The nation’s new retirement plan law puts additional compliance burdens on employers, and especially on HR. Here are some of the key changes.
The 1990s were boom time in America. The stock market surged and billions were made in the blink of an eye. “Greed is good” was the mantra of the day.
But, as they say on Wall Street, “trees don’t grow to the sky.” And when these trees stopped growing, they also crashed to the ground. OK, said many, reward comes with risk and investors know it.
Unfortunately, one class of investors didn’t sign on under those terms. These were workers whose company pension plans had reduced their contributions to the plans because they were making so much in the markets. Suddenly, promised retirement dollars simply weren’t there anymore. Many likely felt, “There ought to be a law.”
Now there is one … the Pension Protection Act of 2006 (PPA).
Enacted last August but with effective dates that range from now until 2010, PPA seeks to ensure that companies with pension plans will always have sufficient assets to meet their obligations.
Recently, Sallie Olsen, a CPA and director of 401(K) plans for AKT Retirement Services in Oregon discussed the new law with BLR’s newsletter, Best Practices in Compensation & Benefits. Here are some of the key points she made:
–Plan worth assessed on a more recent time frame
Pension plan assets come primarily from employer contributions and investment returns, with the total reassessed every year to be sure there’s enough to meet future needs.
Under old rules, employers could average the plan’s worth on a 5-year basis, allowing them to use past good years to lessen the impact of current bad ones. “It was easy during the 1990s to stay fully funded because [investment] earnings made up for the contribution,” says Olsen. “Then we went into three negative earnings years. A lot of plans became underfunded.”
The new law requires managers to average the worth of their plans over just 2 years, forcing them to pump up the company’s contribution, even in a short down market.
–Switching from defined benefit to cash balance
Defined benefit plans promise a certain monthly amount in retirement, come what may. If market returns are down, the employer must make up the difference. In a cash balance plan, that monthly stipend is based on how much is in the plan at time of retirement. Employers always know what they must pay, regardless of market conditions. This reduces an employer’s risks.
Olsen predicts that, under PPA, many companies will now switch to cash balance plans. For a time, there was legal worry that such a switch might be discriminatory to workers of differing ages, but recent court decisions have laid that concern to rest. “So employers have the opportunity to ask, ‘Is my workforce getting older, and will I have huge liabilities with my defined benefit plan? Can I mitigate that with a cash balance plan?’” says Olsen.
–Automatic 401(K) enrollments now legal
Many companies have wanted to automatically enroll their entire workforce in the company 401(K) plan. That’s now legal, so long as the plan gives the employee the option to opt-out. Putting the burden on workers to refuse inclusion, rather than having to convince them to join, should increase 401(K) participation, says Olsen. But companies must provide notice to workers that, unless they actively refuse the plan, deductions to their paychecks will be made automatically.
–Notice requirements multiply
Olsen says this is one of several new forms of notice called for by PPA. Others include regular updates on the plans’ funding status and special notices if the plan is underfunded. Notices must go to both current and qualified former employees.
“It usually falls to HR to get these notices out,” says Olsen, “Employers are really going to have to be up to speed on this.”
BLR will provide the plain-English guidance you need to help you comply with the HR requirements of the Pension Protection Act of 2006. One of the key sources is our subscription website, HR.BLR.com, available for a 14-day trial in your office, with no obligation to join. Click on the link below for more on this comprehensive, yet easy-to-use and understand service.