The Pension Protection Act of 2006: Good News for Employers and Employees

The recently passed Pension Protection Act of 2006 includes a number of significant tax incentives intended to enhance retirement savings for millions of Americans. Specifically, the Act made permanent a number of retirement plan and individual retirement account (IRA) liberalizations that were added to the tax laws in 2001 but were set to terminate after 2010. Here are some of the details:

The 2001 Law (EGTRRA)
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) substantially increased pension and IRA contribution limits through 2010, as well as making other improvements in pensions and retirement savings through enhanced vesting, portability, and reduced regulatory burdens. For example, prior to 2001, the maximum amount that a taxpayer could contribute to a tax-favored IRA plan was $2,000 per year. EGTRRA increased that limit in steps to $5,000 by 2008 (the limit is $4,000 today). The $5,000 limit will then be increased each year after 2008 to reflect inflation.

The 2001 legislation similarly increased the limits on the maximum tax-deductible amount that an employee can contribute to an employer-sponsored defined contribution retirement plan such as a 401(k) plan. This limit was increased in steps from the $10,500 per year in effect in 2001 to $15,000 per year in 2006. That limit will then be adjusted to reflect inflation in years after 2006. EGTRRA also instituted new catch-up contributions for individuals age 50 and older, allowing them to annually contribute an extra $5,000 to 401(k) plans and an extra $1,000 to IRAs. Catch-up contributions provide a significant savings boost for baby boomers, women previously out of the workforce, and those who fell behind in their retirement savings.

EGTRRA also removed existing barriers that prevented employees from being able to take their retirement savings with them when they switched jobs, particularly when they moved from different employment sectors. For the first time, employees changing jobs were permitted to take their retirement savings with them when they moved between 401(k), 403(b), and state and local 457 arrangements.

The 2001 legislation also created incentives for small employers to offer pension plans.

The Pension Protection Act of 2006
As discussed above, all of EGTRRA's favorable provisions were scheduled to end at the conclusion of 2010, reverting back to pre-EGTRRA law and limits. For example, if EGTRRA had not been made permanent, the portability of employees' retirement savings accounts would have ended, once again presenting employees with a frustrating set of barriers that often led them to cash out their retirement savings. The Pension Protection Act of 2006, by making EGTRRA permanent, ensures that these flexible rollover and portability rules - along with EGTRRA's other favorable changes - will stay in place.

The new law also makes permanent the saver's credit, which would not have been available after 2006 absent the extension. The saver's credit is a tax credit for low and moderate-income savers who contribute to workplace retirement plans or IRAs. Under this provision, single individuals earning up to $15,000 and married couples earning up to $30,000 can receive a tax credit of up to 50% of the first $2,000 contributed to a retirement plan or IRA. The new law also indexes the saver's credit income limits to prevent this benefit from being eroded by inflation.

Retirement Planning Opportunities
In short, the Pension Protection Act of 2006, by making EGTRRA permanent, preserves the advantages of higher employee contribution limits for employer plans, higher IRA contribution limits, more flexible plan rules, portability, a catch-up for those over 50, and an increase in employer contribution limits.

If you would like more details about the Pension Protection Act of 2006 or would like to discuss retirement planning opportunities under the new law, please contact Randall L. Duncan, Chair of our Closely Held Business Team. We will be happy to accommodate your request.

Closely Held
Business Team

The Closely Held Business Team - Dunn Carney is dedicated to assisting business owners in navigating through the opportunities and challenges the law presents to advance each owner’s success in business. They understand the multifaceted issues business owners face each day and the need for responsive and proactive legal counsel.

Team members include:
Randy Duncan, Team leader
Bob Allen
Shane J. Antholz
Ric Ashe
John Barhoum
Merrill Baumann
David Buono
Brian Cable
Jack Cooper
Ken Davis
Tim Hering
Frank Hilton
Elizabeth Howard
Scott Jonsson
Robert Kerr
JoDee Keegan
Eric Smith
Kyle Stinchfield
Matt Wilmot
Bob Winger
J. David Zehntbauer

Our Hospitality Team assists business owners and industry associations with all their legal needs including real estate services, entity formation, employment issues and litigation. Our hospitality attorneys have a diversity of specialties tailored to address the needs of our clients.

Hospitality Team members:
J. David Zehntbauer, Head of the Hospitality Team
Robert L. Allen
Kenneth S. Antell
Brian R. Cable
Daniel J. Drazan
Anne D. Foster
James M. Hillas
JoDee K. Keegan
Kyle J. Stinchfield
Kjersten H. Turpen