After months of negotiations between the House and Senate, Congress finalized a pension reform bill in August 2006. President Bush signed it into law. The new law features changes to the rules governing defined benefit plans, reforms to defined contribution plans and variety of other retirement and tax provisions.

Non-Qualified Deferred Compensation Arrangements

The PPA includes provisions, which restrict the funding of non- qualified deferred compensation if the company is in bankruptcy or the company’s defined benefit plan is underfunded.

If these rules are violated, the amount set aside for the non-qualified deferred compensation will become immediately taxable (for certain executives) and subject to an additional 20% tax and interest at the underpayment rate plus 1%.

This new restriction applies generally to the executive officers of companies subject to Section 16(a) of the Securities Exchange Act of 1934.

Unlike other PPA provisions that have delayed effective dates, the new rules for non-qualified deferred compensation are effective from date of enactment (8/17/2006).

Tax Free Distributions from IRA’s for Charitable Purposes

Beginning in 2006, a taxpayer who has attained the age of 701/2 may withdraw from either a traditional or a Roth IRA and exclude up to $100,000 per year for a qualified charitable distribution. (Such amounts will not be taken into account in determining the taxpayer’s charitable income tax deduction for the year.) Note that this provision only applies to IRA’s, not other qualified plans. A qualified charitable contribution can be made only for two year period after 12/31/2005 through 1/1/2008, and must be made directly to the charity.

Long Term Care Offered as Part of an Annuity or Life Insurance Policy

This provision essentially allows qualified long term care insurance to be included as part of an annuity or life insurance contract. Under the provision, long term care insurance, when issued in combination with a non-qualified annuity or life insurance policy, is treated as a separate contract for federal income tax purposes. As a result, the benefits paid from a long term care insurance riders for provisions generally will be excluded from gross income. Also, charges assessed against the cash value of a life insurance contract or annuity contract as payment for coverage under a qualified long term care contract, which is part of or a rider on the annuity or life insurance contract are not includible in income, although they do reduce the investment (basis) in the contract.

Finally, the new law provides that no gain or loss is recognized on the exchange of life insurance contract, an endowment contract, or an annuity contract or a qualified long term care insurance contract for a long term care insurance contract.

This provision applies to contract issued after 1996, but only with respect to taxable years after 2009. It is effective for exchanges after 2009.

Additional Pension and Retirement Provisions:

The following are a brief “headline” of some of the key provisions of PPA.

• For plan years starting in 2008, the minimum funding requirements will change.
  
• If a plan is not adequately funded, lump sum distributions will be restricted.
  
• Cash balance/ Hybrid plans have been subject to legal uncertainty. Much of this uncertainty has been eliminated by these changes.
  
• Two new Prohibited Transaction Exemptions for investment advice provided by a fiduciary advisor.
  
• New prohibited transaction exemptions were created for certain financial investments.
  
• A qualified plan will be permitted to directly rollover to a Roth IRA.
  
• The Hardship exception for qualified plans is amended and expanded to include spouses and dependents.
  
• Defined Contribution Plans will be required to provide 100% diversification out of employer securities. Plans must offer three investment choices other than employer securities. ESOP plans will be exempted from this requirement.
  
• The PPA provides for a new combination of defined benefit and 401(k) type plans.
  
• Faster vesting: For defined contribution plans effective for plan years after 12/31/2006, plans must vest non elective on either a three year cliff or two to six year graduated vesting schedule.
  

These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.

Although this material is intended to be accurate as of the date of initial publication, ALTIUS Financial, Inc. does not assume any liability or responsibility for any errors or omissions in such materials or undertake any obligation to update such materials.