Tighter rules, expanded opportunities
An overview of the retirement plan provisions of the Pension act
By : Charles D. Epstein, CLU, ChFC, AIF®
Registered Investment Advisor, Epstein Financial Services
The Pension Protection Act of 2006 (PPA) was designed to safeguard employee pensions by tightening the funding rules for defined benefit plans. But the act also expands savings opportunities related to defined contribution plans, such as 401(k)s, Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLEs).
Thus, whether your family business provides a traditional pension plan or a defined contribution plan, PPA may have a major impact.
More pension funding required
If you provide a traditional pension plan — a defined benefit plan, where your employees are promised a set benefit at retirement and your business is responsible for funding the plan — you may have to increase the money you contribute each year. Specifically, most employers are now required to have fully funded their pension plans by the end of a seven-year phase-in period. Before PPA, plans were required to be only 90% funded. “Fully funded” means that the company has set aside sufficient assets so that, actuarially, it will be able to meet its future pension obligation.
Any employer with a plan that is less than 80% funded will face more stringent requirements, and certain payouts from severely underfunded plans are now restricted.
The bottom line is that, if your company has a pension plan, you should make sure that the plan is in full compliance with the new law.
401(k)s now even more attractive
If you provide a 401(k) or similar defined contribution plan, you now may more easily automatically enroll employees in plans and set up the default investment options. In order to not participate, employees must affirmatively opt out. It is possible that this will increase employee participation, which, in turn, could increase the amount you and other executives are permitted to contribute.
PPA also permits providers to make investment recommendations to plan participants. The investment advisor may be compensated, but the compensation must not be dependent on which investment choices are made. This allows the business to provide advice without being held responsible if employees lose money on their investments.
Under PPA, employees and business owners alike will continue to be able to contribute increased amounts to defined contribution plans and make catch-up contributions if they’re age 50 or older. This is because the act permanently extends retirement-related provisions set to expire after 2010. Participants will also enjoy increased portability between plans.
The Roth 401(k) also has been made permanent, so it may now be more attractive for you to offer. Contributions to Roth 401(k)s are not pretax, but qualified distributions are tax-free. So offering the Roth 401(k) option may give your business a competitive advantage if you are one of the first to offer the plans.
Restrictions and rewards
PPA may have a significant impact on your family business’s retirement plan — and on you. The more informed you are, the better prepared you’ll be to comply with new restrictions — and reap new rewards.
For more information please call Charlie Epstein at Epstein Financial Services at 413-734-6418 or email at firstname.lastname@example.org.