Pension Protection Act of 2006
In an effort to stabilize and strengthen traditional pension programs and avert
a taxpayer-funded bailout of such programs, Congress passed the Pension Protection
Act (PPA) in 2006. The new law requires most employers to fully fund their pension
plans over a seven-year period beginning in 2008. (Most plans are currently underfunded,
which means that the amount of benefits already promised to recipients exceeds the
amount of funds in the plan.)
The statute also provides tax benefits to other retirement savings plans. Employers
may now automatically enroll their employees into a 401(k) retirement plan with default
contribution levels. Employees declining to participate in their employer's
plan must elect to "opt out" of the 401(k). Furthermore, the PPA permits non-spouse
beneficiaries to roll over assets they inherited from a qualified retirement plan
into an IRA. The beneficiary will not be taxed on the rollover, being taxed only
when they withdraw the assets.
In the past, the IRS limited this favorable tax treatment to people who inherited
retirement assets from a deceased spouse. The new law allows more flexible retirement
and estate planning for beneficiaries who are not the account owner's spouse (like
domestic partners, for example.)
The new law extends a number of retirement benefits. IRA contributions will be $4,000
in 2006 and 2007, $5,000 in 2008, and adjusted for inflation thereafter. Catch-up
contributions (elective deferrals made by eligible participants in excess of the
statutory limit) for individuals age 50 or older will be $1,000 for IRAs, and $5,000
for 401(k) plans. 401(k) catch-up contributions will be adjusted in increments of $500
based on inflation, but IRA catch-up contribution limits will not be adjusted for
inflation.
In addition, the new law removes the sunset provision that would have disallowed
Roth 401(k) and Roth 403(b) plans after 2010.
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