The Pension Protection Act of 2006—And How It Still Helps Retirement

What’s included in the 394-page Pension Protection Act of 2006 (PPA) that then-President George W. Bush called “the most sweeping reform of America’s pension laws in over 30 years?” Legislators designed this law to make sure workers would receive the pensions they were promised and to improve workers’ options for funding their own retirement. And it still does that.

The 2006 act expanded on the protections provided by the Employee Retirement Income Security Act of 1974 (ERISA), which requires plans to keep their participants informed and makes it harder for bad actors to take advantage of people who are trying to save for retirement or earn a pension.

Below are some of the key provisions of the PPA and how they may be helping to protect your retirement.

1. Improved Funding for Defined-Benefit Pension Plans

The PPA created new minimum funding standards to help make sure employers can fulfill their pension promises to workers without straining the pension insurance system.

This system, which includes a government corporation called the Pension Benefit Guaranty Corporation (PBGC), could call on taxpayers to help pensioners if the system is underfunded—which, at the end of fiscal year 2018, it was. Employers that provide pensions must pay premiums to the PBGC.

The PPA changed the law so that companies that underfund or terminate their pensions have to pay more into the insurance fund. It also requires companies to measure their pension obligations more accurately and allows them to contribute more to their pension plans in good times to create a cushion for lean times.

2. Raised Contribution Limits for Retirement Accounts

If you entered the workforce in 2001 or later, you may not remember a time when you could only contribute $2,000 a year to an individual retirement account (IRA) and $10,500 to a 401(k), and the catch-up contribution didn’t exist.

That’s because the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) signed into law on June 7, 2001, created some comprehensive changes to retirement plan rules, including increasing contribution limits for employer plans and IRAs.

Those changes were scheduled to disappear in 2011, but the Pension Protection Act made them permanent.

IRA contribution limits quickly ramped from there. For tax years 2020 and 2021, the limit is $6,000. An additional catch-up contribution is allowed for people aged 50 and over. That is set at $1,000 for tax years 2020 and 2021.

The contribution limits for other types of retirement plans also increased rapidly. For 401(k), 403(b), and 457(b) plans, the allowable tax-deferred contribution limit for tax years 2020 and 2021 is $19,500.

With the PPA, participants aged 50 and up also gained the ability to make catch-up contributions. For 401(k)s, those started out at $1,000 in 2002. In 2020, the maximum 401(k) catch-up contribution is $6,500.

3. Direct Conversions From Qualified Plans to Roth IRAs

The PPA is the reason you can take assets from your 401(k), 457(b), and 403(b) plans and directly convert them to a Roth IRA. Before it, you had to take the intermediate step of putting your assets in a traditional IRA first.

The PPA also has made it easier to move your retirement savings when you switch jobs.

4. Permanent Saver’s Credit to Help Low-Income Workers

It can be challenging to set aside money for retirement if you don’t earn a lot. However, the saver’s credit can make it easier. It offers eligible low-income and lower-middle-income individuals a tax credit of up to $1,000 ($2,000 if married filing jointly) as an incentive for contributing to employer-sponsored retirement plans, IRAs, and ABLE accounts. EGTRRA enacted the saver’s credit as a temporary measure, and the PPA made it permanent.

The saver’s credit phases out as your income increases. To get the maximum credit, single filers can’t have an adjusted gross income (AGI) higher than $19,500 in 2020 and $19,750 in 2021. Married couples filing jointly can’t have an AGI higher than $39,000 in 2020 and $39,500 in 2021 to get the maximum credit. 

Single taxpayers become ineligible for it once their AGI exceeds $32,500 in 2020 and $33,000 in 2021. The limit for married taxpayers is $65,000 in 2020 and $66,000 in 2021. Income limits are indexed for inflation, so they may go up or down in the future. 

5. Direct Deposit of Tax Refunds to IRAs 

It is now possible to have your federal tax refund directly deposited into your IRA. To do this, you fill out IRS Form 8888.

You can direct your refund into up to three checking, savings, or IRA accounts. Traditional, Roth, and SEP IRAs are eligible to receive direct deposits of tax refunds, but SIMPLE IRAs are not.

The PPA also made it possible for taxpayers to request that the saver’s credit be deposited directly into a qualified retirement plan or IRA.

6. Penalty Exception for Qualified Reservists on Active Duty

Members of the military reserves may receive orders to work for the military full time and could be deployed. If this order is for more than 179 days or is indefinite, the IRS considers the individual a “qualified reservist.”

Qualified reservists called to active duty are allowed to take distributions from an IRA, a 401(k), or a 403(b) during their period of active duty without paying the 10% tax penalty that usually applies to distributions taken before age 59½.

What’s more, qualified reservists who take a distribution and end up not needing it have two years after their active duty ends to roll those distributions into an IRA.

This exception was temporary at first, but it became permanent with the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act).

7. Rollovers of Inherited Retirement Plan Assets

Because of the PPA, a non-spouse beneficiary who inherits assets from a 401(k), 403(b), or 457(b) plan can use a trust-to-trust transfer mechanism to place those assets into an IRA. Before, only spouses could make such transfers.

Such direct transfers are treated as inherited IRA assets and have special required minimum distribution rules. Those rules are still different for spouses and other beneficiaries.

8. Tax-Free Distributions From IRAs for Charities

The PPA decided that you can get a tax break when you take distributions from your traditional or Roth IRA to donate to charity. This temporary tax break eventually became permanent with the Protecting Americans From Tax Hikes (PATH) Act of 2015. You must be at least 70½ at the time of the distribution.

You can donate up to $100,000 per taxpayer per year without paying tax on your qualified charitable distribution. These donations also count toward your required minimum distributions for tax purposes.

However, you cannot also claim these amounts as charitable donations if you itemize your deductions. The IRS doesn’t allow double-dipping.

One big caveat: The SECURE Act that was signed into law at the start of 2020 reduces the maximum deductible charitable contribution from retirement accounts to reflect deductions made in previous years.

If your IRA contains both deductible (pretax) and nondeductible (after-tax) contributions, charitable distributions are deemed to come from deductible (pretax) contributions first, which is the more advantageous option.

This means that more of the money remaining in your IRA may be distributed to you tax-free, assuming you have nondeductible contributions in your account.

Make sure the charity is eligible before doing a charitable distribution. Donor-advised funds and certain private foundations are not eligible. Also, make sure your donation goes directly from your IRA to the charity.

9. Plans for Small Employers

If you work for a company with two to 500 employees, you might participate in a combination defined-benefit/defined-contribution plan. The PPA allowed for this eligible combined plan, which is basically a pension and a 401(k) in a single package that goes by the name DB(k) plan.

Employers have fewer paperwork requirements under this combined-plan option. Employees must receive certain minimum benefits and matching amounts on a particular benefit schedule.

For example, the 401(k) portion of the plan must enroll employees automatically with a 4% salary deferral contribution and an employer match of at least 50% on the first 4% of pay with immediate vesting. The pension portion must be fully vested after three years. It also must provide at least 1% of final average pay per year of service up to 20 years or a cash balance formula that increases as the participant gets older.

10. Investment Advice to Participants in Workplace Retirement Plans

You can get investment advice for your workplace retirement plan through your plan sponsor (which is usually your employer), but your sponsor and the entity giving the advice have to follow certain rules that the PPA lays out.

Advice can come from plan fiduciaries such as investment companies, banks, insurance companies, and registered broker-dealers. The fiduciary must do one of two things to comply with the law:

• Charge the same fee for its advice regardless of which investments plan participants choose
• Use a third-party-certified computer model to provide advice

Plan sponsors are still required to be prudent in selecting and monitoring the fiduciary advisor. They have to authorize the advisor and have the advice program audited annually. However, when they follow the rules, this provision reduces plan sponsors’ liability for the investment advice their participants receive.

A Few Other Benefits of the Law

The Pension Protection Act of 2006, combined with the Employee Retirement Income Security Act of 1974, is responsible for many of the laws that protect workers’ pensions and retirement savings today. The PPA created a number of new laws for pension and retirement plans and made permanent some 2001 laws that were temporary.

In addition to the ten provisions above, the act made it easier for employers to automatically enroll employees in workplace retirement plans, increased how quickly employer contributions to employees’ defined-contribution plans vest, and gave employees the right to diversify out of employer stock in their retirement plans. 

Those with long memories for Congressional trivia may recall that the act also contains some notoriously unrelated provisions related to leather basketballs, rubber basketballs, and volleyballs. But these little quirks keep journalists and historians from falling asleep before they read all the way to page 394. Or not.

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