WHAT IS Pension Protection Act of 2006 - PPA
The Pension Protection Act of 2006 (PPA) made significant reforms to U.S. pension plan laws and regulations. Signed into law by President George W. Bush on August 17, 2006, the PPA sought to protect retirement accounts and hold companies that underfunded existing pension accounts accountable. The law also made several pension provisions from the Economic Growth and Tax Relief Reconciliation Act of 2001 permanent, including the increased individual retirement account (IRA) contribution limits and increased salary deferral contribution limits to a 401(k). It also attempted to strengthen the overall pension system and reduce the reliance on the federal pension system and the Pension Benefit Guaranty Corporation.
BREAKING DOWN Pension Protection Act of 2006 - PPA
The Pension Protection Act of 2006 was the federal government’s way of closing the loopholes that allowed the companies that paid into the Pension Benefit Guaranty Corporation to cut pension funding. Those loopholes created issues for the millions of U.S. workers who participate in defined benefits and pension plans within the private sector. In an attempt to save money, some employers found ways to cut funding for the pension plans and skip payments. Others decided to terminate the plans all together, creating a greater obligation for the PBGC. To close the loopholes that made it possible for organizations to skip payments, the PPA now requires those guilty of underfunding to pay higher premiums.
The Pension Protection Act of 2006 brought about the most significant changes made to pension plans since the Employee Retirement Income Security Act of 1974 (ERISA). The act also addressed a number of other retirement investment vehicles; in particular, those employees eligible for 401(k) benefits received several benefits from the law’s passage as well.
The Pension Protection Act and 401(k) Plans
The legislation requires all employees be automatically enrolled in the 401(k) plan when offered to them. Lawmakers sought the automatic enrollment provision to help those who may not be familiar with retirement options build their retirement savings. In addition, the change encouraged employers to train their employees on how to invest and prepare for retirement. Many viewed the law’s passage as a step forward for behavioral finance. Behavioral finance research shows that automatic enrollment and investor education causes employees to pay more attention to their financial planning than when left to navigate the process on their own.
The law not only protected retirement plans, but the safe harbor automatic enrollment provisions also provided companies certain benefits. For example, it costs companies less to manage automatic enrollment plans.