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The New Pension Law Impact on Defined Contribution Plans
In August, 2006 a new pension law, The Pension Protection Act of 2006 (PPA), was signed into law by the government. The PPA makes a number of significant changes to the prior rules governing employee benefit plans.
The main purpose of this memo is to focus on the changes affecting defined contribution plans (ESOPs, 401(k) plans, profit sharing plans, etc.) that may involve the need for you to take action in the near future.


.: Vesting Changes
Under prior law the minimum vesting schedules for ESOPs and other defined contribution plans (other that 401(k) plans with matching contributions) were based on either 5 year cliff vesting (0% vesting for four years, 100% vesting in the fifth year), or seven year graded vesting (0% for 2 years, 20% per year thereafter, 100% after seven years).
Under the new law, effective for 2007 plan years, the minimum vesting schedules are shortened to either 3 year cliff vesting (0% for 2 years, 100% in the third year) or 6 year graded vesting (0% for one year, 20% per year thereafter, 100% after six years).

Exception for certain ESOPs: There is an exception to the 2007 effective date for the new vesting rules for ESOPs that had exempt loans outstanding as of September 26, 2005 (i.e. loans incurred by an ESOP to finance the purchase of employer securities). The new vesting rules for these plans will not take effect until the year in which these loans are paid in full, or were scheduled to be repaid as of September 26, 2005, if earlier.

Observations: All defined contribution plans, other than the ESOP exceptions listed above, that operate under either the 5 year cliff or the seven year graded vesting schedule will need to be changed immediately to reflect the new laws. This includes 401(k) plans, profit sharing plans, money purchase plans, and any ESOP that did not have a loan in place as of September 26, 2005, or that currently no longer has a loan in place. Also, even if you have an ESOP that does currently have a loan under the exception rule above you will need to monitor your situation so that once the loan is paid you shift to one of the new minimum vesting schedules.


.: Bonding Requirements
ERISA requires that every fiduciary and every person who handles funds of a plan maintain a bond in an amount equal to at least 10% of plan assets, but no greater than $500,000. Effective for plan years beginning after December 31, 2007 this limit is increased for plans that hold employer securities to a maximum of $1 million.

Observation: This provision mainly effects ESOPs. You should take action toward the end of the 2007 year to make sure that your bonding limits are increased accordingly based on your plan assets.