THE PENSION PROTECTION ACT OF 2006 What does the Financial Planner Need to Know??? May 20, 2008.

THE PENSION THE PENSION PROTECTION ACT OF 2006PROTECTION ACT OF 2006

What does the Financial Planner Need to Know???

May 20, 2008

EGTRRA PERMANENCYEGTRRA PERMANENCY Provisions Were Set to Expire 12/31/10

Increased Annual IRA Limits

Greater Flexibility for Rollovers

Increased Benefit Limits for Defined Benefit

Plans

Increased Contribution Limits for 401(k) Plans

Increased Contribution Limits for Other Defined Contribution Plans

EGTRRA PERMANENCYEGTRRA PERMANENCY• Allowed Catch-Up Contributions for Older

Workers

• Allowed Roth 401(k)s

• Simplified Top Heavy Rules

• Allowed Plan Loans to All Employees, Regardless of the Type of Business Entity

• Established Low-Income Saver’s Credit

• Miscellaneous Provisions

DEFINED BENEFIT PLAN DEFINED BENEFIT PLAN FUNDING CHANGESFUNDING CHANGES

Actuarial Cost Method

Interest Rates and Yield Curves

Mortality Tables

Other Actuarial Assumptions


• Asset Valuations

• Minimum Required Contributions

• Use of Credit Balances

• “At-Risk” Plans

• Restrictions on Benefit Increases, Lump Sums and Other Benefits


The interest rate to determine liabilities (and lump sums) are now valued using a “yield curve” based on high-quality corporate bond rates of varying maturities.

Separate interest rates would be established for each of three “segments” – liabilities due in 5 years; between 5 and 20 years; and those longer than 20 years


• Yield curve would be derived from a 2-year average of interest rates on investment-grade bonds

• Alternatively, a plan can elect to use the full yield curve (i.e., non-segmented) without the 2-year averaging, but only for minimum funding


• Minimum Required Contribution (MRC) is sum of:– Target Normal Cost (TNC)– Shortfall Amortization Charge– Any Funding Waiver Amortizations.

• The MRC may be reduced by Credit Balances in certain circumstances


Benefit restrictions are applicable to all DB plans that are underfunded or have liquidity problems.

The “adjusted funding target attainment percentage” (AFTAP) must be calculated to determine whether the benefit restrictions apply:

Based on plan’s ratio of plan assets (reduced by credit balances) to the plan’s funding target.


FTAP less than 100% Funding Shortfall Amortization Quarterly Contributions

FTAP less than 80%, above plus

May be “At-risk” No benefit increases Cannot apply Carryover Balance or

Prefunding Balance Subject top Section 4010 filing (no longer

based on $50 million Unfunded Vested Benefits)

Partial restriction on lump sum payments

FTAP less than 60%, above plus o No benefit accruals o No lump sum payments


• With the exception of accelerated benefit distributions: – Plan sponsors may make additional

contributions or provide security to avoid the limitations.

• Restrictions do not apply to new plans for the first five years of the plan.

• Small plans not exempt from these rules even though they are exempt from “at-risk” rules.

DEFINED CONTRIBUTION PLAN DEFINED CONTRIBUTION PLAN CHANGESCHANGES

• Faster vesting to either 3 yr or 6 yr graded

• Rollovers of after-tax money and Roth 401(k)’s allowed to 403(b) plans

• Rollovers from Qualified Plans, 403(b)’s, and 457 plans can be made directly to Roth IRA– Through 2009, compensation limits of $100k AGI– Compensation limits eliminated after 2009– IRA conversions back in 2010 with 3 yr spread of taxes!!

DEFINED CONTRIBUTION PLAN DEFINED CONTRIBUTION PLAN CHANGESCHANGES

• Special exemptions for government plans and Indian tribal plans

• Non-spousal beneficiaries now can rollover to IRA and take annual distributions – Big Estate Planning Opportunity

INVESTMENT ADVICEINVESTMENT ADVICE

• New Prohibited Transaction Exemption for Fiduciary Advisors

• Default Investment Elections

• Diversification Rights with Respect to Amounts Invested in Employer Securities


• Prohibited Transaction Exemptions for “fiduciary advisors” to provide advice to participants and beneficiaries on their own funds under 2 alternative exemptions:

“fiduciary advisor” defined as an Registered Investment Advisor, bank, insurance company, broker, dealer, an affiliated offshore institution/individual, or an employee

Fee Leveling Exemption• Fees received by fiduciary advisor are not dependent on the

investment selections made.


Computer Model Exemption• Advice delivered by a computer model certified by

an independent investment expert• Model must use all plan investments and cannot

weigh towards advisor’s investments• Must allow participants to use other advisors• Disclosures made before advice given as well as

annually– All relationships identified– Past performance – Advisor indicates fiduciary status– Participant can have independent advisor

• Fiduciary Advisor is an RIA, Bank, Ins Co. Broker/Dealer, or an affiliate


• Detailed disclosures required to be made before the initial advice given, as well as annually thereafter

– The relationship between the fiduciary advisor, the plan investment options and fees that will be received

– The past performance of investment options under the plan

– Services provided by the advisor and that the advisor is a fiduciary

– That the participant is free to engage an independent advisor

– Other disclosures required by securities laws

PORTABILITY OF BENEFITSPORTABILITY OF BENEFITS

• In-service distributions from pension plans to participants who have reached age 62 (even if the normal retirement age is later than age 62) will be allowed

• Distributions from Qualified plans, 403(b) annuities and 457 plans can be rolled over directly to ROTH IRAs. The ROTH IRA conversion rules must be followed:

– The taxable portion of the rollover amount would be taxed at the time of the rollover, and

– Only individuals with $100,000 or less of Adjusted Gross Income (AGI) can do the rollover. After 2010, there is no $100,000 AGI restriction.

PORTABILITY OF BENEFITSPORTABILITY OF BENEFITS

Non-spouse designated beneficiary who inherits a participant’s interest in a qualified plan, 403(b) annuity, or 457 plan, can transfer this interest to an inherited IRA. The inherited IRA must be maintained in the name of the deceased plan participant (such as, “Tom Smith, as beneficiary of John Smith”). The transfer from the plan must be a direct rollover (trustee-to-trustee transfer) from the plan to the Inherited IRA. The funds must not go through the hands of the non-spouse beneficiary and also not be inadvertently deposited to the beneficiary’s own IRA or to non-IRA account. Generally, the Beneficiary must make annual withdrawal from the inherited IRA but is allowed to spread these out over his or her lifetime.

AMENDING PLANSAMENDING PLANS

• Private Retirement Plans Must Be Amended By End of the 2009 Plan Year

• Governmental Retirement Plans Must Be Amended By End of the 2011 Plan Year

• Plans must comply operationally through end of 2009 Plan Year

2001 2007

Gross Company Payroll $ 1,000,000 $ 1,000,000

Employee Elective Deferrals $ 100,000 $ 100,000

Net Payroll for ComputingDeductible Contribution $ 900,000 $ 1,000,000

Deduction Limit 15% 25%

Deductible Contribution $ 135,000 $ 250,000

Adjustment for Employee Deferrals (100,000) 0

Allowable Employer Profit Sharing $ 35,000 $ 250,000Contribution

EGTRRA PERMANENCYEGTRRA PERMANENCY401(K) PROFIT SHARING PLANS401(K) PROFIT SHARING PLANS

EGTRRA PERMANENCYEGTRRA PERMANENCYCATCH-UP CONTRIBUTION LIMITSCATCH-UP CONTRIBUTION LIMITS

Year 401(k), 403(b), SARSEP, SIMPLEGovernmental 457 Plan Plan

2002 $1,000 $ 500

2003 $2,000 $ 1,000

2004 $3,000 $ 1,500

2005 $4,000 $ 2,000

2006 $5,000 $ 2,500

2007 $5,000 $ 2,500

EGTRRA PERMANENCYEGTRRA PERMANENCYONE-PERSON 401(k) PLANONE-PERSON 401(k) PLAN

To maximize contributions (2007), we need the following:

Minimum Compensation : $ 118,000

Section 401(k) Deferral : $ 15,500

Profit Sharing Contribution : $ 29,500

Total Contribution/Allocation : $ 45,000

Total dollars needed in Business Entity : $ 147,500

Contribution as a % of Compensation : 38.14%

REPORTING AND DISCLOSUREREPORTING AND DISCLOSURE • Plan sponsors of DB Plans must furnish a new

detailed funding notice to all participants and the PBGC within 120 days after the end of the plan year.

• Must include whether plan’s funding target percentage is less than 100%; the plan’s assets and liabilities as of the last day of the prior plan year; breakdown of active participants versus retirees; the plan’s funding policy and asset allocation and an explanation of any amendments affecting plan liabilities

REPORTING AND DISCLOSUREREPORTING AND DISCLOSURE

• Small plans (100 or fewer participants) allowed to provide notice when Form 5500 due

• Summary Annual Reports for DB Plans repealed

• DOL to provide model notice


Electronic display of Form 5500 information required to be posted on plan sponsor “intranet” web site and DOL web site.

Effective in 2008—unclear what information must be included

5500 will require disclosure of assumptions used to project future retirements and forms of distribution


• Plan sponsors required to file an ERISA 4010 notice if funding target percentage below 80% for preceding year.

• Participants have right to get access to information filed with the PBGC upon a plan termination.


New benefit statement requirements for ALL PLANS--effective 1/1/07--DOL will issue model notice

Benefit statements required

o quarterly for participant-directed plans

o annually for other DC plans o every 3 years for DB plans


• Statement must “on the basis of the latest available information” show amount of vested benefits.

• Statements must also include explanation of any

permitted disparity or floor-offset arrangement affecting benefits under the plan.

• DC plan statements must show assets as of the most recent valuation date (e.g., some plan assets are trustee invested and “hard-to-value”), including employer securities.

REPORTING AND DISCLOSUREREPORTING AND DISCLOSURE Statements for participant-directed plans must include: an explanation of any restrictions on the right to

direct an investment information on the importance of diversification a statement about the risk of holding more than

20% of a portfolio in the security of one entity. Statements not required for defined benefit plans if participant given annual notice of right to request statement.


• All statements may be provided in written, electronic, or other appropriate form.

• DOL directed to provide simplified 5500 Form for plans with fewer than 25 participants.

• One-participant plans with assets less than $250,000 will be exempt from the 5500 Form filing requirement.

• Notice and comment period regarding distribution is expanded to 30--180 days before the distribution commences.

AUTO-ENROLLMENT SAFE AUTO-ENROLLMENT SAFE HARBORHARBOR

• Passes 401(k) tests and top heavy tests• Must cover all eligible employees

– Applies to new hires and those that did not affirmatively elect

• Automatic enrollment must be between 3% and 10%• Employee contributions must automatically increase

by 1% each year to at least 6% but not more than 10%• Matching contributions must be 100% for the first 1%

and 50% up to the next 5% with 100% vesting after 2 yrs

• Annual notices, preempts state laws, default investments, allows permissible distributions within 90 days, excess contributions disgorged and taxed in year of distribution

• This is a winner!

NEW 403(b) REGULATIONSNEW 403(b) REGULATIONS

• Written Plan Document

• Contract Exchanges

• Plan-to-Plan Transfers

• Plan Termination

• Universal Availability

• Non-Discrimination

• Catch-Up Contributions

NEW 403(b) REGULATIONSNEW 403(b) REGULATIONS

• Distributions

• Timing of Contributions

• Controlled Group Issues

• Incidental Life Insurance

• Roth IRA Contributions

• Effective Date-1/1/09

CASH BALANCE PLANSCASH BALANCE PLANS

• Contributions to fund retirement benefits can exceed 401(k)/defined contribution maximum of $46,000

• Participants have hypothetical account balances


• Cash Balance plans are granted regulatory recognition

• Cash Balance plans are not age-discriminatory if pay and annual interest credits for older workers are not less than those of younger workers

• Beneficial for small business and individual private corporations


• Elimination of 25% deduction limit

– 2006/2007: 25% limit applies only to the defined benefit plan if, profit sharing allocations do not exceed 6% of pay

– 2008: 25% limit is eliminated for PBGC covered plans regardless of profit sharing contribution

• Professional services firm need a minimum of 26 employees to be PBGC covered


• Participants have hypothetical accounts

• Accounts are credited with – Employer contribution credit

– Interest credit

• Participant may receive account balance on termination


• Benefits are more easily understood by the participant

– Participant receives an annual statement that shows an account balance

• Costs are understandable for the plan sponsor

• Contribution credits for the staff (as a % of pay) can be the same


• Assets must be pooled and trustee directed

• Interest credit is guaranteed

• For employer– Investment gains: decrease contributions

– Investment losses: increase contributions


• Manage investments to– Match the interest credit rate

– Match the client’s objectives

• Investment risk on employer


• Cash Balance investment strategies involve:– Plan demographics

– Cash flow

– Risk tolerance

• Investment strategy is coordinated with plan actuary


IDEAL CANDIDATES

• Professional Firms with 2 or more partners

• Principals between the ages of 45 & 65

• Employees, on average, at least 5-10 years younger than principals

• Budget in excess of $45/$50k

CASH BALANCE PLANSCASH BALANCE PLANSAGE ANNUAL

CREDITS45 85,40050 111,60055 145,80060 190,60065 198,000

PLAN DESIGNPLAN DESIGN Employee-(Age) Comp. Deferrals

3% Non-Elective

Enhanced

Match1

Profit

Sharing2 Catch-UpTotal

Allocation

HCE-(60) $220,000 $15,000 $6,600 $8,800 $13,600 $5,000 $49,000HCE-(50) 220,000 15,000 6,600 8,800 13,600 5,000 49,000

NHCE-(40) 50,000 $1,000 1,500 667 30 3,197NHCE-(30) 35,000 600 1,050 400 21 2,071NHCE-(25) 30,000 0 900 0 18 918NHCE-(25) 20,000 600 600 400 12 1,612NHCE-(23) 20,000 0 600 0 12 612NHCE-(23) 19,000 0 570 0 12 582NHCE-(28) 30,000 0 900 0 18 918NHCE-(27) 18,000 0 540 0 11 551

$662,000 $32,200 $19,860 $19,067 $27,334 $108,461

HCE-ADP 6.82%NHCE-ADP 0.84%

% of TotalHCE-ACP 4.00% HCE-ER Total $98,000 92.23%NHCE-ACP 0.56% NHCE-ER Total $8,261 7.77%

Total $106,261 100.00%1 Enhanced Match is 66.67% of the first 6% deferred.2 Satisfies gateway (3.06%).

Cost Benefit Analysis

PLAN DESIGNPLAN DESIGNEmployee-(Age) Compensation

Defined

Benefit Cost % of Comp. Notes:

HCE-(60) Grp 1 $220,000 $102,802 46.73% Normal retirement benefit:

HCE-(50) Grp 2 220,000 49,160 22.35%

NHCE-(40) Grp 2 50,000 6,061 12.12%

NHCE-(30) Grp 2 35,000 2,107 6.02%

NHCE-(25) Grp 2 30,000 1,390 4.63%

NHCE-(25) Grp 2 20,000 869 4.35% Maximum 20 years.

NHCE-(23) Grp 1 20,000 1,159 5.80% Normal retirement age: 65

NHCE-(23) Grp 1 19,000 1,101 5.79% Actuarial Assumptions: 6%, 1994 GAR-Unisex Mort.

NHCE-(28) Grp 2 30,000 183 0.61%

NHCE-(27) Grp 2 18,000 890 4.94%

$662,000 $165,722

% of Total

HCE Total $151,962 91.70%

NHCE Total $13,760 8.30%

$165,722 100.00%

Cost Benefit Analysis

Group 1 - 5.0% of compensation time year of

participation.

Group 2 - 3.0% of compensation time year of

participation.

Plan DesignPlan DesignDB/DC ComboDB/DC Combo

Partic VA RA CompCB Contrib

Credit PS Contrib % of Pay Prior Design % of Pay

HCE1 62 65 220,000.00 171,600.00 0.00 78.00% 44,000.00 20.00%

HCE2 60 65 101,693.09 117,963.98 0.00 116.00% 17,451.18 17.16%

HCE3 54 65 220,000.00 44,000.00 0.00 20.00% 44,000.00 20.00%

HCE4 34 0 53,289.55 0.00 0.00 0.00% 8,921.01 16.74%

NHCE1 50 65 32,087.94 3,208.79 0.00 10.00% 5,371.73 16.74%

NHCE2 49 65 16,279.01 1,627.90 0.00 10.00% 2,725.21 16.74%

NHCE3 49 65 22,305.65 2,230.57 0.00 10.00% 3,734.11 16.74%

NHCE4 53 65 26,450.21 2,645.02 0.00 10.00% 4,427.93 16.74%

NHCE5 47 65 22,116.54 2,211.65 0.00 10.00% 3,702.45 16.74%

NHCE6 49 65 28,135.13 2,813.51 0.00 10.00% 4,710.00 16.74%

NHCE7 55 0 30,166.75 0.00 3,016.68 10.00% 5,050.11 16.74%

NHCE8 32 0 21,352.27 0.00 2,135.23 10.00% 3,574.51 16.74%

NHCE9 26 0 31,081.55 0.00 3,108.16 10.00% 5,203.25 16.74%

NHCE10 55 0 44,599.46 0.00 4,459.95 10.00% 7,466.23 16.74%

Totals 869,557.15 348,301.42 12,720.02 41.52% 160,337.72 18.44%

SUMMARYSUMMARY

• EGTRRA Permanency

• Defined Benefit Funding Rules

• Investment Advice

• 403(b) Compliance

• Disclosure

• Cash Balance Plans

• Plan Design Opportunities

THE PENSION PROTECTION ACT OF 2006 What does the Financial Planner Need to Know??? May 20, 2008.

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