Pension Reforms Enacted

On August 17, 2006, the President signed the Pension Protection Act of 2006, the most comprehensive reform of traditional private pension plans since 1974. The primary purpose of this legislation is to tighten funding requirements for traditional defined benefit pension plans. The Act also includes requirements that affect defined contribution plans, including 401(k)s. Employees will need advice and employer plans and payroll systems will need adjustments.

Employers will be able to offer automatic enrollment in 401(k) and other defined contribution plans. Employees must actively opt out if they do not wish to participate.

Starting with 2007 individual tax returns, a new line and a related form will allow tax refunds to be sent directly to the taxpayer's IRA, thereby facilitating retirement savings, particularly for lower-income taxpayers.

Additional provisions will encourage making one-on-one retirement planning available to employees to assist them in making investments in 401(k)s and other company savings plans.

Form 5500 reporting requirements are simplified. Beginning in 2010, for example, small employers with no more than 500 employees may create a combined defined benefit/401(k) plan using a single plan document and trust fund. Only one Form 5500 annual report would need to be filed for the combined plan.

No Form 5500 will be required for plans covering a single person if the assets of the plan are less than $250,000.

Treasury and Department of Labor have been instructed to provide simplified reporting for plans with fewer than 25 participants. Stay tuned.

Employers may no longer restrict plan investments to employer stock a la Enron and WorldCom.

The higher contribution limits for IRAs, 401(k)s, and 403(b) plans enacted in 2001 are made permanent.

Legal issues relating to cash-balance pension plan portability are clarified.

Charitable Contributions and Exempt Organization Provisions in Pension Act

The pension act also contains some provisions in the exempt organization/charitable contribution area, including

The act clarifies that, when an S corporation makes a charitable contribution of property, a shareholder's basis in the stock will be reduced by an amount equal to the shareholder's pro-rata share of the adjusted basis of the contributed property, rather than the fair market value of the property.

A deduction for clothing and household goods is only available if they are at least in good used condition.

Special rules encouraging contributions of inventories of food and books are extended through 2007 for all businesses, not just regular corporations.

Façade easements for structures located in historic areas are curtailed, but other conservation easements are encouraged, particularly for farmers and ranchers who can write off up to 100 percent of their AGI over the next 15 years for 2006-07 contributions. Others conservation easements are subject to a 50 percent AGI limit, but also may use the extended 15-year carryover.

The Act improves appraiser accountability by strengthening penalties for substantial overstatements of valuations of property for charitable donation, gift tax and estate purposes.

The Act requires public disclosure of Forms 990T by 501(c)(3) organizations.

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