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The Pension Protection Act of 2006, which was signed by President Bush on August 17, 2006, represents some of the most comprehensive pension reform in decades. The majority of the legislation in the Act applies to the funding requirements of traditional defined benefit pension plans, but there are provisions of interest to the sponsors of defined contribution plans. The following information is a summary of the federal legislation enacted by the Pension Protection Act relating to defined contribution plans.
Automatic Enrollment 401(k) Safe Harbor
The legislation created a new 401(k) Safe Harbor that will take effect beginning January 1, 2008, to encourage employers to adopt automatic enrollment in their plans. Plans that meet the safe harbor criteria will be exempt from the ADP/ACP tests and would be deemed to meet top-heavy requirements. The requirements for a qualified automatic enrollment arrangement are:
  • The initial automatic enrollment percentage must be between 3% and 10% of compensation.
  • The minimum enrollment percentage automatically escalates by 1% each year.
    • In the second year of participation, the minimum percentage is 4%;
    • In the third year of participation, the minimum percentage is 5%;
    • In all subsequent years the minimum percentage is 6%.
  • The automatic enrollment arrangement need not apply to those participants already deferring or those who have already elected not to defer.
  • An employer contribution that is 100% vested after two years of service and meets one of the following minimum contribution formulas:
    • A matching contribution of at least 100% of deferrals up to 1% of pay, plus 50% of deferral on the next 5% of pay. This equates to a match of 3.5% on deferrals of 6% or compensation or more; or
    • A nonelective contribution of at least 3% of compensation.
  • Employer contributions are subject to in-service distribution restrictions similar to those applicable to employee deferrals and employer contributions under the current 401(k) Safe Harbor.
  • An annual notice must be provided to the participants.
  • "Erroneous contributions" may be distributed to employees who elect to stop their deferrals within 90 days of their initial automatic enrollment. The amount distributed would be treated as compensation and would not be included in the nondiscrimination testing.
Automatic enrollment arrangements also permit sponsors to make ADP/ACP refunds up to six months after the close of the plan year without incurring a 10% excise tax. Generally this excise tax is assessed on the employer when refunds are made more than 2.5 months after the close of the plan year. This extended refund deadline is not limited to those employers who utilize the automatic enrollment Safe Harbor. Any employer with an automatic enrollment arrangement that meets certain criteria can rely on this provision. In addition, all ADP/ACP refunds will be taxed in the year of distribution.
Investments and Fiduciary Responsibilities
The DOL is required to issue a fiduciary Safe Harbor under ERISA Sec. 404(c) for default investments in participant-directed plans. Compliance with this Safe Harbor will relieve the plan fiduciary of liability with respect to investment and asset allocation for participants who fail to give investment direction, including those participants who are automatically enrolled in the plan. An annual notice must be provided to participants explaining these default investment provisions. The regulations will include information on the types of investments that qualify for the Safe Harbor default. However, fiduciaries will continue to be responsible for the prudent selection and monitoring of these qualifying default investment alternatives. Fiduciary relief will also be available for the mapping of investments during a blackout period in a participant-directed plan.
In addition to the responsibilities resulting from the Pension Protection Act, the DOL is also involved in a number of its ongoing projects related to qualified retirement plans. In order to clarify previous guidance on the deadline for depositing deferrals and other money withheld from employees' pay into the plan's trust, the DOL is developing a Safe Harbor period of a specified number of days in which this money will not be considered a plan asset for the purpose of applying the prohibited transaction provisions. These funds must be deposited into the plan trust by the end of the Safe Harbor period. In addition, the DOL is revising its regulations governing 404(c) compliance to ensure that participants and beneficiaries are provided sufficient information, including information about fees and expenses, to make informed investment decisions.
Miscellaneous Provisions

EGTRRA Permanency - EGTRRA provisions, which include catch-up contributions and Roth 401(k) provisions, have been permanently extended. These provisions were previously scheduled to sunset in 2010.

Participant Statements - Participant-directed defined contribution plans must provide quarterly statements to plan participants. Statements may be provided electronically.

Minimum Vesting Schedule - Effective for contributions made for plan years beginning on or after January 1, 2007, all employer contributions will be subject to a minimum vesting schedule no more restrictive than either a 6 year graded schedule or a 3 year cliff schedule. These vesting schedule minimums previously applied only to matching contributions or top-heavy plans.