United States: Highlights of the Pension Protection Act of 2006

The Pension Protection Act of 2006 (the "Act") was signed into law on August 17, 2006. Some commentators have described it as "the most sweeping reform of pension funding rules since 1974, helping to guarantee that companies uphold their pension promises to workers. A summary of the more important qualified plan, IRA, charitable giving and reform provisions of the Act follows.

Summary of Qualified Plan and IRA Provisions

Permanent Retirement and Savings Incentives The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) substantially increased pension and individual retirement account (IRA) contribution limits (both regular and catch-up) through 2010 and also made other improvements in pensions and retirement savings through enhanced vesting, portability and reduced regulatory burdens. The Act makes these favorable changes permanent, and also indexes the income limits for traditional, spousal and Roth IRAs to minimize the erosion of these benefits due to inflation. Similarly, the favorable EGTRRA provisions regarding qualified tuition plans, which were originally scheduled to expire after 2010, have also been made permanent by the Act.

Rollovers into Roth IRA Accounts For distributions after 2007, the Act allows distributions from qualified retirement plans, tax-sheltered annuities and governmental (Code Sec. 457) plans to be rolled over directly into a Roth IRA, subject to the usual adjusted gross income (AGI) rules that apply to rollovers from a traditional IRA into a Roth IRA. The AGI rules do not apply to distributions for tax years beginning after December 31, 2009, meaning that both traditional IRAs and qualified retirement plans, tax-sheltered annuities and governmental (Code Sec. 457) plans can be converted into Roth IRAs regardless of the individual's AGI.

Liberalized Hardship Distribution Rule For purposes of the 401(k) hardship distribution rules, "hardship" includes hardship of a beneficiary under the plan, even if the beneficiary is not a spouse or dependent. This provision is effective August 17, 2006.

Rollovers by Nonspouse Beneficiaries Under pre-Act law, only participants and surviving spouses were able to rollover amounts from qualified plans, 403(b) annuities and IRAs to another plan or IRA; nonspouse beneficiaries were not eligible to rollover inherited amounts. The Act provides that, for distributions after 2006, nonspouse beneficiaries may rollover, to an IRA structured for such purposes (in a trustee-to-trustee rollover), amounts inherited.

Defined Contribution Plan Investment Rules Under the Act, participants must be allowed to immediately diversify any employee contributions or elective contributions invested in employer securities. For employer contributions, participants must be able to diversify out of employer stock after they have been in the plan for three years. The diversification requirement applies to plans with publicly traded employer securities.

Defined Benefit Plan Change The Act made numerous highly technical changes to various defined benefit plan provisions (including age discrimination testing, employer funding, Form 5500 informational reporting, Pension Benefit Guarantee Corporation premiums and conversions into cash balance plans), explanations of which are beyond the scope of this discussion. In general, these provisions are intended to create more pension transparency so that participants, regulators and investors can have a better understanding of the financial health of traditional pension plans.

Direct Deposit of Tax Refunds into IRAs The Act requires the IRS to establish procedures for depositing federal tax refunds directly into an IRA.

IRA Distributions for Charitable Purposes The Act provides an exclusion from gross income for certain distributions of up to $100,000, per year, from a traditional individual retirement account (IRA) or a Roth IRA, where the distribution is contributed to a tax-exempt organization to which deductible contributions can be made. This provision is effective for 2006 and 2007, applies only to distributions made on or after the date the IRA owner attains age 70 1/2, and must be made directly from the IRA trustee to the charitable organization. Distributions that are excluded from income under the new provision are not allowed as a deduction. The provision can save taxes for those who itemize their deductions to the extent that AGI limitations would have otherwise reduced the amount of charitable contributions currently deductible. In addition, excluding the IRA distributions from AGI also results in a lower AGI, which may make deductions affected by AGI (such as medical deductions and miscellaneous itemized deductions) easier to deduct, and may also reduce the amount of Social Security benefits that are subject to tax.

Automatic Enrollment Arrangements Current law allows automatic enrollment in 401(k) plans (where the employer withholds contributions unless the participant opts out of the program), but, because of state garnishment laws and fiduciary liability concerns, employers have been discouraged from implementing automatic enrollment provisions. The Act addresses these concerns and provides incentives for automatic enrollment and for automatic increases in contribution percentages. Participants have the ability to opt out within 90 days, but participants, once in, do not typically opt out. These provisions are at least partially in response to recent studies that have shown that, in the second and third quarters of 2005, the saving rate for the first time in the last 60 years has fallen into negative territory. In other words, Americans as a whole are spending more than they are saving. Furthermore, studies have also shown that only 8.4% of 401(k) participants contribute the maximum amount allowed.

Guard and Reservists Called to Active Duty Under the Act, distributions from an IRA or pension plan to members of the National Guard and Reserves called to active duty through 2007 are not subject to early withdrawal penalties. Withdrawn amounts may be repaid to the IRA or pension plan within two years of the distribution without regard to the annual contribution limit.

Long-Term Care/Annuity Products The Act authorizes a new insurance product that allows annuities to carry a long-term care rider so that annuity earnings can also be used to provide coverage against long-term care needs.

Summary of Charitable Giving and Reform Provisions

Qualified Conservation Contributions The Act raises the charitable deduction limit from 30% of AGI to 50% of AGI for qualified conservation contributions. Furthermore, the charitable deduction limit is raised to 100% of AGI for eligible farmers and ranchers, provided that the contribution does not prevent use of the donated land for farming or ranching purposes. The Act also authorizes the carryover of unused deductions for up to 15 years, an increase from the current five-year carryover. This provision is effective for 2006 and 2007.

Basis Adjustment for S Corporation Contributions Under the Act, for 2006 and 2007, the amount by which an S corporation shareholder's stock basis is reduced (due to a charitable contribution by the corporation) is limited to the shareholder's pro rata share of the contributed property's adjusted basis, as opposed to the fair market value (FMV) of the property. This can result in a larger post-contribution stock basis if the FMV of the property exceeds its basis on the date of the contribution.

Cash Contributions With regard to charitable contributions of money, for tax years beginning after August 17, 2006, the donor must maintain a canceled check, bank record, or receipt from the donee organization showing the name of the organization, the date of the contribution and the amount of the contribution. Previously, only contributions in excess of $250 required substantiation to this extent.

Clothing and Household Items In general, for contributions made after August 17, 2006, no deduction is allowed for charitable contributions of clothing and household items that are not in "good" used condition (or better). In addition, the IRS can deny a deduction for any item with minimal monetary value.

Notification Requirement for Exempt Organizations The Act requires certain exempt organizations to file an annual notice with the IRS containing basic contact and financial information. This requirement applies to organizations that currently do not have an annual filing requirement because their gross receipts are less than $25,000.

Appraisal Reform The Act makes it easier for the IRS to impose accuracy-related penalties on a taxpayer who claims a deduction for donated property for which a qualified appraisal is required, and defines a "qualified appraiser" and a "qualified appraisal."

If you have any questions about the information in this Alert or would like to learn more about the Pension Protection Act of 2006, please contact Michael A. Gillen, CPA, CFE, Director of Tax Accounting, or the practitioner with whom you are regularly in contact.

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

Duane Morris LLP, among the 100 largest law firms in the world, is a full-service firm of more than 600 lawyers. In addition to legal services, Duane Morris has independent affiliates employing approximately 100 professionals engaged in other disciplines. With offices in major markets, and as part of an international network of independent law firms, Duane Morris represents clients across the United States and around the world.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions