and Tax Relief Reconciliation Act ("EGTRRA") permanent. These were scheduled to expire in PPA 811.

45 PPA Impact on DC Plans (Cont'd.) Recall EGTRRA added such items as: The age 50 plus 401(k) "catch-up" contributions. The ability to rollover contributions among different types of plans (for example, from a 403(b) plan to a 401(k) plan). The increased annual dollar pre-tax contribution limits (currently $15,000 for 2006 and $15,500 for 2007). The increased permissible annual compensation limits (currently $220,000 for 2006 and $225,000 for 2007). The increased annual individual participant "annual additions" ($44,000 for 2006 and $45,000 for 2007). Roth 401(k) contributions. Simplified top-heavy plan rules.

46 PPA Impact on DC Plans (Cont'd.) Accelerated Vesting. Starting in 2007 (except for certain leveraged ESOPs), PPA accelerates the vesting schedule for all employer contributions to either: A 3-year cliff; or 6-year graded (with 20% per year starting with the completion of year 2). o These are the "old" top-heavy plan vesting schedules imposed on employer matching contributions under EGTRRA. Modified IRC 411(a) and ERISA 203(a).

47 PPA Impact on DC Plans (Cont'd.) Automatic Enrollment. PPA provides automatic enrollment in 401(k) plans. PPA codifies prior action of the IRS allowing such automatic enrollment. See Rev. Rul and Treas. Reg (k)-1(a)(3). Employee is treated as having elected to participate in the 401(k) plan, and make pre-tax contributions through payroll reduction. Must be a uniform percentage of compensation as set by the plan. Contributions continue until the participant elects to stop, or elects a different contribution percentage rate.

48 PPA clarifies ERISA preempts state laws that directly/indirectly prohibit automatic enrollment. o For example, state laws typically require an employee's written authorization to withhold pay. PPA's protection applies only if there are: o o PPA Impact on DC Plans (Cont'd.) Preemption of State Employment Laws. PPA preempts state law regarding wage withholding consent requirements to: Appropriate notices to affected employees within a reasonable period before each year; and Appropriate default investments under the Plan.

49 PPA Impact on DC Plans (Cont'd.) Withholding Notice. The notice must explain: The employee's right to elect to have no deferrals made, or to change the contribution percentage; and How the contributions will be invested in the absence of investment directions by the employee. Caution. Although the PPA preemption provision was effective on enactment at 8/17/06, it is based on satisfying certain IRS notice requirements that are not effective until PPA 902 and modified ERISA 502 and 514.

50 PPA Impact on DC Plans (Cont'd.) PPA Impact on DC Plans (Cont'd.) Automatic Enrollment 401(k) Safe Harbor Plans. PPA adds, starting in 2008, an automatic enrollment 401(k) safe harbor plan. Automatically satisfies IRC 401(k)/(m) ADP/ACP Tests and 416 Top-Heavy Plan Rules. Employees are automatically enrolled unless they elect otherwise.

51 PPA Impact on DC Plans (Cont'd.) PPA Impact on DC Plans (Cont'd.) Automatic Enrollment 401(k) Safe Harbor Plans. Requires Employer contributions of: o Matching contribution of 100% of the 1 st 1% of deferrals and 50% of next 5% of deferrals (for a total of 3½% match), or o Basic 3% contribution whether or not eligible employee makes any deferral. Requires full vesting after 2 years of service.

52 PPA Impact on DC Plans (Cont'd.) PPA Impact on DC Plans (Cont'd.) Automatic Enrollment Safe Harbor Plan (cont'd). Auto-deferral rate cannot exceed 10% of pay, but must be at least: o 3% for employee's 1 st participation year; o 4% in the 2 nd year; o 5% in the 3 rd year; and o at least 6% thereafter.

53 PPA Impact on DC Plans (Cont'd.) Automatic Enrollment Safe Harbor Plan (cont'd). Applies only to new employees and current eligible employees who have not affirmatively declined to make elective deferrals. These auto-enrolled participants have an initial 90-day period to have their deferral amounts returned (returned without 10% penalty tax). PPA requires a notice to participants regarding the safe harbor contributions and how such contributions will be invested under the plan. New IRC 401(k)(13), 401(m)(12) and 416(g)(4)(H).

54 PPA Impact on DC Plans (Cont'd.) Default Investments. PPA adds new "default investment" provisions for participant directed investment plans. These are intended to protect fiduciaries where participants or beneficiaries fail to direct investment. These are discussed below.

55 PPA Impact on DC Plans (Cont'd.) PPA Impact on DC Plans (Cont'd.) Benefit Statements. Starting in 2007, participant benefit statements are required: Quarterly for plans with participant-directed investments; and Annually for all other DC plans; and On written request (limited to 1 per year). DOL to issue model statements by 8/17/07. New ERISA 508.

56 PPA Impact on DC Plans (Cont'd.) PPA Impact on DC Plans (Cont'd.) Benefit Statement. Statement are to include: Total accrued benefit/account balance; The vested portion of the benefit; The value of each investment; and An explanation of any integration or offset provisions applicable to the plan. Failure to provide penalty = $100/day. Modified ERISA 502(c).

57 These are to apply for 401(k) plans [and 403(b), 457 and 409A plans] for qualifying financial hardships [and unforeseen financial emergencies] for designated beneficiaries. This appears to include parents, children, grandchildren and/or domestic partners [other?]. IRS has 180 days to issue guidance. PPA 826. PPA Impact on DC Plans (Cont'd.) Hardship Distributions. The PPA directs the IRS to expand the financial hardship withdrawal rules:

58 PPA Impact on DC Plans (Cont'd.) Active Duty Reservist Withdrawals. No 10% early withdrawal penalty tax where: Elective deferral withdrawals from 401(k) plan [or 403(b) and IRAs], and Reservist's active duty is/was during period of 9/11/01 to 12/31/07, and Active duty was for at least 179 days. Modified IRC 72(t).

59 PPA Impact on DC Plans (Cont'd.) PPA Impact on DC Plans (Cont'd.) Gap Period Income. Income attributable to excess 401(k) elective deferrals, which are distributed after year-end, need not be refunded starting with the 2008 plan year. The PPA eliminates the IRS gap period income refund required in the recent IRS final 401(k) regulations. Income attributable to excess contributions during the plan year still must be refunded with the excess contributions.

60 III. Enhanced Rollover Rules Under The Pension Protection Act

61 PPA's New Rollover Rules New Rollover Rule. Starting in 2007: Qualified plan [401(a) DB and DC] after-tax monies can be rolled over to another qualified plan (DB or DC) [or even 403(b)] if: o Such other plan separately accounts for such monies and earnings on such monies. Modified IRC 402(c)(2) [and 403(b)].

62 PPA's New Rollover Rules (Cont'd.) New Rollover Rule. Starting in 2007: A non-spouse beneficiary can transfer the decedentparticipant's eligible plan benefit to an "inherited" IRA. o The balance of an inherited IRA can be paid out over the life expectancy of the beneficiary. Eligible plan benefits include qualified 401(a) [DB and DC and 403(a) annuity] plans, as well as other IRC 402(c)(8) plans such as IRAs, 403(b) and governmental 457 plans. Modified IRC 402(c)(11) [and 403(a), 403(b) and 457(e)].

63 PPA's New Rollover Rules (Cont'd.) New Rollover Rule. Starting in 2008: Eligible plan monies can be rolled directly over to a Roth (after-tax) IRA. o This includes both taxable and after-tax benefit monies. o The taxable benefit rollover is a taxable event. Eligible plan benefits include IRC 402(c)(8) plans see above. Modified IRC 408A.

64 IV. The Pension Protection Act and Fiduciary Matters

65 PPA and Fiduciary Matters PPA and Fiduciary Matters Fiduciary Matters Not Covered. PPA added new PT exemptions regarding: Block trading Electronic or alternative trading systems Foreign exchange transactions Party in interest service providers Cross trading Bonding Plan asset definitions Corrected party in interest transactions PPA 611 and 612.

66 PPA and Fiduciary Matters Investment in Employer Stock. PPA imposes investment diversification requirements on DC Plans of publicly traded companies effective for plan years beginning after Except for certain ESOPs that hold no employee or matching contributions, participants (and beneficiaries and alternate payees under QDROs) must be allowed to: o o Diversify any pre-tax and after-tax employee contributions invested in employer stock, and With respect to participants who have at least 3 years of service, diversify any employer contributions invested in employer stock.

67 PPA and Fiduciary Matters (Cont'd.) Investment in Employer Stock (cont'd). PPA provides a 3-year (1/3 rd /year) transition period. Plans must provide at least three diversified investment options (materially different risk and return characteristics) Participants must have 30-days notice of their diversification rights. Failure to provide notice = $100/day penalty. New IRC 401(a)(35) and ERISA 101, 204(j) and 502(c).

68 PPA and Fiduciary Matters (Cont'd.) PPA and Fiduciary Matters (Cont'd.) Default Investments. For plan years starting after 2006, no fiduciary liability for participant "default" investments if certain conditions are met. Plan must comply with DOL regulations on this. o The DOL issued proposed regulations on 9/27/06. Plan must give at least annual notice on investment options and rights. Participants must have a reasonable time to direct their investments after the notice. PPA 624.

69 PPA and Fiduciary Matters (Cont'd.) PPA and Fiduciary Matters (Cont'd.) Investment Advice Exemption. The PPA has a special exemption for prohibited transaction (PT) rules for investment advice by related parties or service providers after This only applies for Plans with participantdirected investments. Modifying ERISA 408 and IRC 4975.

70 PPA and Fiduciary Matters (Cont'd.) PPA and Fiduciary Matters (Cont'd.) Advice Exemption. The exemption is for investment advice provided by a party in interest "fiduciary advisor" if: Provided through an objective computer model that has been certified by an independent third party; or Provided by advisers whose compensation does not vary with the investments selected. The arrangement must be authorized by a independent fiduciary (e.g., the employer), subject to ERISA "prudence" standards.

71 PPA and Fiduciary Matters (Cont'd.) PPA and Fiduciary Matters (Cont'd.) Advice Exemption. Fiduciary advisors include: A registered investment advisor; A bank, savings association or similar institution acting thru it's trust department; An insurance company; A broker dealer; An employee, agent or registered representative of those above; or An affiliate of those above.

72 PPA and Fiduciary Matters (Cont'd.) Advice Exemption. The Fiduciary Advisor must provide detailed written disclosure notices, and: Implement the advice solely at the direction of the participant; Be paid only reasonable compensation; Acknowledge fiduciary status in writing; and Maintain information for at least 6 years.

73 PPA and Fiduciary Matters (Cont'd.) Blackout Exemption. PPA provides ERISA 404(c) fiduciary liability relief for plan years after 2007 during a blackout period if PPA requirements are met. Also provides ERISA 404(c)(4) protection with mapping to a qualified change in investment option. The plan must also provide notice to the participants and beneficiaries. DOL to issue guidance by 8/17/07. PPA 621.

74 PPA and Fiduciary Matters (Cont'd.) PPA and Fiduciary Matters (Cont'd.) ERISA Bonding. For plan years starting after 2007: The ERISA bonding requirement to protect plan assets increases for plans invested in employer securities. The minimum bond is 10% of assets but at least $1,000 [same as pre-ppa]. The maximum bond "cap" is increased from $500,000 to $1,000,000, or such greater amount as the DOL may establish after notice and hearing for interested parties. Modified ERISA 412(a).

75 Misc. PPA Items V. Miscellaneous Items Under The Pension Protection Act

76 Misc. PPA Items Excess Pension Assets. PPA modifies the rules for use of excess pension assets to pay qualified current retiree health liabilities after 8/17/06. New IRC 420(f). IRC 415 Limit Highest 3 Years' Compensation. For years after 2005, PPA clarifies compensation earned during a participant's highest 3 years is not limited to only years of active participation (overriding IRS proposed regulations). Modified IRC 415(b)(3). Validation of EPCRS. IRS voluntary correction program [see Rev. Proc ] confirmed, and PPA "clarifies" IRS has authority to waive income, excise, or other taxes to ensure that such penalties bear a reasonable relationship to the failure. PPA 1101.

77 Including that a DRO will not fail to be a QDRO solely because: o o it is issued after or modifies a previous domestic relations order, or QDRO, or because of the time at which it is issued (e.g., after the participant is dead). PPA Misc. PPA Items QDRO Rules to be Clarified. PPA directs the DOL to issue regulations by 8/17/07clarifying the status of certain domestic relations orders (DROs):

78 Misc. PPA Items PPA Plan Amendments. In general, plans must be amended on or before the last day of the 1st plan year beginning on or 1/1/09. PPA Coercive Interference. Penalty under ERISA 511, for prohibited interference with a participant's plan rights, increased to $100,000 and/or 10 years in prison. PPA 623.

79 Amounts set aside or reserved (directly or indirectly) or transferred to a trust or other arrangement or restricted for the payment of deferred compensation under a nonqualified deferred compensation plan (maintained by a plan sponsor or member of its controlled group) will be considered a taxable transfer to the individual subject to the additional 20% penalty tax and interest under IRC 409A. A restricted period is any time in which (i) the plan sponsor is bankrupt, (ii) a plan is at-risk, or (iii) the 12-month period beginning 6 months before an under-funded plan is terminated. Modified IRC 409A(b). Misc. PPA Items Restrictions on Deferred Compensation. Starting with transfer after 8/17/06, during a "restricted" period:

80 VI. Guidance Provided by DOL and IRS Under the Pension Protection Act

81 PPA Guidance to Date DOL Regulations on 404(c). DOL Proposed Regulations (9/27/06) on default investments and fiduciary protections under ERISA 404(c). DOL has stated informally that there will be significant changes in the final regulations as a result of comments received.

82 PPA Guidance to Date (Cont'd.) IRS Notice (11/30/06). Provides certain transitional relief and guidance, and model language, regarding the public employer stock diversification and notice requirements. This is discussed above.

83 PPA Guidance to Date (Cont'd.) IRS Notice Cumulative List of Changes in Plan Qualification Requirements, PPA Provisions listing PPA provisions effective in 2006 and 2007 (see Section IV of this Notice for rules that apply to the PPA provisions), including: New DC Plan requirement to divest out of publicly traded securities. Modified hardship distributions rules under 401(k) plans. New active duty reservist's right to take in-service distributions from a 401(k) plan.

84 PPA Guidance to Date (Cont'd.) IRS Notice (cont'd). New rollover rule for after-tax monies. New rollover rule for nonspouse beneficiaries. New cash balance/hybrid plan rules. Modified faster vesting rules for employer nonelective contributions. Extended interest rate assumptions for applying benefit limitations to lump sums. Modified notice periods for distributions and elections.

85 PPA Guidance to Date (Cont'd.) IRS Notice Provides temporary transitional guidance on 8 PPA changes, including: Rollovers from qualified plans to IRAs for nonspouse beneficiaries; The rule allowing IRA owners age 70½ or older to directly transfer tax-free, up to $100,000 per year to an eligible charity; Hardship distributions from a 401(k) and similar plans;

86 PPA Guidance to Date (Cont'd.) IRS Notice (cont'd). Early distributions from qualified plans to terminated public safety employees; Distributions to pay for health insurance for retired public safety officers; Earlier vesting of certain employer contributions; New rules for the notice and consent period for distributions; and Modified interest rate assumptions for lump sum distributions.

87 IMPORTANT NOTICE: These materials are intended for general information purposes only and do not and are not intended to constitute legal advice. The reader must consult with legal counsel to determine how the laws discussed herein apply to the reader's specific circumstances.

88

89 Conclusion

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