WASHINGTON – The pension bill that Sen. Chuck Grassley helped to shepherd through Congress contains some of the most generous tax incentives ever passed to help workers save for retirement. Grassley, as chairman of the tax-writing Finance Committee, has worked to enact many of the provisions since becoming chairman in 2001.
“This legislation makes a generous investment in workers’ retirement,” Grassley said. “Congress is saying it’s a wise use of tax breaks to help people create a nest egg. I hope these incentives will help to turn around our very low national savings rate. Unfortunately, we have nowhere to go but up. This should help steer us in the right direction.”
The Pension Protection Act of 2006, given final Senate approval by a 93-5 vote last night, now goes to the President for his expected signature. The bill contains the most sweeping reforms of pension funding rules since 1974, helping to guarantee that companies uphold their pension promises to workers. The measure permanently extends pension and savings tax incentives that were part of the major 2001 tax bill. The bill includes:
1. An increase in the annual contribution limit for tax-favored Individual Retirement Accounts (IRAs). Under current law, the limit increases to $5,000 in 2008 and is indexed for inflation thereafter. Without congressional action, that limit was set to return to $2,000 by 2011. This provision alone costs $36.2 billion over 10 years, representing a big investment in workers’ futures.
2. “Catch-up contributions” that allow people age 50 and over to make additional $1,000 contributions to IRAs each year and up to $5,000 contributions each year to 401(k) plans to boost their nest eggs.
3. An increase in the contribution limits on 401(k) plans, which rise to a maximum $15,000 in 2006 and are indexed thereafter.
4. Permanence of a saver’s tax credit aimed at lower income taxpayers, a top priority for Grassley. The credit, which otherwise would expire in 2006, is designed to encourage lower-income workers to save in tax-qualified accounts.
In 2003, some 5.4 million taxpayers took advantage of the saver’s credit, available to married taxpayers with incomes of up to $50,000 and singles up to $25,000 on contributions of up to $2,000. The maximum credit is 50 percent for married couples making up to $30,000 and singles up to $15,000, and it phases out after those income levels.
• Incentives to encourage automatic savings mechanisms by 401(k) plan sponsors. It provides legal protections, known as a “safe harbor,” to encourage companies sponsoring plans to implement automatic savings mechanisms for defined contribution plans.
• Increased flexibility and favorable tax treatment to allow individuals with annuity and life insurance contracts with a long-term care insurance option to use the cash value of their annuities to pay for long-term care insurance. This will give individuals more options to pay for their long-term care needs and make long-term care insurance more affordable for them.
A summary of the Pension Protection Act of 2006 follows. More information is available at: JCX-38-06: Technical Explanation Of H.R. 4, The "Pension Protection Act Of 2006," As Passed By The House On July 28, 2006, And As Considered By The Senate On August 3, 2006
http://www.house.gov/jct/x-38-06.pdf
Summary of Pension Provisions Included in
H.R. 4, the Pension Protection Act of 2006, as Passed by the House and Senate
Title
I.
Reform of Funding Rules for Single Employer Defined Benefit Pension Plans.
Sections 101, 102, 111, 112. Minimum funding standards for single-employer defined benefit plans. Under current law, employers have considerable flexibility in choosing the assumptions and methods used to calculate minimum funding requirements. However, employers generally must fund plans that are not at least 90% funded on a more accelerated basis under the Deficit Reduction Contribution (DRC) requirements, using specified interest and mortality assumptions. If employers make contributions in excess of the minimum required, the excess is added to the plan’s “credit balance.” The credit balance is increased each year by earnings at the interest rate assumed by the plan. The accumulated credit balance can be applied toward future years’ minimum contribution requirements.
Under the proposal, plan liabilities are determined using a 3-segment yield curve developed from a 24-month average of the yield on the top three grades of corporate bonds. Assets can be averaged over 24 months, but the result is limited to 105% of market value as of the plan’s valuation date. As under the current law DRC rules, Treasury establishes the standard mortality table. However, the proposal permits large companies to develop and use plan-specific mortality tables for minimum contribution calculations.
A plan’s credit balance under the old rules becomes the beginning balance of the “carryover” account under the new rules. Contributions in excess of the minimum required under the new rules are added to a new “prefunding” balance. Both the carryover and prefunding balances are credited with the plan’s actual rate of return each year. The employer can elect to use the carryover and prefunding balances (carryover first) to reduce the minimum required contribution only if the plan’s funding target attainment percentage is at least 80%. (For the 80% test, the funding target attainment percentage is determined by subtracting only the prefunding balance from plan assets.)
The liability for benefits earned under the plan in past years is the plan’s “target liability.” The liability for benefit accruals in the current year is the plan’s “normal cost.” The plan’s minimum contribution requirement for a year is the normal cost plus amounts required to amortize any funding shortfall over seven years. For the first year under the new rules, the funding shortfall is the target liability minus assets. In subsequent years, a new shortfall amortization base is established to reflect gains or losses during the preceding year. Generally, both the carryover and prefunding balances are deducted from assets to calculate the funding shortfall.
Liabilities are increased if the plan is “at-risk.” A plan is “at-risk” if the plan’s funding target attainment percentage is both less than 80% without regard to at-risk liabilities and less than 70% counting at-risk liabilities. The funded percentage is determined by subtracting both the carryover and prefunding balances from assets. The 80% test is phased in at 65% in 2008, 70% in 2009, 75% in 2010 and 80% for 2011 and thereafter. The plan determines the at-risk liabilities by assuming that workers eligible to retire in the next ten years will retire as early as possible. (There is an exception for auto companies and suppliers that excludes anyone offered an early retirement in 2006.) The additional at-risk liability is phased in at 20% per year for each consecutive year the plan is at-risk. If a plan is at-risk for the current year and two out of the previous four years, a load of 4% of liability plus $700 per participant is added to the at-risk liability. Plans with 500 or fewer participants are not subject to at-risk liability.
The proposed rules apply to plan years beginning after 2007. There is no collective bargaining delay. The estimated gain is $4.739 billion over five years and the estimated cost is $2.456 billion over ten years.
Sections 103 and 113. Benefit limitations under single-employer plans. Under current law, employers in bankruptcy may not make a benefit increase effective until the employer reorganizes. Also, where a plan’s new current liability funding percentage is less than 60%, an increase generally may not be effective until the employer has brought funding up to 60%. The proposal provides stronger limitations based on the plan’s “adjusted funding target attainment percentage.” The funding target attainment percentage is the ratio of assets (minus carryover and prefunding balances) to target liability (without regard to at-risk status). The adjusted percentage is determined by adding the amount of annuity purchases for non-highly compensated employees in the last two years to both assets and liabilities.
If the adjusted funding target attainment percentage is below 60% for a plan year, the proposal prohibits the plan from triggering shutdown benefits, prohibits accelerated payments (including lump sums) during the year, and freezes benefit accruals. If the percentage is below 80%, the plan may not have benefit increases. Between 60% and 80%, lump sum payments are limited to the lesser of the present value of the participant’s PBGC guaranteed benefit and 50% of the lump sum the participant would otherwise receive. (The balance of the benefit would be payable in the form of an annuity.) The restrictions do not apply if the plan is 100% funded without reducing assets for credit balances. Collectively bargained plans must convert carryover and prefunding balances to assets if the conversion will eliminate a restriction. Special rules apply to new plans and to plans of employers in bankruptcy.
The benefit limitations are generally effective for plan years beginning in 2008. There is a special collective bargaining rule that delays the effective date until the earlier of the expiration of the contract or plan years beginning in 2010. The estimates are included in the section 101 estimates.
Sections 104, 105, 106 and 115. Special rules for multiple employer plans of certain cooperatives; Temporary relief for certain PBGC settlement plans; and special rules for plan certain government contractors; and Modification of transition rule to pension funding requirement.
The proposal delays the effective date of the funding and benefit limitation rules for rural electric, agricultural, and telephone multiple employer plans until 2017, defense contractors until the earlier of when the CAS Board allows recovery of the new contribution rates or 2011, and until 2014 plans of employers that took over sponsorship of the plan so that PBGC did not have to terminate the plan. In addition, the proposal modifies existing special rules for an urban bus company. The estimates are included in the section 101 estimates.
Section 116. Restrictions on funding of nonqualified deferred compensation plans by employers maintaining underfunded or terminated single-employer plans.
Under current law, Employers may set aside or reserve money to pay nonqualified deferred compensation as long as the plan is not considered “funded.” The proposal amends Code section 409A to prevent such a set aside or reserve for certain executives if the employer or a member of its controlled group is bankrupt, has an “at-risk” plan (generally less than 80% funded) or a plan that has terminated without having sufficient assets to pay all benefits. The proposal also denies an employer a deduction for “gross ups” intended to cover penalties incurred by prohibited funding of nonqualified arrangements. These provisions apply as of date of enactment. The estimated gain of this provisions is $33 million over five years and $64 million over ten years.
Title II. Funding Rules for Multiemployer Defined Benefit Plans and Related Provisions.
Sections 201 and 211. Funding rules for multiemployer defined benefit plans. Under current law, multiemployer plans are subject to the same general funding rules as single employer plans. However, longer amortization periods apply to multiemployer plans than to single employer plans, and there is no DRC. Plans may apply for amortization extensions of up to 10 years. The interest rate for extensions is the greater of 150% of the Federal mid-term rate or the plan rate. The proposal retains the funding-standard-account approach of current law but reduces longer amortization periods to 15 years and eliminates the shortfall method. A plan can get an automatic five-year amortization extension, and another five years with approval of IRS. The amortization extension interest rate is the funding rate but the old rate is grandfathered for extensions and modifications under applications filed before June 30, 2005. The section is effective for plan years beginning in 2008. The estimated cost is $69 million over five years and $287 million over ten years.
Sections 202 and 212. Additional funding rules for multiemployer plans in endangered or critical status. The proposal adds new funding rules for multiemployer plans that are in endangered, seriously endangered, or critical status, including some relief from excise taxes for an accumulated funding deficiency. Status is generally based on current funding percentages and projected accumulated funding deficiencies. In general, a plan less than 80% funded is in endangered or seriously endangered status and a plan less than 65% funded is in critical status. Endangered (and seriously endangered) plans must develop funding improvement plans that will increase the plan’s funding percentage over 10 or 15 years. Endangered plans’ goals are an improvement of 1/3 of underfunding within 10 years (and no accumulated funding deficiency). Seriously endangered plans’ goals generally are an improvement of 1/5 of underfunding over 15 years.
A critical status plan must adopt a rehabilitation plan that sets goals for how the plan will get out of critical status within 10 years. A critical status plan may provide for benefit cutbacks (other than for normal retirement benefits) after notice and may impose a 5% surcharge on employer contributions. The trustees develop the funding improvement plan or rehabilitation plan and submit it to the collective bargaining parties for adoption. Failure to timely adopt the plan and meet other deadlines is subject to $1,100 a day penalties under ERISA or an excise tax under the Code in certain cases. The multiemployer provisions are effective generally for plan years beginning in 2008. The estimated cost is included in the section 201 estimate.
Sections 203 and 213. Measures to forestall insolvency of multiemployer plans. Under current law, multiemployer plans in reorganization must determine whether they will be insolvent within three years. The proposal expands the time to 5 years. The estimated cost is included in the section 201 estimate.
Section 204. Withdrawal liability reforms. Employers withdrawing from multiemployer pension plans are subject to withdrawal liability. The law contains various exceptions and special rules. The proposal repeals the limitation on the withdrawal liability of insolvent employers and updates the rules relating to limitations on withdrawal liability based on the company’s net worth, effective for sales beginning in 2007. The proposal also addresses withdrawal liability if work is contracted out (effective for work after enactment), makes the “free look” employer participation rules available for building and construction trade plans, amends the “fresh start” option rules for calculating withdrawal liability (effective for withdrawals after 2006), and changes the withdrawal liability payment rules in cases where the plan alleges a transaction was undertaken to evade or avoid withdrawal liability (effective for withdrawal liability notices after enactment relating to transactions after 1998). The estimated cost is included in the section 201 estimate.
Section 205. Prohibition on retaliation against employers exercising their rights to petition the federal government. ERISA prohibits retaliation against participants for enforcing their ERISA rights. The proposal extends that prohibition to contributing employers of multiemployer plans (effective on enactment). The proposal has no revenue effect.
Section 206. Special rules for certain benefits funded under an agreement approved by the Pension Benefit Guaranty Corporation. The proposal provides an exception from the new multiemployer plan rules for benefit increases made pursuant to an agreement with the PBGC prior to June 30, 2005, as long as the increases are funded in accordance with the agreement. The estimated cost is included in the section 201 estimate.
Section 214. Exemption from excise taxes for certain multiemployer pension plans. Multiemployer plans that have an accumulated funding deficiency are subject to an excise tax. The proposal exempts a small, fishery-related multiemployer plan from any excise taxes that accumulate prior to the earlier of the plan adopting a rehabilitation plan or 2009. The estimated cost is less than $500,000 over both 5 years and 10 years.
Section 221. Sunset of additional funding rules. The endangered/critical status provisions and the automatic five-year extension for multiemployer plans sunset in 2014. However, any plan already in endangered or critical status continues to follow its plan. The estimated cost is included in the section 201 estimate.
Title III. Interest Rate Assumptions.
Section 301. Extension of replacement of 30-year Treasury rates. Current law requires the use of a 30-year Treasury rate for certain calculations. For 2004 and 2005, a long-term corporate bond interest rate was substituted for the 30-year Treasury rate for plan funding and PBGC premiums. The proposal extends the 2004 and 2005 temporary rates to 2006 and 2007. No separate revenue estimate.
Section 302. Interest rate assumption for determination of lump sum distributions. A plan’s lump sum payment to a participant or beneficiary must be no less than the present value of the annuity to which the participant or beneficiary would have been entitled. For this calculation, the plan must use specified interest and mortality assumptions. The interest rate is the rate on 30-year Treasury bonds. The proposal requires that the plan calculate lump sum values using the three-segment yield curve. The yield curve value is phased in over 5 years at 20% per year (the remainder is based on the existing methodology). The phase in starts in 2008 and the yield curve is fully phased-in in 2012. The yield curve is based on a monthly interest rate not the funding yield curve’s 24-month average. The proposal is effective for 2008 plan years. The proposal has negligible revenue effect.
Section 303. Interest rate assumption for applying benefit limitations to lump sum distributions. The maximum benefit a participant may accrue and receive is stated in terms of an annuity. The Code specifies a minimum interest rate that may be used for conversion to other forms of payment. The permanent rate is the same as the rate for minimum lump sums. However, there is a temporary provision (through 2005) that allows the conversion at 5.5%. The proposal provides, starting for 2006 distributions, the rate cannot be less than the greatest of 5.5%, 105% of the minimum distribution interest rate, or the rate specified in the plan. The proposal has negligible revenue effect.
Title IV. PBGC Guarantee and Related Provisions.
Section 401. PBGC premiums. Single-employer plans that have unfunded vested benefits must pay the PBGC a variable rate premium (VRP) equal to $9 per $1,000 of unfunded vested benefits. The plan owes no VRP if the plan is at the full funding limit. For 2004 and 2005, the unfunded vested benefits were valued using 85% of a rate based on investment-grade corporate bonds. The proposal in section 301 specifies the extension of that methodology in 2006 and 2007. The Deficit Reduction Act of 2005 created a temporary (five year) termination premium. The proposal, starting in 2008, requires use of the yield curve’s segment rates for the premium calculation. The yield curve is based on the monthly corporate rate applicable to the plan year. The proposal eliminates the full funding exception to the variable rate premium and makes the termination premium permanent. The estimate will be provided by CBO.
Section 402. Special funding rules for plans maintained by commercial airlines that are amended to cease future benefit accruals.
Current relief from the Deficit Reduction Contribution (DRC) calculation is extended through 2007. In addition, the proposal provides a 17-year funding transition period for airline (and airline catering company) pension plans at a fixed rate of 8.85% if the plans accruals are frozen. If relief is elected for a pension plan, and the plan is terminated in the next 5 years, the PBGC treats the election date as the termination date for most purposes. The company would also subject to twice the termination premium ($2,500 per participant) that would otherwise apply if the plan were terminated while in bankruptcy. Airlines that do not freeze accruals would be allowed a 10-year (rather than a 7-year) amortization period. This provision is effective for plan years ending after enactment.
Section 403. Limitation on PBGC guarantee of shutdown and other benefits. If a plan is amended to increase benefits, the PBGC guarantee of the increased benefits is phased in over five years from the date of the plan amendment. A shutdown benefit is generally based on a provision already in the plan, so the shutdown occurring does not trigger a phase-in period. The proposal treats a shutdown or other contingent event as an amendment that triggers the phase-in of guaranteed benefits, effective for events occurring after July 26, 2005. The estimate will be provided by CBO.
Section 404. Rules relating to bankruptcy of employer. PBGC guarantees and asset allocations are tied to the date a plan terminates. Under the proposal, if a plan terminates after the employer goes into bankruptcy, the bankruptcy date is treated as the plan’s termination date for purposes of (1) the determination of the applicable maximum guarantee and the five-year phase in of the guarantee and (2) the determination of who, and what benefit, is in asset allocation priority category 3 (those who retired or could have retired three years before the termination date). This provision is effective for bankruptcies initiated 30 days after enactment. The estimate will be provided by CBO.
Section 405. PBGC premiums for small plans. Pension plans pay a variable rate premium to the PBGC equal to $9 per $1,000 of unfunded vested benefits. There is no special premium for small plans. The proposal provides that an employer with 25 or fewer employees pays a special reduced variable rate premium for each participant equal to $5 times the number of participants in the plan. (The total variable premium therefore would be $5 x [(the number of participants) squared].) The proposal is effective in 2007. The estimate will be provided by CBO.
Section 406. Authorization for PBGC to pay interest on premium overpayment refunds. PBGC charges interest on underpayments but is not authorized to pay interest on overpayments. The proposal authorizes PBGC to pay interest on premium overpayments but only interest accruing for periods beginning after enactment. The estimated cost is $31 million over 5 years and $31 million over 10 years.
Section 407. Rules for substantial owner benefits in terminated plans. Ten percent owners are designated as “substantial owners” and special rules apply to them with respect to guaranteed benefits. The proposal simplifies the rules by substituting majority owner rules (50% or more owners) for substantial owner rules and the applying the special guarantee limitation (now on majority owners) only to the plan’s first 10 years. There is also a change in the allocation of assets rules relating to majority owners. The changes are effective for notices of intent to terminate or notices of determination given after 2005. The proposal has negligible outlay effect.
Section 408. Acceleration of PBGC computation of benefits attributable to recoveries from employers. PBGC shares recoveries from the employer with participants based on the proportional losses of the PBGC (unfunded guaranteed benefits) and the participants (unfunded non-guaranteed benefits). Smaller terminations use an average recovery ratio (the “SPARR”) to accelerate processing (i.e., rather than applying separate ratios for each plan, PBGC annually calculates an average ratio based on the last five years). Before doing the allocation PBGC must split the recovery between return of due and unpaid contributions (DUEC) and recovery of employer liabilities. The proposal changes the SPARR rules so that the most immediate two years are not counted in the five-year averaging period. In addition, a similar averaging ratio is created for DUEC. The proposal is effective for notices of intent to termination or notices of determination given at least 30 days after enactment. The estimate will be provided by CBO.
Section 409. Treatment of certain plans where cessation or change in membership of a controlled group. Where a plan spins off part of the plan, the allocation of assets and liabilities between the parties generally is done using the PBGC termination assumptions. The proposal provides a special rule allowing the plan’s interest rate to be used instead for certain corporate transactions involving fully-funded plans and investment-grade employers. The proposal is effective for transactions after enactment. The estimate will be provided by CBO.
Section 410. Missing participants. PBGC conducts a missing participant program for PBGC-covered terminating defined benefit plans. The proposal expands the PBGC program to cover terminating multiemployer plans, terminating defined benefit plans of small professional plans (which the PBGC does not cover for guarantee purposes), and terminating defined contribution plans. The proposal has negligible outlay effect.
Section 411. Director of the Pension Benefit Guaranty Corporation. The PBGC Executive Director is appointed by the Secretary of Labor. The position is not subject to Senate confirmation. The proposal make the PBGC Director’s position a presidential appointment subject to Senate confirmation by both the Finance Committee and the HELP Committee. The proposal has no revenue effect.
Section 412. Inclusion of information in the PBGC annual report. The proposal requires the PBGC annual report to include additional information on the PBGC’s microsimulation forecasting model (“Pension Insurance Modeling System”) including the specific parameters used for the PBGC forecast and the impact on the PBGC deficit or surplus if PBGC’s investments had earned during the year reported 60% of the average return on investment in the Standard and Poor’s 500 Index, plus 40% of the average return on investment for such year in the Lehman Aggregate Bond index (or similar fixed index). This proposal has no revenue effect.
Title V. Disclosure
Section 501. Defined benefit plan funding notice. Plan administrators must provide participants a summary of the annual report (SAR) 60 days after the annual report is filed. Plan administrators of certain underfunded single-employer defined benefit plans must send a funding notice to participants and beneficiaries pursuant to section 4011 of ERISA at the same time as they send the SAR. All multiemployer defined benefit plans have to provide a notice under ERISA section 101(f) 60 days after the annual report. The proposal creates a new funding notice for multiemployer and single-employer defined benefit plans due 120 days after the beginning of the plan year. (For plans with 100 or fewer participants the notice is dues with the filing of the annual report.) Plan administrator must send the notice to PBGC, participants, beneficiaries, unions, and, in the case of multiemployer plans, employers contributing to the plan. The notice must include detailed information on plan funding and a multiemployer must provide additional information including whether the plan is in endangered or critical status and information on how to get a copy of the funding improvement or rehabilitation plan. The notice under ERISA section 4011 and the SAR for defined benefit plans are eliminated. The proposal is generally effective for plan years beginning after 2007. The proposal has no revenue effect.
Section 502. Access to multiemployer plan information. The proposal expands the ability of participants, beneficiaries, unions, and contributing employers to get plan actuarial and financial information and estimates of potential withdrawal liability from multiemployer plans. The proposal is effective for plan years beginning after 2007. The proposal has no revenue effect.
Section 503. Additional annual reporting requirements. Pension plans file an annual report with schedules and attachments each year providing financial, actuarial and other information about the plan. The proposal requires limited additional information from single-employer defined benefit plans and extensive additional information from multiemployer defined benefit plans. A multiemployer plan must provide a summary of this information to contributing employers and to employee organizations within 30 days after the annual report is due. The proposal is effective for plan years beginning after 2007. The proposal has no revenue effect.
Section 504. Electronic display of annual report information. The proposal requires the Secretary of Labor to electronically display annual report information in electronic form within 90 days after receiving it. Employers with intranets must also display the information on their intranets. The proposal is effective for plan years beginning after 2007. The proposal has no revenue effect.
Section 505. Section 4010 filings with the PBGC.
Current Law. Employers with plans with aggregate underfunding of $50 million or more must provide financial and actuarial information (as provided in regulations) to the PBGC annually. Section 4010 information is confidential and the PBGC may not make it public. A Congressional committee may request the information. The proposal eliminates the $50 million in the aggregate filing requirement and substitutes a requirement that all plans that have a funding target attainment percentage less than 80% must file plan actuarial and employer financial information. In addition to the current requirement of actuarial and financial data, the provision specifies that the employer must provide additional funding information, including termination liabilities, and requires that the PBGC annually submit to the labor and tax committees of the House and Senate a summary report of the information submitted to the PBGC. The proposal is effective for filings for years beginning in 2008. The proposal has no revenue effect.
Section 506. Disclosure of termination information to plan participants. Participants in plans terminating in a distress termination or in an involuntary termination instituted by the PBGC do not receive copies of information the employer files with the PBGC. The proposal requires the plan administrator or plan sponsor in a distress or involuntary termination to provide to participants information provided to PBGC within 15 days of filing it with the PBGC. The bill also requires PBGC to make the administrative record of the involuntary termination decision available. The Act includes confidentiality limitations. The proposal is effective for notices of intent to terminate or notices of determinations after enactment. The proposal has no revenue effect.
Section 507. Notice of freedom to divest employer securities. The proposal adds a new requirement that the plan administrator provide a divestiture notice 30 days before the first date on which the individual could divest employer securities. The Secretary of Treasury is to issue a model notice within 180 days of enactment. The proposal is effective for plan years beginning in 2008. The proposal has no revenue effect.
Section 508. Periodic pension benefit statements. Participants are not required to be given benefit statements on a regular basis. The proposal sets out specific requirements for single and multiemployer plans to provide periodic benefit statements. Defined benefit plans must provide individual benefit notices every three years or upon request. The proposal allows the defined benefit requirement to be met in an alternative way by notifying participants annually how a participant can get the required detailed information. Defined contribution plans must provide individual benefit notices annually; however, where there is individual investment direction, the plan must provide the notice quarterly. Failure to give the notice is subject to a penalty under ERISA. The Secretary of Labor is to provide model notices within 180 days of enactment. The proposal generally applies to plan years beginning after 2006; there is a delay for collectively bargained plans that could delay the effective date until 2009. The proposal extends the period for correcting excess contributions to 6 months for a 401(k) plan using the automatic enrollment provisions. The proposal has no revenue effect.
Section 509. Notice to participants or beneficiaries of blackout periods. The Sarbanes-Oxley Act of 2002 required blackout notices if participants could not self direct investments for a period. The proposal removes the notice requirement for one person and partner-only (and spouses) plans retroactive to the original requirement date. The proposal has no revenue effect.
Title VI. Investment Advice, Prohibited Transactions, and Fiduciary Rules
Section 601. Investment Advice. Under current law, a fiduciary must act in a prudent manner and solely in the interest of participants and beneficiaries. Parties in interest are prohibited from dealing with the plan except pursuant to a statutory, class, or individual exemption. A party-in-interest may provide investment advice using an objective computer model of investment alternatives subject to certain limitations as discussed in the Department of Labor’s Sun America opinion. The proposal would create a prohibited transaction exemption for investment advice provided to employer-sponsored retirement plans through a computer model that is certified by an independent party. An exemption for advice provided by an adviser whose compensation does not vary with the investments selected would be available to both employer-sponsored plans and IRAs.
The Department of Labor, in consultation with Treasury, would be directed to determine whether or not a computer model is available that would be appropriate for the broader range of investment options common to IRAs (stocks and bonds as well as mutual funds). The Department of Labor’s determination must be made by the end of 2007. If the Department of Labor determines an appropriate model is available for IRAs, a certified computer model will be an option for providing investment advice to IRAs. If the Department of Labor determines that an appropriate model is not available, the Department of Labor will issue a prohibited transaction exemption that protects IRA account holders from biased advice without requiring fee-leveling or a computer model. This exemption will sunset on the later of two years after an appropriate IRA computer model becomes available, or three years after issuance of the exemption. No revenue estimate yet.
Section 611. Prohibited transaction rules relating to financial investments. Transactions between a plan and a party-in-interest are prohibited unless there is a statutory class, or individual exemption. The bill provides statutory prohibited transaction exemptions for certain transactions involving block trading (in blocks of at least 10,000 shares with a market value of at least $200,000), regulated electronic communication networks, service providers who are not fiduciaries with respect to the assets involved, foreign exchange transactions, and cross trading (for plans with over $100 million in assets). The proposal also provides relief from certain bonding requirements for broker-dealers subject to other bonding requirements and removes foreign and governmental plans from the numerator for purposes of determining whether more than 25% of a fund is from pension plan assets. The proposal is generally effective for transactions after enactment. The proposal has negligible revenue effect.
Section 612. Correction period for certain transactions involving securities and commodities. The proposal amends the correction period for prohibited transactions involving certain securities and commodities to 14 days after the party discovers or should have discovered that the transaction was prohibited. The proposal applies to any transaction where the party discovers or should have discovered the violation after enactment. The proposal has negligible revenue effect.
Section 621. Inapplicability of relief from fiduciary liability during suspension of ability of participant or beneficiary to direct investments. A plan fiduciary is protected from some liability in self-directed plans. The proposal eliminates the fiduciary’s protection during blackout periods when a participant cannot self direct unless certain specified requirements regarding reasonable blackout periods are satisfied. The proposal is effective for plan years after 2007 (with a collective bargaining delay till as late as plan years beginning in 2010). The proposal has no revenue effect.
Section 622. Increase in maximum bond amount. Fiduciaries of plans and others who handle plan money must be bonded for at least $500,000. The proposal increases the fiduciary bond requirement to $1 million for plans that holds employer securities. The proposal is effective for plan years after 2007. The proposal has no revenue effect.
Section 623. Increase in penalties for coercive interference with exercise of ERISA rights. The Act increases penalties for coercive interference with ERISA rights from a $10,000 fine and one year in prison to a $100,000 fine and three years in prison. The proposal is effective upon enactment. The proposal has no revenue effect.
Section 624. Treatment of investment of assets by plan were participant fails to exercise investment election. Employers have some fiduciary protections where participants self direct their accounts. The proposal extends similar fiduciary protections in situations where the participant does not make an investment choice and the plan sponsor makes a default investment consistent with Department of Labor regulations (to be issued within six months of enactment). The proposal is effective for plan years beginning after 2006. The proposal has no revenue effect.
Section 625. Clarification of fiduciary rules.The Department of Labor ha