If your business sponsors a defined-contribution retirement plan (such as a 401(k) or profit sharing plan) for its employees, then you want to be aware of several significant changes that will go into effect for the 2007 plan year. Most result from provisions contained in the Pension Protection Act of 2006, enacted last August. Now is the time to review your plan with an eye toward making sure it will be in compliance for 2007. Here are the main items to consider.
Accelerated Vesting for Employer Contributions
Employer nonelective contributions, such as profit sharing contributions, must become nonforfeitable ("vested ") faster than under previous law. These contributions must vest using either the minimum three-year cliff or six-year graduated vesting schedules that already apply to any employer matching contributions. If your plan’s vesting schedule for all employer contributions doesn’t currently satisfy the new requirement, then your plan document will have to be amended.
Default Investment
Many plans allow participating employees to direct their own investments and provide for a "default " investment in the event a participant does not make an investment choice. The 2006 pension law provided new requirements for default investments. Among those new rules: new guidelines for determining which investments qualify as default investments and a notification to participants prior to each plan year that explains their right to direct plan investments and, absent such a direction, the default investment in which their accounts will be invested.
Investments in Publicly Traded Employer Securities
If your plan calls for investments of employee contributions in your company’s publicly traded securities, new rules require that participants must be allowed to diversify those investments into other plan investments. Where employer securities were bought with employer contributions, the participant must be allowed to diversify the investments after the participant has completed three years of service. This requirement for employer contributions is phased in over three years, but the phase-in does not apply to participants age 55 and older with at least three years of service. Other exceptions apply.
Investment Advice
Many retirement plans are (or are considering) offering investment advice to plan participants. The new law offers fiduciary liability protection, in the form of a prohibited transaction exemption, to employers and other plan fiduciaries who make such advice available by providing requirements for how and by whom the advice is given. In general, the advice must be given by a "fiduciary adviser " through the use of a certified computer model or under a fee-leveling arrangement. Disclosures of all fees and affiliations of the fiduciary adviser must be provided to participants at the time of the advice and regularly afterwards. If all rules are met, the plan fiduciaries are not responsible for the specific advice given, but remain liable for choosing and monitoring the advice giver.
Expansion of Hardship Withdrawals
Plans may allow hardship withdrawals to a plan participant based on the hardship of the participant’s designated beneficiary, whether or not the beneficiary is a spouse or dependent of the participant. Withdrawals can thus be made due to the hardship or unforeseeable financial emergency of a grandchild, parent, or domestic partner. The change is not mandatory but, if the plan sponsor chooses to make it, the plan document must be amended.
Rollovers of Distributions
Participants may make direct rollovers of after-tax contributions to any retirement plan (from a 401(k) plan to a 403(b) annuity, for example). If your plan will accept these rollovers, it will have to separately account for the after-tax amounts.
In addition, a non-spouse beneficiary of a decedent’s plan account (or IRA) may roll over the inherited amount directly to her or his own IRA.
Benefit Statements
New rules regarding benefit statements apply for 2007. In general, plan sponsors must provide benefit statements:
- Quarterly to participants who direct their own investments and
- Annually for all other participants.
Special requirements apply to the content of statements for participant-directed plans. Statements may be delivered in electronic format.
New Plan Dollar Limits
For 2007, several dollar limitations for retirement plans have been adjusted for inflation. Among them:
- The annual limit on elective deferrals to 401(k) plans increases to $15,500 (up from $15,000 in 2006).
- The cap on the amount of annual compensation that may be taken into account in determining contributions and benefits is $225,000 (up from $220,000).
- The 2007 limit on "annual additions " to a defined contribution plan account (employer contributions, employee contributions, and forfeitures) is $45,000 (up from $44,000).
Summary
The 2006 pension law made numerous changes that will affect your plan in 2007 and beyond. As a plan sponsor, you should review your plan document and your plan’s operation each year to determine whether new laws or regulations might have an impact on your retirement plan. If you would like our assistance in that review, please let us know.
