Pension Protection Act of 2006

Pension Protection Act of 2006

The Pension Protection Act of 2006 (PPA) was actually an amendment to the Employee Retirement Income Security Act (ERISA) of 1974. One could argue that Congress taking 32 years to amend the law governing retirement plans is a bit excessive. You’d be correct.

The amendment, according to some financial writers, actually came into being because the Pension Benefit Guaranty Corporation (PBGC) was about to be put out of business by all the corporate pension defaults occurring during that period.

The Pension Benefit Guaranty Corporation is a federal corporation created under the Employee Retirement Income Security Act of 1974. It has a mandate to guarantee payment of basic pension benefits earned by workers and retirees participating in private-sector defined benefit pension plans.

The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by investment returns. These two sentences speak volumes on why the PGBC ran into rough waters.

At the time they were responsible for 44 million people and over 29,000 different plans. Both those figures are astronomical. Something had to be done so the Pension Protection Act of 2006 was passed.

The PPA helped IRAs. For example, the act did extend an earlier tax act’s contribution limits for IRAs and 401(k)s. Had it not extended the limits, they would have expired or been severely reduced.

The Pension Protection Act of 2006 also provided that an IRA could be passed on to a non-spouse beneficiary. This gave the non-spouse beneficiary control over the decision on when to withdraw the money in the IRA. Of course once they withdrew the money, they owed taxes.

This pass along feature came with restrictions and guidelines on how to set up a new IRA account. Those particular transfers had to be designated in a certain manner and the new account had to be designated as a special account with its own heading.

The Pension Protection Act of 2006 let employers enroll workers in defined contribution plans automatically where heretofore they needed Department of Labor permission. Workers also received greater disclosure from the pension administrator as to the performance of their pensions. The aura of performance secrecy was lifted.

For workers who withdrew from their company’s plans within 90 days of enrollment, the tax burden was lifted off their shoulders. They received their money without facing the usual applied tax penalties for early withdrawal from a tax qualified pension plan.

The Pension Protection Act of 2006 forced companies to more accurately analyze their pension plans as well as denying them the ability to underfund their plans by skipping payments. At the same time it lifted the cap employers were allowed to invest in their own plans.

One can accurately state the Pension Protection Act of 2006 allowed workers greater control over how their accounts are invested. The performance secrecy veil was lifted so workers could see the performance of the vehicles in which they were invested and they now could chose different vehicles.

As time marched on, the Pension Protection Act of 2012 was passed. Keeping the image of Father Time marching on squarely in view, new legislation is being proposed regarding pensions and worker rights as you read this article.

Most financial observers agree though that the Pension Protection Act of 2006 was the impetus to pension reform. As with everything else in Washington, there is still a long way to go before total reform is implemented.

Using these “two words” in your 401k, IRA or any other investment account can make you very wealthy…

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