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This significant tax legislation (the Act) was signed into law by the President on August 17, 2006. The new law is designed to not only strengthen traditional defined benefit pension plans, but also to improve and extend many retirement benefits provided by IRA's, 401(k) and other defined contribution plans. In addition, the new law tightens the rules for charitable donations of cash, clothing, household goods, and other items. Following is a brief summary of some of the Acts' provisions.

1. Defined contribution plans must allow participants to direct employer securities into other investment options.

 

2. Automatic enrollment in 401(k) Plans is encouraged by providing nondiscrimination safe harbor rules for elective deferrals and matching contributions.

 

3. Plan sponsors can arrange for "fiduciary advisors" to offer professional investment advice to help participants manage their 401(k) or other retirement accounts.

 

4. Taxpayers are allowed to direct the IRS to deposit tax refunds directly into their IRA account.

 

5. The Act allows distributions from a deceased person's retirement plan to be rolled over tax free to a nonspouse beneficiary's IRA. Previously, this type of distribution could only be rolled over to an IRA by a surviving spouse.

 

6. Effective after 12/31/07, retirement plan rollovers can be made directly to a Roth IRA. This will be treated as a Roth conversion (taxable, but no 10% penalty; AGI must be less than $100,000).

 

7. Defined contribution plans must provide pension benefit statements at least quarterly to participants and beneficiaries who have self-directed accounts, and at least annually to participants and beneficiaries whose accounts are not self- directed.

 

8. The vesting schedule for all employer contributions to defined contribution plans has been expedited. 100% vesting must now occur either after 3 years (cliff vesting) or over 2 to 6 years (graded vesting @ 20% per year).

Many taxpayer-friendly changes to the Tax Code's retirement plan rules made in prior years were set to expire sunset after 2010 or earlier. These incentives are now made permanent by the Act, and include the following:

1. Permanent higher dollar amount for IRA contributions ($4,000 starting in 2006, $5,000 in 2008, inflation adjusted thereafter)

 

2. Permanent higher dollar limits on defined contribution plans, including maximum additions to a participant's account ($44,000 in 2006), elective deferrals for 401(k), 403b, and 457 plans ($15,000 in 2006), SIMPLE plan contributions ($10,000 in 2006) and compensation that may be taken into account under a plan ($220,000 in 2006); all these are inflation adjusted after 2006.

 

3. Permanent increases in the annual benefit limit under a defined benefit plan ($175,000 for 2006), inflation adjusted thereafter;

 

4. Permanent catch-up contributions for older workers ($1,000 after 2005 for IRAs, $2,500 for SIMPLE plans, $5,000 for 401(k) plans; only the SIMPLE and 401(k) catch ups are inflation adjusted;

 

5. Permanent faster vesting of employer matching contributions (full vesting under three-or-six year schedules);

 

6. Permanent higher deductible amounts for employer contributions to employee retirement plans; 25% of compensation deduction limit for defined contribution plans, stock bonus and profit sharing plans, and SEP's

 

7. Permanent Roth 401(k)s and 403(b)s;

 

8. Permanent start-up tax credit for new small employer-sponsored plans (maximum $500/year for each of the first three years);

 

9. Permanent deemed IRAs set up under an employer plan allowing separate employee contributions;

 

10. Permanent enhanced rollover rules (including qualified plan rollovers of distributions of after-tax contributions, direct rollovers from IRAs to employer plans, and rollovers of distributions from governmental 457 plans, 403(b) plans, or cash-outs);

 

11. Permanent retirement saver's credit for lower and middle income taxpayers.

1. Encourages plans to create a funding cushion by allowing a tax deduction for plan contributions up to 150% (140% for multiemployer plans) of a plan's current liability rather than 100% as allowed under current law.

 

2. Requires most plans to become fully funded over a 7-year period. Stricter funding requirements apply to "at risk" plans less than 80% funded.

 

3. Mortality tables are updated and use of a plan's actual experience and projected trends is permitted in determining a plan sponsor's "minimum required contribution" each year.

 

4. Cash balance and pension equity plan (hybrid plan) conversions are encouraged by providing relief from age discrimination claims and clarifying requirements for conversion.

1. Individuals over age 70 1/2 can distribute up to $100,000 of their traditional or Roth IRA balance directly to qualified charitable organizations in 2006 and 2007. Income is not recognized on the distribution, and there is no charitable deduction. The distribution does not count against the 50% of AGI limitation.

 

2. Contributions of used clothing and household items will be allowed only if the items are in "good" condition.

 

3. Donors of charitable contributions of cash or checks must retain records of the gift, regardless of amount, consisting either of (1) a bank record (cancelled check), or (2) a written receipt or letter from the charity indicating the charity's name, the date of the contribution, and the amount.

 

4. The Act adds a civil penalty to be assessed against a person who prepares an appraisal that results in a substantial or gross valuation misstatement.