Pension Protection Act of 2006: Next steps and considerations for plan sponsors of single-employer defined benefit plans * Effective immediately or retroactively Provision Summary of Provision Next Steps and Considerations Effective Date Optional or Maximum benefits payable from qualified defined benefit plans (IRC Section 415). The interest rate used to determine the maximum decreasing annuity (e.g., lump sum) payable from a qualified plan is the greater of: (1) 5.5%; (2) The plan s interest rate; or (3) The rate that provides a benefit of not more than 105% of the benefit calculated using the interest rate applicable for minimum lump-sum calculations. Update calculations immediately to reflect the new provisions. Review 2006 distributions. Monitor regulatory environment for potential 2006 relief. Amend plan**. Effective for distributions made on or after January 1, 2006. Regulatory relief is likely for distributions made between January 1, 2006, and the law s enactment on August 17, 2006. EGTRRA permanence The provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 made permanent. Retain existing plan benefit and compensation limits. Immediate Optional **Note: This chart addresses administrative and operational considerations. It does not address minimum funding, PBGC, or deduction issues. * 1
Effective immediately or retroactively Provision Summary of Provision Next Steps and Considerations Effective Date Optional or Cash balance/hybrid plans Age discrimination hybrid plans are not age-discriminatory as long as they meet certain requirements. Conversions wear-away of preconversion accrued benefits is not allowed; early retirement subsidies must be preserved in certain cases. Whipsaw the lump-sum distribution from a hybrid plan can be equal to the hypothetical account balance. Review plan design for potential impacts; especially for vesting and interest-crediting provisions. Amend plan*. Immediate for plans established after June 29, 2005 Plans established before that date must operate in accordance with the new vesting and interestcrediting provisions by the first day of the 2008 plan year. Delayed effective date for collectively bargained plans Interest crediting interest must be credited at a rate not greater than a market rate of return. Vesting participants in hybrid plans must be fully vested after three years. No inference these provisions are prospective only and make no inference on plans created and/or amended before June 29, 2005. 2
Effective immediately or retroactively Provision Summary of Provision Next Steps and Considerations Effective Date Optional or Restrictions on funding of nonqualified deferred compensation plans. Plans cannot make a contribution to a rabbi trust: (1) while the qualified plan is less than 60% funded; (2) the sponsor is in bankruptcy; or (3) if the plan is terminated with insufficient assets, without significant negative tax ramifications for specified executive participants. Monitor the funded status of the qualified plan. Develop a process for relaying information on funded status to administrator of nonqualified plan. Immediate, but the practical effective date is likely 2008 (except in cases of bankruptcy or plan termination) when the new funding rules go into effect, although this interpretation is subject to confirmation by the Treasury. Effective in 2007 Periodic benefit statements Plans are required to issue a benefit statement once every three years or an annual notice that lets a participant know how to obtain a statement. The statement must contain the total accrued benefits, vested percentage, and an explanation of any permitted disparity or floor-offset arrangements used to determine benefits. Decide whether to meet the new requirement with periodic statements or an annual notice. Update and enhance benefit statement with required disclosures. Department of Labor (DOL) to issue model statement(s) by August 2007. December 31, 2006 Collectively bargained plans have delayed effective dates. 3
Effective in 2007 Provision Summary of Provision Next Steps and Considerations Effective Date Optional or Expanded notice and consent period Doubles length of the notice and consent period for cash-out distributions, distributions of survivor annuities, and eligible rollover distributions to 30 180 days (from 30 90 days). Notice must describe right to defer and consequences of failing to do so. Modify plan distribution forms. Amend plan;* update participant Update 402(f) special tax notice IRS to issue revised model IRS to issue model language for participant s right to defer benefit. December 31, 2006 Rollovers by nonspouse beneficiaries. Benefits received by a nonspouse beneficiary from a qualified plan may be directly rolled over to an IRA, which is then treated as an inherited IRA. Amend plan;* update participant Effective for distributions after December 31, 2006 Unclear at this point whether optional or required, although we expect plans will offer rollover right. This applies to a plan that permits a lump-sum distribution or installments over a period of fewer than 10 years. 4
Effective in 2007 Provision Summary of Provision Next Steps and Considerations Effective Date Optional or Rollovers of after-tax amounts Expands the portability of after-tax distributions from any qualified retirement plan so they can be rolled over to a section 403(b) arrangement, defined benefit plan, or any defined contribution plan. Consider whether to accept this type of rollover (we anticipate that defined benefit plans will not adopt this provision given that most defined contribution plans already accept these rollovers). Tax years beginning after 2006 Optional Amend plan;* update participant Phased retirement distributions for participants who are actively employed at age 62 or older Participants may take in-service distributions after attaining age 62. Decide whether to permit phased retirement distributions. Look for regulatory guidance on this new distribution option. December 31, 2006 (but awaiting regulations) Optional 5
Effective in 2008 Provision Summary of Provision Next Steps and Considerations Effective Date Optional or Benefits accrued or payable from a qualified plan are limited if the funded status falls below 80% for a given year. Participants must be notified of the restrictions within 30 days of their imposition. Plan amendments increasing benefit levels are generally prohibited and lump-sum payments are limited if the funded status falls below 80%. Benefit accruals are frozen and some optional forms of distribution (e.g., lump sums) are prohibited if the funded status falls below 60%. Monitor the funded status of the qualified plan. Establish a process for relaying information on the plan s funded status among the plan sponsor, the plan s actuary, and the thirdparty administrator. Determine whether third-party administrator needs to provide data on accelerated schedule to plan s actuary. Delayed effective date for collectively bargained plans 6
Effective in 2008 Provision Summary of Provision Next Steps and Considerations Effective Date Optional or New mortality and interest assumptions must be used to calculate lump sums [IRC Section 417(e)(3)]. The minimum value of lump sums and certain other optional forms of payment must be calculated using interest rates derived from the modified yield curve-segmented interest rates. Monitor regulatory environment for guidance on the new interest and mortality assumptions. The new interest rate will be phased in over five years. The new mortality table will be prescribed by the Treasury Department but will be based on the mortality table applicable to the new funding rules. There will be no phase-in for the new mortality table. Additional survivor annuity option Plans required to offer QJSA options that provide for both 50% and not less than 75% survivor annuity. Evaluate current annuity options to determine whether an additional option needs to be made available. Amend plan;*update participant Collectively bargained plans have delayed effective dates. 7
Effective in 2008 Provision Summary of Provision Next Steps and Considerations Effective Date Optional or Plan valuation date must be first day of plan year. This provision applies to all plans with 100 or more participants. Determine whether third-party administrator needs to provide data on accelerated schedule to plan s actuary. A detailed annual funding notice must be sent to all participants within 120 days after the plan year. This notice effectively replaces the defined benefit Summary Annual Report (SAR) requirement and provides participants with many more plan details than in the past. Coordinate development of notice among plan sponsor, third-party administrator, and the plan s actuary. Direct rollover to Roth IRA Individuals who are eligible to convert a traditional IRA to a Roth IRA may roll over distributions directly to a Roth IRA (with taxable portion of the rollover amount taxed at the time of rollover), subject to current adjusted gross income maximum of $100,000 which expires in 2010. Amend plan;* update participant Partner with third-party administrator on process and administration. Effective for distributions after 2007 IRS guidance will hopefully clarify whether a plan sponsor will be required to offer direct rollovers to a Roth IRA. This applies to a plan that permits a lump-sum distribution or installments over a period of fewer than 10 years. 8
Effective in 2008 Provision Summary of Provision Next Steps and Considerations Effective Date Optional or Electronic display of annual report information (Form 5500). Electronic filing of annual report with DOL and public access through DOL website and access by employees on employer intranet website. Update intranet website. Look for DOL electronic filing requirements. Effective after 2008 DB/401(k) Plan Combination of defined benefit plan and 401(k) plan that meets specified requirements. This type of plan is only available to employers with no more than 500 employees. Be on the lookout for future guidance. Consider changes in plan designs. December 31, 2009 Optional 2006 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. PPA 112006 9