Pension Protection Act

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President George W. Bush signs into law, the Pension Protection Act of 2006

The Pension Protection Act of 2006 (Pub. L. 109–280), 120 Stat. 780, was signed into law by U.S. President George W. Bush on August 17, 2006.

1 Pension reform
2 Charitable organization reform
- 2.1 Supporting Organizations
3 Tax Savings
4 External links

Pension reform

This legislation requires companies who have underfunded their pension plans to pay higher premiums to the PBGC and extends the requirement of providing extra funding to the pension systems of companies that terminate their pension plans. It also requires companies to analyze their pension plans' obligations more accurately, closes loopholes that previously allowed some companies to underfund their plans by skipping payments, and raises the cap on the amount employers are allowed to invest in their own plans. This will allow employers to deduct more money using the pension tax shield in times of high profits.

It requires actuaries to use the equivalent of the projected accrued benefit cost method for determining annual normal cost.

Other elements:

Provides statutory authority for employers to enroll workers in defined contribution plans automatically; formerly, the authority came from DoL rulemaking
Expands disclosure that workers have about the performance of their pensions
Removes the conflict of interest fiduciary liability from giving self-interested investment advice for retirement accounts
Gives workers greater control over how their accounts are invested
Extends the 2001 tax act's contribution limits for IRAs and 401(k)s.

Charitable organization reform

The Pension Protection Act also reformed several types of tax-exempt charitable organizations including donor-advised funds, private foundations, and supporting organizations.

Supporting Organizations

The Pension Protection Act cracks down on supporting organizations, particularly type III supporting organizations. This act applies further regulations and penalties that takes away several of the privileges that supporting organizations have over private foundations. This includes applying private foundation law of excess benefit transactions, excess business holding rules, and pay out requirements among others.

Tax Savings

Public Safety Officers

One tax benefit allowed under the pension protection act is that qualified retired "Public Safety Officers" may exclude from income the cost of health insurance. This exclusion is shown on the tax return as simply subtracting the exclusion from the figure shown on the 1099-R form, and placing the smaller figure on the pension income line on the 1040. The text literal "PSO" must be written on the dotted line to the left of your figure. See IRS Pub 575 for more details.

Public safety officers include Police, Firefighters, ambulance workers, and many types of federal and state employees dealing with criminals.

Early withdrawal penalty exceptions

The PPA tells the Secretary of Treasury to provide further exceptions to the 10% penalty on withdrawing from a retirement account before reaching proper retirement age. In particular, some penalty exceptions are narrowly defined to only covering IRA accounts, leaving 401(k) and other plan holders in the cold. Broadening those exceptions to cover any retirement plan is one hoped-for change. Also, relief for taxpayers who use retirement funds to protect their home and mortgage is anticipated, but again not written into law. IRS publications provide little guidance on this topic, if it has been acted on at all.

Inherited IRAs

The PPA provides a new mechanism for an IRA to be passed on to a non-spouse beneficiary. Transferring an IRA account this way can allow better control over when to withdraw (and pay taxes on) the IRA funds. An IRA account can only be passed on once, and it is not directly transferred into the beneficiary's account. Instead, a special IRA account with the heading " Deceased Name For the Benefit of Beneficiary Name " is made to keep the transfer. As this is a new rule on a subject with long term financial consequences, approach this cautiously. There are several gotchas that could invalidate the transfer, causing everything to be taxed in one year.