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The House and the Senate recently passed the Pension Protection Act of 2006 (H.R. 4, Public Law 109-280), (the PPA), a massive tax law aimed at strengthening pension funds and providing a multitude of other tax changes. The President signed the bill on August 17, 2006. Here's a summary of the major tax law changes enacted in the PPA.

Pension Provisions
The bulk of the PPA is designed to force employers to shore up their defined-benefit pension plans. These types of plans are typically associated with large corporations. In a defined-benefit plan, the employer assumes the responsibility of providing periodic payments for its retired employees, as opposed to definedcontribution plans, e.g., 401(k) Plans that are, for the most part, funded by the employees. Many defined-benefit pension plans are under funded; meaning that promised or expected pension benefits could potentially exceed the funds available leaving these plans strapped for cash. The PPA requires most pension plans to become fully funded over a seven-year period starting in 2008. To achieve full pension funding, the new law allows employers to deduct the cost of making additional contributions to fund the pension, provides strict funding guidelines, and imposes a 10% excise tax on companies that fail to correct their funding deficiencies.

The new law resolves uncertainties that have clouded certain hybrid defined-benefit plans, such as cash balance plans, which include issues concerning age discrimination and calculations of lumpsum distributions.

The pension reform portion of the final bill also addresses participant education, reporting, and disclosure; plan terminations, and numerous other pension and employee benefit rules. This legislation reflects more than a year of frequently acrimonious negotiations. The final provisions are complex, representing the first comprehensive pension legislation in more than 30 years.

Non-Spouse Rollovers from a Deceased Individual's Qualified
Retirement Plan
There's an important new provision for non-spouse beneficiaries of a retirement plan. The new law allows non-spouse beneficiaries to roll over assets inherited from a qualified retirement plan into an IRA. The rollover must be a direct trusteeto- trustee transfer. The beneficiary will avoid tax on the rollover and will be taxed only when the assets are withdrawn. Previously, this tax treatment was available only for people who inherited retirement assets from a deceased spouse.

IRA, 401(k), and other Retirement Plan Provisions
The PPA provides or extends over 20 other tax benefits for other retirement savings. A few of the more important benefits are as follow:

1. Employers can now automatically enroll their employees into a 401(k) retirement plan with default contribution levels. This will enable plans to mitigate contribution limitation placed on highly compensated employees. Employees will need to affirmatively opt-out of the 401(k) Plan if they don't want to utilize the 401(k) Plan.
2. Military personnel who are called to active duty can now take a penaltyfree withdrawal from their 401(k) Plan or IRA if they are called to active duty between September 11, 2001 and December 31, 2007. The IRS will allow these individuals to re-deposit the withdrawal up to two years after the end of their active duty and thereby avoid paying income tax and penalties on the withdrawal.
3. Starting in 2008, the PPA allows a direct rollover from a 401(k) Plan to a Roth IRA, with the rollover treated as a Roth conversion.
4. The new law makes a number of retirement benefits permanent. IRA contributions will be $4,000 in 2006 and 2007, $5,000 in 2008, and adjusted for inflation after 2008. Catch-up contributions for individuals age 50 or older will be $1,000 for IRAs, $2,500 for SIMPLE-IRAs, and $5,000 for 401(k) Plans. IRA catch-up contribution limits, however, will not be adjusted for inflation. SIMPLE and 401(k) Plan catch-up contributions will be adjusted in $500 increments based on inflation. The new law permanently allows for Roth 401(k) and Roth 403(b) plans. Under previous tax law, Roth-type 401(k) and 403(b) Plans were not
5. allowed after 2010. The new law removes this sunset provision. Like a Roth IRA, an individual makes posttax contributions to a Roth 401(k) or Roth 403(b) plan, up to the plan limits. The assets grow tax-deferred and can be withdrawn tax-free in retirement.

Stricter Rules on Charitable Donations
The PPA toughens the tax laws for charitable donations. Under the new law, taxpayers must keep records of all cash donations. Individuals must show a receipt from the charity, a canceled check, or credit card statement to prove their donation. No tax deduction will be allowed if the taxpayer cannot provide any supporting documentation. Taxpayers will not need to provide the receipts with their tax return. Instead, taxpayers will need to keep receipts and other documentation with their copy of the return in the event of an IRS examination.

The new law also toughens the rules for non-cash donations. Donated items, such as cars, clothing, and household goods, must be in "good condition." Unfortunately, the new law does not define "good condition." No tax deduction is allowed for items in less than "good condition."

Charitable IRA Donations
For 2006 and 2007, The PPA allows taxpayers, who have reached age 70½, to donate money to charity directly from their IRA account. The distributions will be tax-free and avoid the penalty on early withdrawals. Taxpayers are allowed to donate up to $100,000 per year from their IRA. Since the distribution will not be included in taxable income, individuals will not be able to claim a tax deduction for the charitable contribution.

This type of distribution will count towards meeting the required minimum distribution. Thus, an IRA owner who makes an IRA qualified charitable distribution in an amount equal to his required minimum distribution for that tax year is considered to have satisfied his minimum distribution requirement for that year, even though a charitable entity (and not the IRA owner) is the recipient of the distribution.

Qualified Tuition Programs (Section 529 Plans)
Unless Congress acted, several of the following rules would have expired. PPA made the following rules relating to qualified tuition programs permanent: (i) the ability to receive tax-free distributions for qualified education expenses, (ii) same-beneficiary rollover from one state plan to another, (iii) treating first cousins as a family member for beneficiary changes, and (iv) including prepaid tuition programs maintained by a private university.

Conclusion
This mammoth 900-plus pages of tax legislation provides businesses and individuals with many new variables to consider for their retirement benefits planning, charitable gift giving, and education plans.