The Pension Protection Act of 2006

Earlier this year, President Bush signed the Pension Protection Act into law. This immense measure (more than 900 pages) overhauls the funding and disclosure rules for defined benefit plans, revises the deduction limits for qualified plans, addresses conversions of pension plans to cash balance plans, liberalizes payout and rollover rules, and, makes a number of other changes relating to pension plans and their beneficiaries.

It also revises specific rules related to charitable giving and makes a number of charitable reforms. As an employee, you will likely see positive changes to the qualified retirement plans at work, so watch for these over the next couple of years. What follows is a summary of a few of the provisions that may affect individuals:

Many Prior Pension, IRA and QTP Provisions Made Permanent

A number of pension, IRA, and Qualified Tuition Program (QTP) changes were made in 2001 but were scheduled to “sunset” at the end of 2010. The act makes these provisions permanent including the following:

• Increases in the IRA contribution limits, including the ability to make catch-up contributions;
• For individuals age 50 and over, catch-up contributions to 401(k), SEP and Simple IRA plans;
• Increases in limits on contributions, benefits and compensation under certain deferred compensation, tax-sheltered annuity and qualified retirement plans; and
• Expanded and liberalized QTP rules related to contributions and distributions.

Rollovers OKed for Non-spouse Beneficiaries

Pre-act law did not allow non-spouse beneficiaries to roll over inherited qualified plan accounts to IRAs. The new law permits rollovers of distributions from an eligible retirement plan of a deceased employee to a non-spouse beneficiary’s IRA, beginning with distributions after 2006. For example, children who inherit their parents’ IRA will no longer be required to pay taxes on the balance immediately, but will be allowed to roll it over to their own IRA.

Rollovers of After-tax Contributions

For tax years beginning after 2006, the act permits an employee to make a direct rollover of after-tax contributions from a qualified retirement plan to either another qualified retirement plan or a tax-sheltered annuity, provided that the receiving plan separately accounts for the after-tax contributions and their earnings. Prior to this change, the rollover options of after-tax contributions were limited.

Charitable Giving Using Tax-free IRA Distributions for Those age 70 1/2 and Older

Under prior law, there was no special tax treatment for distributions from regular or Roth IRAs that were used to make charitable contributions. The distributions were subject to the rules at the time and may have been fully or partially taxable. The contributions were subject to the deduction limitations and may have been reduced by the overall limitations applied to itemized deductions.

Under the act, for IRA withdrawals in 2006 and 2007, there is an exclusion from gross income (up to $100,000) for qualified charitable distributions. To be a qualified charitable distribution, the IRA trustee must make the contribution directly from the IRA to a charitable organization as defined by the Internal Revenue Code, and the distribution must be made after the date the owner of the IRA attains age 70 1/2. Only those amounts that would have been taxable are considered to be qualified charitable distributions. No contribution deduction is taken for those amounts that would have been taxable but are now excluded from income. Note that qualified charitable distributions may be used to meet the required minimum distribution rules even though it is the charity and not the IRA owner receiving the funds.

Recordkeeping Requirements for Charitable Contributions

For contributions made after 2006, the act disallows deductions for monetary gifts (cash, check, etc.) unless the donor maintains appropriate records that include either a bank record or a written communication from the donee organization showing the donee’s name, amount, and date of the contribution.

This article contains only a general discussion of the rules, and you should consult with your tax advisor for additional information or assistance.

This article is not a tax opinion. To the extent that this article includes any tax advice, it is not intended or written to be used by the recipient or any other party for the purpose of avoiding penalties that may be imposed by the Internal Revenue Code or any other tax authority.

Jana B. Bacon, CPA is a member of the Firm of Wolf & Company, P.C. a regional certified public accounting and business consulting firm, with offices in Boston and Springfield, and Albany, New York;www.wolfandco.com)