Pension Protection Act of 2006: Next steps and considerations for plan sponsors of defined contribution plans Effective immediately or retroactively Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) permanence The provisions of the EGTRRA made permanent. Retain existing plan contribution limits. Retain/consider implementing catch-up contributions. Immediate. Retain/consider implementing Roth 401(k). ERISA preemption of state garnishment laws ERISA preempts any state law that prohibits automatic deductions from pay absent express written authorization, subject to satisfaction of notice requirements and qualified default investment alternative requirements. Consider impact on existing automatic enrollment plans e.g., notice requirement. Consider offering an automatic enrollment program. Immediate. 1
Effective immediately or retroactively Qualified reservist distribution Exemption from 10% early distribution penalty for reservists called to duty for at least 179 days (for periods of active duty after September 11, 2001, and before December 31, 2007). Participant can repay elective deferral/ira distribution within two years from later of August 17, 2006, or return from active duty. Consider whether to permit this distribution. Amend plan;* update Distributions after September 11, 2001, and through Optional; however, the 10% penalty relief and ability of participant to repay the distribution to an IRA on an after-tax basis are not dependent on plan provisions. Expanded hardship withdrawals Permits hardship withdrawals for qualifying hardships and unforeseen emergencies of the participant s designated beneficiary (even if not a spouse or dependent). Consider whether to permit this withdrawal and evaluate impact on administration. Review IRS Notice 2007-7, which provided some guidance on these withdrawals. Immediate. Amend plan;* update 2
Effective immediately or retroactively Missing participants Terminating individual account and profit-sharing plans may transfer missing participant benefits to the Pension Benefit Guaranty Corporation (PBGC) upon plan termination. Consider when terminating a defined contribution plan with missing participants. After PBGC issues missing participant distribution final regulations. Effective in 2007 Faster vesting of employer nonmatching contributions Required three-year cliff or six-year graded vesting schedule (20% for each year of service in years two through six) for nonmatching employer contributions. Confirm vesting schedule(s) for pre- and post-january 1, 2007, nonmatching contributions. Amend plan;* update participant communications. Effective for contributions made for plan years beginning after Collectively bargained plans and leveraged ESOPs have delayed effective dates. 3
Effective in 2007 Diversification of employer securities Required diversification in a defined contribution plan that holds publicly traded employer securities after three years of service for employer contributions and immediately for elective deferrals. Satisfy notice requirement, which Vanguard assisted plan sponsors in completing. Amend plan;* update participant communications. Collectively bargained plans have delayed effective dates. Notice of diversification right required 30 days in advance of ability to diversify. Privately held companies, stand-alone ESOPs, and oneparticipant plans are exempt. Periodic benefit statements Required quarterly benefit statements for participants in defined contribution plans who have a right to direct investments. Statement must include the value of assets and specified additional disclosures. Vanguard enhanced quarterly benefit statements to include required disclosures on vesting, the Department of Labor (DOL) website, and the importance of diversification. Collectively bargained plans have delayed effective dates. 4
Effective in 2007 Default investments ERISA section 404(c) protection generally available when notice and qualified default investment alternative (QDIA) requirements satisfied. Review DOL final regulations effective December 24, 2007. Consider whether current default investment satisfies DOL requirements. Satisfy notice requirement, which Vanguard assisted plan sponsors in completing. Statutory effective date for plan years beginning after Final qualified default investment alternative regulations effective December 24, 2007, with retroactive fiduciary relief available in some circumstances. Participant investment advice New prohibited transaction exemption available to plan sponsors who use a computerbased or compensation-based advice program. Independent third-party program remains available advice option. Evaluate existing advice programs and other available options. Review DOL Field Assistance Bulletin 2007-01. Consider offering advice. Effective for investment advice provided after Expanded notice and consent period Doubles the length of the notice and consent period for mandatory cash-out distributions, distributions of survivor annuities, and eligible rollover distributions to 30 180 days (from 30 90 days). Modify plan distribution forms. Amend plan;* update participant communications. Update 402(f) special tax notice IRS to issue revised model. 5
Effective in 2007 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. Review IRS Notice 2007-7 to determine implications for plan and consider adopting this provision. Amend plan;* update Effective for distributions after December 31, 2006, or any later effective date specified in the plan. Rollovers of after-tax amounts Plan may provide for after-tax amounts to be rolled over from a qualified defined contribution plan into a section 403(b) arrangement or defined benefit plan. Consider whether to accept this type of rollover. Amend plan;* update Tax years beginning after 2006. In-service withdrawals while employed on and after age 62 Participants may take in-service withdrawals after reaching age 62. Likely no steps required because most plans already permit in-service withdrawals at age 59 1 2. 6
Effective in 2008 Automatic enrollment safe harbor Additional nondiscrimination safe harbor plan design option for plans with qualified automatic contribution arrangement (QACA), automatic deferral increases, specified employer contribution, and qualified default investment alternative (QDIA). QACA requirements include automatic enrollment at 3% with automatic deferral increases up to 6% (optionally 10%), nonelective employer contribution or specified matching contribution, full vesting after two years, withdrawal restrictions, default investment, and a notice requirement. Consider plan design modifications; model cost impact compared with current plan provisions. Review proposed regulations issued by the IRS on November 8, 2007. Satisfy notice requirement (IRS issued a model). Amend plan;* update participant communications. 7
Effective in 2008 Corrective distributions of excess contributions Plans with an eligible automatic contribution arrangement (EACA), which satisfies the notice and qualified default investment alternative requirements, may distribute excess contributions within six months (versus 2 1 2 months) after end of plan year without a 10% excise tax on employer. Amend plan;* update Optional; however, taxation in year of distribution available for all plans. Corrective distribution taxed in year of distribution for all plans. Permissible withdrawal Plans with an eligible automatic contribution arrangement (EACA), which satisfies the notice and qualified default investment alternative (QDIA) requirements, may permit employees to elect during the first 90 days after the start of automatic enrollment contributions to receive a distribution of the deferrals adjusted for gains and losses. Consider whether to permit refunds if plan includes an eligible automatic contribution arrangement. Amend plan;* update participant communications. Optional; however, plans with immediate eligibility and an EACA seeking immediate ERISA section 404(c) fiduciary relief required to add permissible withdrawal; otherwise fiduciary relief available 30 days after notice. 8
Effective in 2008 Elimination of gap period income requirement Plan sponsors no longer required to distribute gap period earnings for corrective refunds associated with ADP and ACP testing. Amend plan* (for plans that perform actual deferral percentage (ADP)/actual contribution percentage (ACP) test). ERISA section 404(c) relief for investment mapping Extends ERISA section 404(c) protection to fiduciaries when a participant s account is reallocated among one or more remaining or new investment options that are reasonably similar, if advance notice requirements are met. Future DOL guidance expected on fiduciary relief for investment mapping. Satisfy notice requirement. Provides ERISA section 404(c) relief for losses during blackout period. 9
Effective in 2008 Provision Summary of Provision Next Steps and Considerations Effective Date Optional or Required 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 goes away in 2010. Amend plan (possibly);* update Partner with recordkeeper on process and administration. Effective for distributions after 2007. Electronic display of annual report information Electronic filing of annual report with DOL and public access through DOL website and access by employees on employer intranet website. Update intranet website. DOL guidance expected on electronic filing requirements. Additional survivor annuity option for money purchase pension plans Money purchase pension plans required to offer qualified joint and survivor annuity (QJSA) options that provide for both 50% and not less than 75% survivor annuity. Evaluate current annuity options to determine whether additional option needs to be made available. Collectively bargained plans have delayed effective dates. 10
Effective in 2008 Provision Summary of Provision Next Steps and Considerations Effective Date Optional or Required ERISA bonding for plans holding company stock Increases the maximum bond amount under ERISA to $1 million from $500,000. Increase bond coverage. Safest available annuity requirement DOL is directed to issue regulations clarifying that selection of annuity contract not subject to safest available annuity standard. DOL proposed safe harbor guidance for defined contribution plan fiduciaries to follow when selecting annuity providers and contracts. Effective 60 days after final rule published. Effective After 2008 DB/401(k) plan Combination of defined benefit plan and 401(k) plan that meets specified requirements. Future guidance expected. Consider changes in plan designs. December 31, 2009. 2007 The Vanguard Group, Inc. All rights reserved. www.vanguard.com PPADC 122007 11