Lawyer Article

On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006 ("Act"). This legislation makes extensive changes to the law governing defined benefit pension plans, cash-balance and other hybrid plans, and defined contribution plans (including both 401(k) plans and profit sharing plans). In addition, the legislation makes several substantive changes under the Employee Retirement Income Security Act of 1974 ("ERISA"), which governs all qualified retirement plans and certain nonqualified deferred compensation plans. Finally, the Act provides new rules for funding nonqualified deferred compensation plans, including company-owned life insurance ("COLI").

Following is a summary of the major provisions of the Act. Over the next several weeks, we will be providing more detailed analyses of various provisions of the Act.

Defined Benefit Pension Plan Changes

• Effective beginning in the 2008 plan year, there are new minimum funding rules applicable to all defined benefit pension plans. These rules are similar to the deficit reduction contribution rules applicable under current law. The new rules generally require amortization of unfunded current liabilities over a seven-year period.
• Also beginning in the 2008 plan year, plans must use new interest rate assumptions for calculating their funding obligations. These rates are based on A-AAA rated corporate bonds and a yield curve methodology. The rules currently in place for use of corporate bond rates for interest calculations are extended for 2006 and 2007.
• Beginning in 2008, "at-risk" plans (those that fall below a specified funding threshold) are subject to new accelerated funding requirements. For plans that are not fully funded, there are new restrictions on certain types of benefit payments (e.g., lump sum distributions) and benefit increases. Beginning in 2006, there are increased deduction limits for contributions to fully funded plans.
• The new legislation also expands the reporting requirements regarding plan funding to both the Pension Benefit Guaranty Corporation ("PBGC") as well as participants.

Cash Balance and "Hybrid" Plan Designs

One of the most controversial provisions of the pension-legislation has been the treatment of cash balance plans and whether such plans would be protected by federal legislation from participant and beneficiary claims of discrimination. The Act chooses a middle ground in this regard. However, cash balance plan sponsors may have achieved a more important victory through the Seventh Circuit's recent decision in Cooper v. IBM, where the court reversed an adverse decision finding age discrimination in cash balance plans. The major provisions of the Act concerning cash balance plans are:

• Prospectively from June 29, 2005, cash balance and other hybrid plan designs will not be deemed to violate age discrimination prohibitions, provided that certain requirements are met. However, the legislation makes clear that there is no inference regarding the legality of these plan designs prior to this date.
  Beginning in 2008, all hybrid plans must provide for full vesting in no more than three years.
• Provided that a plan credits interest at a market rate, cash balance plans may treat a participant's account balance as his accrued benefit (as opposed to having to convert the benefit to an annuity at normal retirement age).
• The legislation also provides detailed rules for conversion of traditional defined benefit plans to hybrid plan designs.