Cash Balance and Defined Benefit Plans - immediate increase in tax deductions

Maximum tax deductible contributions will increase for some defined benefit plans, including cash balance plans, beginning in 2006.The change will allow employers greater flexibility in determining the amount they contribute to their plans.

Increased tax deductions for defined benefit and defined contribution plans

Previously, employers who sponsored both a defined benefit plan and a defined contribution plan (profit sharing plan) were limited in the amount they could contribute to plans. Beginning in 2006,  the 25% limitation applies only to the extent that contributions to the defined contribution plan exceed 6% of covered payroll. Employers can now take a deduction for contribution to their defined benefit plan without regard to their defined contribution plan, if they limit their contribution to their defined contribution plan to 6% of covered payroll. If the contribution to the defined contribution plan exceeds 6% of pay, the first 6% is not counted against the 25% deduction limit.

Expansion of Hardship Rules

PPA 2006 makes it easier for 401(k) participants to access their accounts in the event of financial hardship. The new law requires the Treasury Department to expand the definition of hardship to include the hardship of a non-spouse or non-dependent beneficiary. The new rules are to be issued by February 2007.

Rollover Rules

Beginning in 2007, non-spousal beneficiaries (i.e. parents, children and significant others) will be able to roll benefits received from qualified retirement plans directly into an IRA. There is stall a difference in the tax treatment between spousal and non-spousal beneficiaries under the IRA. Spousal beneficiaries can wait until the participant would have reached age 701/2 before beginning minimum required distributions. Non spousal beneficiaries must begin in the year following the participant's death.

Vesting

Beginning in 2007, employer contributions to defined contribution plans (401(k), profit sharing and money purchase plans) must be fully vested after three years of service or vest in accordance with a graded schedule of 20% after two years of service, increasing by 20% for each additional year of service until 100% vesting is reached after six years of service.

The Pension Protection Act Strengthens The Federal Pension Insurance System.

The legislation: