The Pension Protection Act of 2006

What is it?

On August 17th, 2006, President Bush signed into law the most sweeping reform of America's pension laws in over 30 years. Last year, President Bush asked Congress to strengthen protections for the pensions American workers rely on, and the Congress responded by passing this bipartisan bill.

This legislation improves the pension system and expands opportunities to build retirement nest eggs. The new law has benefits and ramifications in some cases for individuals, donors, charitable organizations, corporate donors, churches, retirees and more.

The Pension Protection Act of 2006 strengthens the federal pension insurance system. This legislation:

• Requires companies that under-fund their pension plans to pay additional premiums;
• Extends a requirement that companies that terminate their pensions provide extra funding for the pension insurance system;
• Requires that companies measure the obligations of their pension plans more accurately;
• Closes loopholes that allow under-funded plans to skip pension payments;
• Raises caps on the amount that employers can put into their pension plans, so they can add more money during good times and build a cushion that can keep their pensions solvent in lean times; and
• Prevent companies with under-funded pension plans from digging the hole deeper by promising extra benefits to their workers without paying for those promises up front.

The Pension Protection Act of 2006 also helps workers who save for retirement through defined contribution plans like IRAs and 401(k)s. This legislation:

• Removes barriers that prevent companies from automatically enrolling their employees in defined contribution plans;
• Ensures that workers have more information about the performance of their accounts;
• Provides greater access to professional advice about investing for retirement;
• Gives workers greater control over how their accounts are invested; and
• Makes permanent the higher contribution limits for IRAs and 401(k)s that were passed in 2001, enabling more workers to build larger retirement nest eggs.

What are the charitable giving incentives?

• Tax-Free Distributions from IRA’s for Charitable Contributions

To qualify the distribution must be made to a tax-exempt organization. The provision is effective for two years through 2007. There is an exclusion from gross income for certain distributions of up to $100,000 from either a traditional or Roth IRA. Normally these would be included in income.

• Basis Adjustment to Stock of an S Corporation Contributing Property

This provision which is effective for two years through 2007 allows a shareholder’s basis reduction in the stock of an S corporation. That is if the charitable contribution made is equal to the shareholder’s pro rata share of adjusted basis of the contributed property.

• Extension of Charitable Deduction for Contributions of Food Inventory

This provision extends for all trades and businesses for donations of food inventory. An enhanced deduction equal to the lesser of either twice the taxpayer’s basis in the food inventory donated or else the taxpayer’s basis plus one-half the difference between the basis and the fair market value. Again, it’s effective through 2007

• Qualified Conservation Contributions

This provision raises the tax deduction of charitable contributions for qualified conservation contributions. The increase in the deduction is from 30 percent of adjusted gross income to 50 percent. The provision is that the contribution does not prevent using the donated land for farming or ranching purposes. However, it’s 100% limit of adjusted gross income for eligible farmers and ranchers and allows a taxpayer to carry their deduction forward for up to 15 years so long as they are a farmer or rancher in the year it is carried forward. This is allowable through 2007.

• Changes in the Tax Treatment for Controlling Exempt Organizations on Certain Payments

What payments you ask? Well under our current law interest income, annuities, royalties and rent income paid to a tax-exempt organization was treated as unrelated business income making it taxable to the exempt parent organization if it was made by a taxable subsidiary. This provision will allow payments received or accrued from taxable controlled subsidiaries to certain exempt parent corporations to not be treated as unrelated business taxable income. Exempt organizations are required to report certain amounts received from their controlled subsidiary organizations. Good through 2007.

• Extends the Charitable Deduction for Contributions of Book Inventory

Public schools are now added to the list of eligible donees for the enhanced deduction for contributions of qualified book inventory by C corporations with the provision that extends the current law. Effective through 2007.

• Provides for an Excise Tax Exemption for Blood Collector Organizations

Certain blood collector organizations are exempt from certain excise taxes with respect to their activities related to blood collection under the new provision.

• Provides for a Recapture of Tax Benefit for Charitable Contributions of Exempt Use Property

This provision allows for recovery of the tax benefit from the contribution of property to which a fair market value deduction was claimed if the property isn’t used for an exempt purpose of the donee organization.

• Changes the Rules for Fractional or Partial Interest in Property

Charities that receive a partial or fractional interest in an item of tangible personal property must either take total ownership of it upon the death of the donor or within the set timeframe of 10 years maximum, whichever occurs first. They must also have had possession of the item at least once during the 10 years if the donor was alive. Another requirement is that they used the item for their organization’s exempt purpose. Otherwise they face a recapture of all tax benefits along with interest topped with a 10% penalty.

• Record Keeping for Certain Charitable Contributions are Modified

All donors of money to a charitable organization must maintain a cancelled check, the receipt from the donee organization (showing the name of that organization, date of the contribution and amount of contribution) or a bank record. This is required regardless of the amount of money contributed.

• Modifies the Rules for Donations of Clothing and Household Items

The new provision does not allow deductions for any clothing or household item that is not in good, useable condition or better. The new provision also allows the Secretary of the Treasury to deny deductions for any item of minimal monetary value.

• Taxidermy Donations

There are limits on the basis for taxidermy items donated as far as the basis to the cost of stuffing and mounting an animal. The new value would be considered equal to either the fair market value or the basis – whichever is lower.

• Credit Counseling Deductions

There will be certain requirements placed on tax-exempt organizations providing credit counseling services. They will be subject to a four-year transition rule which will effectively limit the amount of dept management plan (DMP) income to half of the revenues. There will be restrictions imposed on services such as solicitation of contributions from consumers who receive credit counseling. Also, with respect to loans and fees restrictions will apply. The goal is to prevent abuse of consumers by less ethical organizations.

• Conventions or Other Church Related Associations

There is a concrete provision which defines what an Association of Churches or a ‘Convention’ is according to law.

• Reforms for Appraisals

There will be lowered thresholds for alleviating penalties for accuracy-related claim deductions by taxpayers for donated property that requires a qualified appraisal. This provision would include estate tax appraisals. There will be definitions provided for what a ‘qualified appraisal’ or ‘qualified appraiser’ are considered to be.

• Exempt Organization Notification Requirements

Changes have been implemented for organizations that currently do not have annual filing requirements because their gross receipts are less than $25,000. Certain exempt organizations will now be required to file an annual notice with the IRS listing financial information and the organizations contact information.

• Net Investment Income Excise Tax for Private Foundations

Amendments have been made in this provision defining gross investment income to also include capital gains, annuities, national principal contracts and other similar investment income.

• IRS & State Charity Officials and Information Swapping

Under this provision if an appropriate State representative requests in writing to the IRS, they will provide information which was not previously disclosed. This will apply to organizations for which the IRS has either revoked the tax exempt status, or denied them that status. The IRS may also divulge information if they have taken other official actions. They also are allowed to share tax returns filed by the organizations.

• Public Disclosure of Information Regarding Unrelated Business Income Tax Returns

Provisions are already in place but will be enhanced for Section 501(c)(3) organizations to allow disclosure of Form 990 for unrelated business income tax returns.

• Secretary of Treasury to Conduct Study on Donor-Advised Funds and Supporting Organizations

This study undertaken by the Secretary of the Treasury will be an examination of requirements for determining if organizations and operators of donor-advised funds and their supporting organizations are operating in a manner upholding their tax-exempt status.

• Additional Accountability for Donor-Advised Funds and their Supporting Organizations

A new tax will be implemented on any loan, grant or other compensation / payment from a donor-advised fund to a person who is considered a donor, donor adviser or related person to any of that organizations supporting organizations which may be made to either a major donor or related individual. Transition rules will apply to present holdings of donor-advised funds and their supporting organizations. If a supporting organization is a functioning part of their charity then they would not be subject to any excess business holding rules. But excess business holding rules on Type III supporting organizations and donor-advised funds will be subject to the changes.

• Fines and Penalties for Charitable Organizations

Social welfare organizations, private foundations, charities and exempt organization managers need to be aware that these provisions will double the amount of excise taxes applicable to certain of their activities.

• Charitable Contributions of Façade Easements

Buildings located in a registered historic district will, under this provision, be allowed a charitable deduction. However no part of the exterior of a historic building may be changed in any regard that is inconsistent with the historical character of the buildings façade. Also, if a rehabilitation tax credit has been claimed then the charitable deduction will then be reduced regarding the donated property.

• Report by Secretary of Treasury on Certain Life Insurance Contracts

The Secretary of Treasury has designated that charitable organizations reporting certain acquisitions of interests in certain insurance contracts will be required to report to him for two years starting the day the contract is enacted. The Secretary of the Treasury will then issue a report within 30 months if the insurance contracts are consistent with tax-exempt purposes of the charitable organization reporting them.

What are the Tax Provisions?

• The provisions from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) regarding individual retirement accounts and pensions will now be permanent substantially increasing pension and individual retirement account (IRA) contributions. This is good until 2010. It also makes other improvements by enhancing vesting and reducing regulatory burdens. Besides that the income limits for traditional, spousal and Roth IRAs are indexed to prevent erosion by inflation.

These include:

• Treating elective deferrals as after-tax Roth contributions
• Increasing the contribution limits on 401(k) plans
• Allowing catch-up contributions for people age 50 and over
• Increasing the annual allowable contribution limits for IRAs
• Allowing tax credits for pension start-up costs

• The saver’s tax credit benefiting lower income taxpayers becomes permanent. It allows a provision of the Saver’s credit up to $2,000 and indexes the income limits to prevent this benefit from eroding due to inflation.

• Section 529 qualified tuition programs are permanently extended and allows the authority for the Secretary of the Treasury to regulate for any tax abuse.

• Public Safety employees (including police and firemen) over the age of 50 who may retire early will be waived the 10 percent early withdrawal penalty for distribution.

• Public Safety officers who retire or become disabled may make tax-free distributions of up to $3,000 per year from the government pension plan to which they belong if the money is used to purchase health or long-term care insurance.

• Tribal Pension Plans covering employees engaged in essential government functions not including commercial operations of casinos and hotels or marinas, will be treated the same as government employees under the Code and ERISA. This clarifies the law regarding tribal pension plans.

• Trusts established for black lung trusts used to fund retiree health for coal miners will now enjoy the elimination of the aggregate limits on the use of excess funds.

• Elsewhere assets in excess of 120 percent of current liability to be used to fund retiree health benefits will be allowed under the new provisions. This includes both single employer plans and collectively bargained plans. Additional contributions to the defined benefit plan would be required any time the asset values fall below 120 percent of current liability.

• IRAs may be direct deposited once the IRS establishes procedures

• Annuities and life insurance contracts with a long-term care insurance option will be provided an increased flexibility and more favorable tax treatment. This allows annuity earnings to be used to provide coverage against long-term care needs.

• Early withdrawal penalties on distributions from an IRA or pension plan will be waived for members of the National Guard or reserves if they are called to active duty through 2007. These will not be subject to early withdrawal penalties. The withdrawn amounts may be repaid to the IRA or pension plan within two years regardless of the annual contribution limit.

Trade Provision Changes and Amendments

To spur the increase of trade and provide further economic opportunities for American businesses, workers and consumers a number of provisional changes were made specifically in the arena of trade.

• Suspension of Tariffs are being provided on duties for liquid crystal devices (LCD) panel assemblies in use for direct view televisions. This will be in place until 2009. Also the provision continues the suspension of duties on ceiling fans for the same length of time. Duties on certain nuclear steam generators, pressurizers and reactor vessel heads will be suspended through 2010.

• New Shipper Bonding Privilege - Suspension of the ability for importers to choose posting a bond or security in lieu of a cash deposit equal to their estimated duties is temporarily suspended. The Secretary of the Treasury will be reporting on the effects this change will create regarding problems relating to the collection of duties.

• Wool Trust Fund and Wool Fabric Duty Suspension – Currently the law allows a temporary duty reduction or suspension of certain fabrics made from worsted wool and payments made under the wool trust fund. The provision will extend through 2009. Three refund pools representing importers of wool fabric, yarn and fiber and top will benefit and all persons eligible for refunds including U.S. manufacturers of these products.

• The Miscellaneous Trade and Technical Corrections Act of 2006 – Due to companion bills introduced in the Senate, there has been an introduction of both suspended or reduced tariff rates on certain selected products. The provision also corrects government errors and the bill allows re-liquidations of duties related to certain products.

• Duties on Repairing Vessels – There has been a clarification with the new provision that 50 percent ad valorem duty on vessel repairs does not include the cost of equipment, repair parts or materials that are installed on the vessel as documented under the laws of the United States and ones engaged in foreign or coasting trade if the installation was done by regular crew members of the vessel while it was on the high seas or in foreign waters or in a foreign port. This does not involve foreign shipyard repairs by foreign labor. This will apply as soon as the bill is signed and applies to vessel equipment, repair parts and materials installed on or after April 25, 2001.

• CAFTA-DR Provision With Respect to Agreement Implementation – Narrow proclamation authority is extended to President Bush under this provision so he can make changes regarding countries entering into a letter of understanding regarding pocketing material with the United States. There will be certain limitations in respect to countries who have not entered into this agreement with the U.S. There is also a technical correction regarding the retroactive effective date for certain liquidations and re-liquidations of co-produced products. There will be a new reporting requirement for the U.S. Trade Representative’s Office regarding the status of negotiations related to other CAFTA-DR textile changes concerning socks and technical corrections.

Further Amendments and Provisions

• Grants the power to the secretary of the Treasury to change or establish the Employee Plans Compliance Resolution System or implement any other employee plan correction policies deemed appropriate.

• Makes changes to ERISA, the Employee Retirement Income Security Act and the Internal Revenue Code to create new standards of minim funding for single and multi-employer defined benefit pension plans.

• Reduction of unemployment compensation due to pension rollovers will be prohibited.

• Interest rate rules for funding standard accounts requiring the use of a rate based on long-term investment grade corporate bonds instead of 30-year securities will receive an extension.

• The interest rate calculation for lump-sum distributions will be amended.

• Employers can automatically enroll employees in defined benefit plans under this provision.

• Funding notice requirements that are required by defined benefit plans have been established.

• Rules have been established governing whether plans fail to meet requirements prohibiting age discrimination in defined benefit pension plans.

• Commercial passenger airlines with defined benefit plans now have alternative funding rules established for them.

• New provisions are established requiring single-employer plans that are fully-funded to pay variable-rate premiums to (PBGC), the Pension Benefit Guaranty Corporation.

• Fiduciary advisers of a plan are now allowed to provide investment advice to participants or beneficiaries if they meet certain requirements.

• Provisions have been established governing the division of pension benefits in the case of a divorce.

• Establishes requirements of defined contribution plans holding publicly traded securities to provide employees with the opportunity to divest employer securities and a minimum of three investment options to select from aside from employer securities.

• Certain hydroelectric facilities in Alaska will be provided an exception to certain tax-exempt bond rules under this provision.

• Additional technical corrections relating to the Mine Improvement and New Emergency Response Act of 2006 regarding mine safety and the Going-to-the-Sun- Road (SAFETEA-LU) have been made in this provision as well.

Further technical explanations, details and information can be found at (http://www.house.gov/jct/x-38-06.pdf)