Expiring EGTRRA Provisions

PPA makes the Economic Growth and Tax Relief Reconciliation Act of 2001’s pension and IRA provisions permanent. Most were slated to expire after 2010. Among these provisions:

• Higher maximum annual limits for salary deferrals to 401(k), 403(b), and 457 plans and for contributions to IRAs;
• Catch-up contributions for individuals age 50 or older;
• The option to treat 401(k) plan elective deferrals as after-tax Roth contributions (if a plan allows); and,
• The Saver’s Credit for lower income individuals who save for retirement (which was to expire after 2006). The income limits for the credit will also be adjusted for inflation.

Automatic Enrollment

For plan years beginning on or after January 1, 2008, PPA provides employers with incentives to adopt automatic enrollment for their 401(k) plans. With automatic enrollment, an employer can enroll employees in its 401(k) plan without their consent, as long as they have the right to opt out of contributing.

A plan with an automatic enrollment feature will not be subject to annual nondiscrimination testing if it complies with new safe harbor rules. To qualify, a plan has to provide for an automatic contribution of at least 3% for the first full plan year of participation and increase the contribution percentage 1% in each of the next three years until it reaches 6%. (The percentage cannot exceed 10%.) In addition, employers must either (1) match 100% of the first 1% of salary a nonhighly paid employee defers and 50% of additional deferrals that don’t exceed 6% or (2) contribute at least 3% of pay on behalf of each eligible nonhighly paid employee — whether or not the employee participates in the plan. Plans must also meet new vesting and written notice requirements.

PPA eliminates conflicts with state laws on wage withholding without employee consent and allows employees to take penalty-free withdrawals of automatic deferrals and related earnings if the employee makes a withdrawal request within 90 days of the first deferral. It also gives plans with non-safe harbor automatic enrollment arrangements additional time to test for discrimination and make corrective distributions, if needed. These plans will have six months after the end of the plan year, rather than until March 15, or 2½ months, as under pre-PPA law.

Inherited Benefits

Beginning in 2007, non-spouse plan beneficiaries can roll over inherited 401(k) and other retirement account balances to their own IRAs. Previously, only surviving spouses could do this. The transfer must be a direct rollover and must be made to a separate IRA opened in the deceased employee’s name specifically to receive the inherited benefits.

Currently, many plans have provisions requiring all inherited benefits to be distributed to non-spouse beneficiaries within five years. Under PPA, payments from the IRA can be based on the non-spouse beneficiary’s life expectancy — or a shorter schedule, if desired. Non-spouse beneficiaries generally will have to begin distributions immediately. Surviving spouses can continue to wait until they turn age 70½ to begin distributions.

Default Investments

For plans that allow employees to direct their own account investments, PPA provides relief from fiduciary liability with respect to default investments for employees who do not give directions for investing their accounts. To secure this protection, the employer must have a default investment that meets U.S. Department of Labor (DOL) regulations to be issued by February 2007. These investments are expected to include balanced funds, target or life-cycle funds, lifestyle funds, and managed accounts. Employers also have to satisfy requirements contained in the new law regarding written notice to participants.

Investment Advice

PPA also provides relief to employers who may be concerned about the potential liability associated with offering investment advice to their employees. Under the new law, employers can arrange with retirement plan service providers who offer investments to their plans (“fiduciary advisers”) to provide advice to employees and, if otherwise warranted, recommend their own funds.

There are many requirements to meet in order to shield employers from liability. The adviser’s fees must be “neutral” (the fees do not vary based on which investment options are chosen) or the adviser must use an unbiased computer model certified by an independent expert to create recommended portfolios for employees. Specific notice and other requirements apply. PPA’s investment advice rules are generally applicable beginning in 2007.

Reporting and Disclosure

For plan years beginning in 2008, identification and basic plan information included in the Form 5500 annual report must be displayed on a nonpublic Intranet website maintained by the employer or plan administrator for employee access. This information also must be filed with the DOL in an electronic format to be displayed on the DOL’s website.

Portability and Distribution Rules

PPA makes it easier for employees to move their retirement savings to other retirement plans and to receive plan distributions. For example:

• Starting in 2008, participants will be able to make direct rollovers from employer-sponsored plans to Roth IRAs. Such rollovers will be taxable events.
• Hardship distributions are allowed for hardships of 401(k) plan beneficiaries who are not a participant’s spouse or dependent.
• Employer nonelective (for example, profit sharing) contributions made for plan years starting after 2006 must become nonforfeitable using the faster three-year cliff or six-year graduated vesting schedules applicable to employer matching contributions.

Plan Amendments

In general, employers have until the end of the 2009 plan year to amend their plans for PPA.

The professionals of Margolis & Company are available to consult with you regarding these changes. Contact us at (610) 667-6250, or email us at info@marg.com.