The Pension Protection Act of 2006 was an act designed to strengthen pension funds in the United States. It amended the Employee Retirement Income Security Act of 1974 and ensured that all pensions would be fully funded. The act also created multiple tax benefits for retirement savings and created stricter rules for how charitable donations could be rewarded in tax law. Certain programs that would have expired, such as the Roth 401k and Roth 403b plans and the Retirement Savings Tax Credit, were extended.
President George W. Bush signed the Pension Protection Act of 2006 into law on Aug 17, 2006. It became public law number 109-280. Up to this point in time, many pensions had not been fully funded. This meant that employers were promising benefits to employees that they might not have been able to pay for when the time came. The Pension Protection Act of 2006 solved this problem by repealing old funding rules that existed under the Employee Retirement Income Security Act of 1974 and setting new minimum funding standards.
According to the 2006 act, all pension had to be fully funded by the end of a seven year period that started in 2008. To make sure this happened, the act imposed a 10 percent excise tax on any company that did not follow the new funding guidelines. It also allowed employers to deduct the cost of the additional contributions to the pension funds.
The Pension Protection Act of 2006 also created and changed multiple tax benefits related to retirement savings. Most of these affected the rules about 401k retirement plans. A 401k is a plan that takes a percentage of an employee's paycheck and invests it tax-free until the employee retires and withdraws the money from the account. The act allowed employers to automatically enroll all employees in 401k plans. An employee had to specifically opt out if he or she did not want to be enrolled.
The act also stipulated that if an employee was in the military and was called to active duty between September 11, 2001, and December 31, 2007, the employee could make a no penalty withdrawal from his or her 401k or Individual Retirement Arrangement (IRA) account. Usually these types of accounts charge penalties if any money is withdrawn before the employee has retired. The Pension Protection Act of 2006 also made it easier to make hardship withdrawals from 401k plans and provided for direct rollover from 401k to Roth IRA plans.
Under the Pension Protection Act of 2006 charitable donations could only be deducted on tax forms if certain criteria were met. Records of cash donations had to be kept with the return in case of Internal Revenue Service (IRS) audit. These records could take the form of receipts from the charity, credit card statements or checks. Items donated had to be in good condition. Taxpayers older than 70.5 could donate to charity directly from their IRA accounts, but these donations would not be tax deductible.