April 02, 2007

The Impact of the Pension Protection Act of 2006 

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The Pension Protection Act of 2006 was signed into law by President Bush on Thursday, August 17, 2006. In addition to provisions broadly affecting defined benefit retirement plans, the law contains measures that have a positive effect on several issues of importance to institutions and employees with defined contribution plans that are served by TIAA-CREF.  These issues include contribution limits, automatic enrollment and the provision of advice, as well as the favorable tax treatment of Section 529 educational savings plans.

TIAA-CREF worked continuously on behalf of our clients throughout the legislative process that led to the enactment of the bill. Through our Federal Relations team, we presented our views on the positive legislative impact to the White House and Treasury and also coordinated our efforts with others in the financial services industry and partnered with Higher Education associations like CUPA-HR when targeting the drafters of the legislation, legislators and other congressional officials.  We presented policy information and research to lawmakers on important issues such as automatic enrollment and we suggested specific corrective language to ensure inclusion of 403(b) plans in all provisions. For inclusion of the Section 529 Qualified Tuition Plan provisions, we worked with state treasurers and the Independent 529 Plan (Tuition Plan Consortium).

Key provisions in the new law are listed below.  For an Administrative Library Series article giving fuller description of these provisions and their significance for administrators and employees, click the link at the top of this page. Additionally, we will be providing web seminars on the practical effects of the new law in October.

Retirement Savings Permanence

• The legislation made permanent the provisions of EGTRRA with respect to employer-sponsored retirement plans and IRAs that would otherwise expire in 2011.
• Notable provisions that are made permanent include:
  • Increased maximum contributions to 403(b), 401(k) and 457(b) plans.
  • Catch-up contributions for individuals 50 and older.
  • Repeal of the Maximum Exclusion Allowance.
  • Roth 403(b) and 401(k) plans.
  • Elimination of the coordination requirement between 457(b) and other elective deferral plans such as 403(b)s.

Automatic Enrollment

• Changes contained in the law permit plans to adopt an automatic enrollment feature that will require the employee to affirmatively opt out of the plan at the start of employment.
• The law is deemed to preempt conflicting state laws except for those relating to public and other non-ERISA plans.
• Plan sponsors can either provide a base employer contribution for all eligible employees or establish a matching plan.
• Directs the Department of Labor to issue guidance on acceptable default investments for automatically enrolled participants.
• Effective for plan years beginning after 2007.

Investment Advice

• The legislation creates an exemption under ERISA for offering investment advice for employer-sponsored defined contribution plans and IRAs.
• One exemption permits such advice with the use of a third-party approved computer-based model, while another permits the advice provided that advisor’s compensation does not vary with the recommendations.
• For IRAs, the Department of Labor will have a year to approve the use of a computer-based model for advice on those accounts.
• Applies to advice provided beginning January 1, 2007.

Section 529 Qualified Tuition Plans

• The legislation makes permanent the favorable tax treatment of 529 plans, including the Independent 529 Plan (I529).
• The Act also makes the underlying authorization for the I529 (Tuition Plan Consortium) permanent.
• In addition, the law includes new authority for the Department of Treasury to prescribe regulations to prevent tax abuse in this area. The areas that are specifically referenced for this new regulatory authority to prevent abuse are: gift, estate, and generation-skipping taxes.
• Effective January 1, 2007