Has Your ERISA Defined Contribution Plan Been Updated for 2008 PPA Changes?

August 14th, 2008

The Pension Protection Act of 2006 (PPA) was originally created to effect change to defined benefit plans.  However, the final version of the more than 900 page statute also contains provisions that significantly impact defined contribution (DC) plans.

Among the provisions of the PPA that affect DC plans, some of the most significant changes are effective for the 2008 plan year.  Highlights of a few of the PPA provisions effective for the 2008 plan year include:

Testing Changes

  • Prior to the PPA, employers were required to calculate interest on the gap period for average deferral percentage (ADP) and annual contribution percentage (ACP) test failures. This requirement has been eliminated for ADP and ACP test failures, but is still required for excess deferrals.

Safe Harbor for Automatic Enrollment

  • The PPA provides a safe harbor which allows employers to avoid ADP, ACP and top-heavy testing through an automatic deferral provision and employer match.

Rollovers to Roth IRA

  • Prior to the PPA, Roth IRAs could only accept rollovers from a designated Roth account, a different Roth IRA or a non-Roth IRA (i.e. qualified rollover contributions). The PPA amended the definition of a qualified rollover contribution to Roth IRAs to include amounts distributed from other qualified plans under §401(a), §457(b), and §403(a) and (b) annuities.

Returned Contributions

  • If an employer chooses to institute an automatic enrollment provision, under certain circumstances an automatically enrolled participant may withdraw from participation by requesting withdrawal from the plan within 90 days of the first contribution. The normal penalty for early withdrawal (10% tax) would not be applicable to these withdrawals.

While some of the PPA changes are mandatory, a number of them are discretionary. Employers that sponsor DC plans need to review their plan documents to determine which, if any, of the mandatory changes are applicable and have their plan documents updated accordingly.  Additionally, employers should assess the discretionary provisions of the PPA to determine whether they wish to implement any of the allowed changes.  Benefits counsel can assist you by detailing the allowed and mandatory changes, reviewing plan documents to determine which apply to your specific situation, and preparing any necessary amendments to the plan.  Please contact our office for more information.

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