Pension Protection Act Provisions
With this summer’s passage of the Pension Protection Act of 2006 (PPA), Congress made permanent a number of provisions to encourage retirement savings that originated in an earlier bill, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). These provisions affected both 401 defined contribution plans and 457 deferred compensation plans.
The EGTRRA enhancements included significantly higher annual contribution limits and special “catch-up” provisions for participants age 50 and over. To encourage workers to stay in long-term retirement plans when they switched jobs, EGTRRA allowed for easy rollovers among 457, 401, and 403(b) plans. Individual Retirement Account plan contribution limits were also boosted.
All these elements of EGTRRA were not permanent, however, and were set to expire over a period of years ending in 2010. Without EGTRRA, maximum deferrals would have been cut nearly in half, to the lesser of $8,500 or a third of includible compensation. Catch-up provisions would have disappeared. Rollovers for 457 plan participants would have been restricted to other 457 plans. IRA contribution limits would have reverted to $2,000.
ICMA-RC worked hard with other industry groups to encourage Congress to make these important savings tools permanent. A number of ICMA-RC employers wrote Congress to support passage of these provisions.
With the passage of PPA, 457 plan investors can now set long-term retirement goals knowing the rules won’t change midstream.
Here’s a look at each of the relevant provisions that were made permanent or that became law with the Pension Protection Act.
- Maximum deferrals in 457 plans for the 2006 calendar year are the lesser of $15,000 or 100 percent of compensation. In 2007, the limit rises to $15,500 under regulations tied to the Cost of Living Adjustment (COLA) determined annually by the Internal Revenue Service.
- The 457 plan catch-up limit for “pre-retirement” contributions, for workers to make up for years in which they did not contribute the maximum allowed, is $15,000 in 2006 and $15,500 in 2007.
- The age 50-and-over catch-up limit is $5,000 in 2006 and the same in 2007.
- IRA contributions of up to $4,000 are allowed in 2006 and 2007. In 2008, the limit rises to $5,000.
- The IRA catch-up limit for participants 50 or over is $1,000 in 2006 and under COLA remains the same in 2007.
- Portability between 457 plans and other retirement plans (401, 403(b), 457 and IRA) is permitted. Prior to EGTRRA, portability was limited to other 457 plans.
- Rollovers from 457 plans to non-spouse beneficiaries may be directly transferred to an IRA. This change provides for parity of retirement benefits inherited by a non-spouse through a retirement plan or IRA. This appears, however, to be an option under the new law and further IRS guidance will be helpful.
- Another optional plan provision would allow 457 plan participants to receive a hardship distribution based on an unforeseeable emergency experienced by a designated beneficiary even if the beneficiary is not a dependent or spouse.