Reaping the benefits
On Aug. 17, President Bush signed the Pension Protection Act of 2006 (PPA), a wide-reaching law affecting many aspects and types of pension plans, including traditional defined benefit (DB) plans and defined contribution (DC) plans, such as 401(k) and 403(b) plans. Regarded as the most sweeping legislation to be passed in more than 30 years, the act was created largely in response to concerns about sufficient funding of traditional pensions, the adequacy of future retirement income, and the solvency of the Washington-based Pension Benefit Guaranty Corp. (PBGC), an organization that guarantees the pension benefits of private sector workers.
The law includes comprehensive DB pension funding reforms, provisions governing the division of pension benefits upon divorce, special protections for cash balance and other types of hybrid pensions, and provisions to permanently set changes enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). While most of the PPA applies to private employer plans, some of its provisions specifically address state and local government pension plans.
For example, the PPA contains two provisions that will benefit public safety officers, such as police, firefighters and emergency medical service workers. The provisions make it easier for retired safety officers to use pension money to purchase health insurance and to access their pension benefits at an earlier age.
Starting in 2007, retired public safety officers can use up to $3,000 of pension benefits annually to purchase health or long-term care insurance tax-free. To be eligible, the officer must have left service because of a disability or have reached normal retirement age. The policy will cover the retired officer, a spouse and/or a dependent. To keep the benefit tax-free, the pension plan must pay the premium directly to the insurer.
In general, employees who separate from service and take their pension benefits before age 55 face a 10 percent premature distribution penalty. Because public safety officers are likely to retire before age 55, the PPA creates an exception for officers who retire at or after age 50 and who participate in a governmental plan, including a deferred retirement option plan (DROP). With the PPA, the workers can receive their benefits between ages 50 and 55 without penalty.
Other provisions of the PPA apply to governmental and nongovernmental pensions. The EGTRRA provisions that have been made permanent include Roth 401(k) and 403(b) after-tax contributions and catch-up contributions to plans by employees more than 50 years old. Non-spouse beneficiaries now can roll over a pension distribution to an individual retirement account without tax penalties. Military reservists and National Guard members can take a distribution from their pension without the premature distribution penalty if they are called to active duty for 180 days or more.
At more than 900 pages, the PPA makes a myriad of changes to pension plans, issuing effective dates ranging from immediately to 2017. Future regulations from the Washington-based Internal Revenue Service and the U.S. Department of Labor over the next several months and years will clarify how to comply with the PPA.
The author is a senior information specialist for the Brookfield, Wis.-based International Foundation of Employee Benefit Plans.