Pension Protection Act of 2006

The Pension Protection Act of 2006 (H.R. 4) was signed into law by the President on August 17, 2006. The law includes a number of significant tax incentives to enhance retirement savings for millions of Americans. The following is a brief summary of some of the retirement related provisions included in the law:

  1. Permanent Retirement and Savings Incentives -The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) substantially increased pension and individual retirement account (IRA) contribution limits through 2010 as well as making other improvements in pensions and retirement savings through enhanced vesting, portability and reduced regulatory burdens. The law makes these favorable changes permanent. The law also indexes the income limits for traditional, spousal and Roth IRAs to prevent these benefits from being eroded by inflation.
  2. Minimum Funding Standards – Significant changes in defined benefit funding rules, for both single and multiemployer plans. These are the most sweeping changes in the funding rules since the enactment of ERISA.
  3. Benefit Accruals Under Hybrid Plans – Rules regarding hybrid plans including cash balance and pension equity plans are incorporated in Titles I and II of ERISA, and the Age Discrimination in Employment Act.
  4. IRS Correction Programs (EPCRS) – The law provides that the Treasury has the full authority to establish and implement EPCRS, including the authority to waive income, excise or other taxes to ensure that any tax, penalty or sanction is not excessive and bears a reasonable relationship to the nature, extent and severity of a plan mistake (i.e., compliance failure). The Treasury is instructed to give special attention to the concerns and circumstances that small employers face with respect to compliance and correction of plan mistakes.
  5. Saver’s Credit Made Permanent -The law makes permanent the Saver’s Credit of up to $2,000. Without this extension, the credit would not have been available after 2006. The law also indexes the Saver’s Credit income limits to prevent this benefit from being eroded by inflation.


  1. Requirement to Allow Employees to Divest Plan Assets – The law requires employers to allow participants in defined contribution plans that are invested in employer securities to elect to direct the plan to divest employer securities into other investment options.
  2. Combined Defined Benefit and Defined Contribution Plan – The law creates a new type of plan for small employers (with not more than 500 employees) consisting of a combination defined benefit plan and defined contribution plan where the assets are held in a single trust.
  3. Automatic Enrollment -The law creates a safe harbor to encourage employers to offer automatic enrollment in employer-sponsored defined contribution pension plans, which will encourage employee participation.
  4. Treatment of IRA Contributions for Guard and Reservists Called to Active Duty The law provides that distributions from an IRA or pension plan taken by members of the National Guard and Reserves called to active duty through 2007 are not subject to early withdrawal penalties. Withdrawn amounts may be repaid to the IRA or pension plan within two years of the distribution without regard to the annual contribution limit.
  5. Long Term Care/Annuity Products -The law authorizes a new insurance product which allows annuities to carry a long-term care rider, so that annuity earnings can also be used to provide coverage against long-term care needs.
  6. Public Safety Officer Retirement Distributions for Health and Long Term Care Insurance -Public safety officers who retire or become disabled may make tax-free distributions of up to $3,000 annually from their governmental pension plans if the distribution is used to purchase health or long-term care insurance.
  7. Rollover Rules – The law provides new rollover requirements for after-tax rollovers in annuity contracts, direct rollovers from retirement plans to Roth IRAs, and rollovers by nonspouse beneficiaries of certain retirement plan distributions.
  8. Transfers of Excess Defined Benefit Fund Assets for Retiree Health -The law allows assets in excess of 120 percent of current liability to be used to fund retiree health benefits. Further, additional contributions to the defined benefit plan would be required when asset values fall below 120 percent of current liability. The law applies to both single employer plans and collectively bargained plans.
  9. Lump Sum Interest Rate – The law phases out the use of the 30-year Treasury rate in computing lump sum distributions, and replaces it with a segmented corporate bond yield curve rate.
  10. In-Service Distributions at age 62 – The law allows pension plans to provide for distributions to employees who have attained age 62 and who have not separated from employment at the time of the distributions.

For additional information, see:

  • President Bush Signs H.R. 4, the Pension Protection Act of 2006
  • Summary and Bill Information – Pension Protection Act of 2006
  • Technical Explanation of the Pension Protection Act of 2006

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