The Pension Protection Act of 2006 was signed into law on August 17, 2006.
This massive piece of legislation was designed to ensure adequate funding for pension plans in light of the catastrophic failures of Enron and other companies following corporate accounting scandals.
It also introduced the concept of qualified charitable distributions from IRAs and a new type of retirement plan called a DB/K.
How did things work out?
Here’s what small business owners need to know.
Funding of pension plans
The main reason for the law was to put pension plans on a sound financial footing. It seems that after 10 years, not much has improved. According to one source, underfunding for large corporate pension plans is still rampant. According to the article, this is in part due to flat investment returns and declining contributions.
For small businesses, the impact is indirect. Few small businesses offer pension plans, and those that do, which are usually professional firms, can afford to fund them (i.e., contribute the amount actuarially determined to pay promised pensions).
Small businesses that offer qualified retirement plans use defined contribution plans, such as 401(k)s, that shift all or most of the cost of contributions to employees. However, small firms with pension plans feel the impact of underfunding through increased premiums from the Pension Benefit Guaranty Corporation (PBGC).
Qualified charitable distributions
Those who are age 70½ or older can transfer up to $100,000 directly to a public charity each year on a tax-free basis. The transfer counts toward the owner’s required minimum distributions (RMD) for the year, but there’s no current tax on the transfer.
This transfer option keeps the owner’s adjusted gross income lower than it would have been with the RMD, giving greater access to a variety of tax breaks, minimizing the tax on Social Security benefits in many cases, and minimizing or avoiding the additional Parts B and D Medicare premiums.
This very favorable tax rule was supposed to be temporary (only for 2006 and 2007). It was extended several times, and the PATH Act of 2015 made it permanent. However, the original $100,000 limit applies today and is not increased annually for inflation.
DB/Ks
DB/K plans (referred to as eligible combined plans) were supposed to combine the best of a defined benefit (pension) plan with a defined contribution (401(k)) plan under new Code Section 414(x). They would have enabled participants to earn a pension while also contributing to a savings plan while employers enjoyed simplification (a single trust and a single annual filing). These plans never got off the ground.
The IRS put a stumbling block to plan approval by requiring two filings and two separate user fees. And while only one annual filing was required, it appears that separate administration for each component — the defined benefit and defined contribution portions. Small businesses simply didn’t find the administrative cost of these plans attractive enough to use them. For all intents and purposes, the DB/K is dead.
Conclusion
It’s hard to believe it’s been 10 years since this legislation. It’s even harder to believe that the legislative process used then seems to have fallen into disuse.
Back then, there was a process in which the Senate passed one bill, the House another, and it took the Conference Committee 5 months to resolve differences and put the final bill to a vote. There were actually committee reports and an opportunity for the public to read them prior to final Congressional action.
There appeared to be compromise between the parties when there was a process followed. What happened?
