Pension Protection Act of 2006

On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006, which is the most extensive revision of the nation’s pension law in three decades. The new law contains comprehensive pension reform aimed at strengthening the pension system.

The new law also encourages personal retirement savings for individuals. A notable portion of the Pension Act makes permanent many of the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that were due to expire after year 2010.

Numerous provisions are included in the hundreds of pages of the Act. Below is a summary of some of the provisions. At the bottom of this page is a link to more information and technical analysis of the new Act.

Charitable Contributions

Charitable contribution deductions will be disallowed for any monetary contributions cash or check, unless the donor maintains a record of the contribution. The record must be in the form of a bank record, cancelled check or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. There is no “amount” limit on this provision!

Non-Cash Contributions

For an individual, partnership or S corporation, no charitable deduction is allowed for any contribution of clothing or of household items unless the clothing or household item is in good, used condition or better. IRS is authorized to issue regulations denying a charitable deduction for any contribution of clothing or a household item that has minimal monetary value including used socks and undergarments.

The taxpayer may claim a charitable deduction even if the contributed clothing or household item is not in good used condition if the claimed deduction is for over $500 and the taxpayer includes a qualified appraisal for the property.

Effective for contributions made in tax years beginning after August 17, 2006. For calendar year taxpayers this will apply in year 2007.

Qualified Charitable Distributions

Certain taxpayers will be allowed to make charitable contributions of their otherwise taxable IRA distributions.

Retirement Contribution Credit (Saver's Credit)

Effective August 17, 2006, the saver’s credit is made permanent. The saver’s credit allows certain taxpayers a credit for elective deferrals and individual retirement account (IRA) contributions.

The income limits of those taxpayers who are eligible for the saver’s credit will be indexed for inflation beginning in 2007. The $2,000 limit on the amount of retirement contributions to which the applicable percentage is applied will not be indexed.

Nonspouse Beneficiaries

A nonspouse beneficiary may rollover a distribution from decedent’s qualified plan to his or her IRA beginning with distributions made after December 31, 2006. This new rollover provision does not alter or amend the required minimum distribution rules that apply to inherited IRAs.

Thus, qualified plan distributions to nonspouse beneficiaries are not required to be distributed in an immediate lump sum following the employee’s death, allowing the beneficiary to defer taxation on the distribution until required to do so under the rules for inherited IRAs.

Rollovers to Roth IRA's

Beginning in 2008, taxpayers who receive amounts from qualified retirement plans, §403(b) annuities, and governmental §457 plans may roll over those amounts directly into a Roth IRA. Qualified retirement plan distributions that are rolled into a Roth IRA are not excluded from income. If the distribution would be taxable had it not been for the rollover, the distribution is included in the individual’s gross income but not subject to the 10 % premature distribution penalty if the taxpayer is under age 59½.

A taxpayer may not roll amounts from a qualified plan to a Roth IRA in any year in which the following applies:

• The taxpayer’s modified adjusted gross income exceeds $100,000

• The taxpayer is married and files a separate return

Effective for distributions made after December 31, 2007.

IRA Contribution Limits

The IRA and Roth IRA contribution limits increased gradually from $2,000 to $5,000 by 2008, and will be adjusted for cost-of-living increases for years after 2008.

Distributions for Health Care

An employee who is an eligible retired public safety officer can make an election for any tax year, to exclude from gross income any distribution from an eligible retirement plan for health insurance premiums. The exclusion applies to the extent that the aggregate amount of distributions does not exceed the amount paid by the employee for qualified health insurance premiums of the employee, his spouse, or dependents for the tax year. The amount that may be excluded from gross income cannot exceed $3,000.

The income exclusion only applies to a distribution if payment of the premiums is made directly to the provider of the accident or health insurance plan, or the qualified long-term care insurance contract, by deduction from a distribution from the eligible retirement plan. The exclusion doesn't apply to premiums paid by the employee and reimbursed with pension distributions.

Effective for distributions in tax years beginning after December 31, 2006.

Penalty Exemption for Public Safety Employees

The 10% early withdrawal tax is waived for certain pension plan distributions made to public safety employees. The 10% tax on early withdrawals does not apply to distributions from a defined benefit governmental plan made to a “qualified public safety employee” who has separated from service after attaining age 50.

A “qualified public safety employee” is any employee of a state or political subdivision who provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of the state or political subdivision.

Effective for distributions made after August 17, 2006.

Hardship Distributions

The IRS must modify the rules for determining whether a participant has had a hardship for purposes of the hardship distribution rules. The modifications must provide that if an event (including the occurrence of a medical expense) would constitute a hardship under the plan if it happened to the participant's spouse or dependent, the event must, to the extent permitted under a plan, constitute a hardship if it happens to a person who is a beneficiary under the plan with respect to the participant.

Effective within 180 days after August 17, 2006.

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