• The PPA includes retirement plan provisions related to vesting, hardship distributions, and automatic enrollment.

Pension Protection Act

The Pension Protection Act of 2006 (PPA) was signed into law on August 17, 2006. It includes a number of significant tax incentives to enhance retirement savings for many Americans. Some of the retirement-related provisions include the following:

• Permanent retirement and savings incentives – The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) substantially increased pension and individual retirement account (IRA) contribution limits through 2010 as well as made other improvements in pensions and retirement savings through enhanced vesting, portability, and reduced regulatory burdens. The law made these changes permanent.
• Vesting – All employer contributions made to a defined contribution plan must be vested using either a six-year graded or a three-year cliff vesting schedule.
• Notice and consent period regarding distributions – A notice must be provided to plan participants at least 30 days but not more than 180 days before a distribution stating the participant’s rights regarding cash-outs (explaining the consequences of not deferring the distribution), eligible rollover distributions, and survivor annuities.
• Saver’s Credit made permanent – The law made permanent the Saver’s Credit of up to $2,000.
• Requirement to allow employees to divest plan assets – The law requires employers to allow participants in defined contribution plans that are invested in employer securities to elect to direct the plan to divest the employer securities into other investment options. Participants are required to be notified of their right to divest and of the importance of diversification.
• Hardship distributions – This provision modifies the rules governing hardship to include events that occur to a participant’s spouse or dependent.
• Treatment of individual retirement account (IRA) contributions for Guard and Reservists called to active duty – The law provides that distributions from an IRA or pension plan taken by members of the National Guard and Army Reserve called to active duty between 9/11/2001 and 12/31/2007 for a period in excess of 179 days are not subject to early withdrawal penalties. Withdrawn amounts may be repaid to the IRA or pension plan within two years of the distribution without regard to the annual contribution limit.
• Rollover rules – The law provides new rollover requirements for after-tax rollovers in annuity contracts, direct rollovers from retirement plans to Roth IRAs, and rollovers by nonspouse beneficiaries of certain retirement plan distributions.
• In-service distributions at age 62 – The law allows pension plans to provide for distributions to employees who have attained age 62 and have not separated from employment at the time of the distributions.
• Automatic enrollment – The law creates a safe harbor to encourage employers to offer automatic enrollment in defined contribution pension plans.
• Combined defined benefit and defined contribution plan – The law creates a new type of plan for small employers (with no more than 500 employees) consisting of a combination defined benefit plan and defined contribution plan where the assets are held in a single trust.