Pension Protection Act Blog

The Pension Protection Act contains a variety of deadlines for applying different provisions. For example, for plan years beginning after December 31, 2006, the faster vesting schedule in Section 904 for employer non-elective contributions must be used.

Even though the plan will apply the different provisions of the Pension Protection Act according to the deadlines contained in the Act, the deadline for amending the plan to incude these provisions is stated in Section 1107 as the last day of the plan year beginning on or after January 1, 2009. For calendar year plans, this means that they will need to amend for the Pension Protection Act no later than December 31, 2009, and the amendment will apply retroactively back to the date the PPA required the provision to be applied. Continuing with the example, for the faster vesting schedule applied to employer non-elective contributions, the amendment must be adopted no later than the last day of the plan year beginning on or after January 1, 2009, but will be effective for plan years beginning after December 31, 2006.

This deadline applies to both the mandatory and optional provisions made by PPA.

Because the plan can wait to amend until 2009 does not mean that the plan should wait until 2009 to amend. For example, Section 829 of PPA permits the plan to make rollovers to non-spouse beneficiaries. The IRS says this provision is optional, and applies to distributions made after December 31, 2006. For small plans who only make one or two distributions a year, the plan sponsor may want to consider amending before the deadline in 2009. Especially if the plan sponsor changes TPA firms every 2 to 3 years.

Assume the plan sponsor decides to apply Section 829 of PPA and permits a rollover to a nonspouse beneficiary in 2007. The plan sponsor decides not to amend in 2007 to memorialize that they have decided to apply this optional provision of PPA, but instead decides to wait until the deadline to amend in 2009. The plan sponsor becomes busy with their business, and doesn’t think much about how their plan is administered. Eighteen months go by, and the plan sponsor decides to change TPA firms. In 2009, the new TPA firm prepares the PPA amendment for the plan, and does not include the provision permitting rollovers to nonspouse beneficiaries in the amendment. The new TPA firm is unaware that, in 2007, the plan sponsor applied this provision to the plan and made a rollover distribution to a nonspouse beneficiary.

The plan sponsor has now failed to operate the plan according to the terms of the plan document. This type of failure is completely avoidable, unintentional, and is the result of poor communication. In 2009, the plan sponsor will possibly remember that they had an employee terminate in 2007. The odds are pretty good that the plan sponsor will not remember the type of distribution made to the participant when the participant cashed out of the plan. The new TPA firm is probably aware that the plan made a distribution in 2007, but the plan sponsor and the former TPA firm probably did not provide them sufficient details about the distribution for the new TPA firm to determine that it was a rollover to a nonspouse beneficiary.

If the plan sponsor amended the plan in 2007, before permitting the rollover to a nonspouse beneficiary, the plan documents would have been clear to the new TPA firm. They would have known in 2009 when they are creating the PPA amendment for the plan that, in 2007, the plan sponsor decided to apply this optional provision of PPA.

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