MADISON, Wis. — Since most credit union plans are relatively well funded, the recently signed Pension Protection Act of 2006 is not a "panic type" of legislation, CUNA Mutual Group has assured.
While there are several pieces that speak to credit unions, larger entities such as the airline and steel industries should expect a much greater impact, said Sharon Severson, director of pension client services at CUNA Mutual.
"A lot of credit unions have moved to 401(k) plans and there are many provisions [in PPA] that talk about automatic 401(k) plans," Severson said. "This legislation clarifies the ambiguous rules that have been there in the past."
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The new law includes a permanent extension of the Retirement Savings Tax Credit or Saver's Credit and higher contribution limits for individual retirement accounts. The credit can be used by low- and moderate-income savers to offset up to $1,000 contributions made to traditional and Roth individual retirement accounts or to other qualified employer-sponsored retirement plans such as 401(k)s, 403(b)s, annuities, SIMPLEs and SEPs. The pension bill also increased to $5,000 the ceiling for annual contributions to traditional, Roth, and spousal IRAs, and included catch-up provisions that give savers over the age of 50 higher limits for retirement saving.
Severson said another important area for credit unions, starting in 2007, is vesting schedules for defined contribution plans. All employer contributions such as money-purchased plans and profit sharing had more liberal vesting schedules, but now have to match them to a three-year cliff or a six-year graded schedule, she explained. Those decisions, which must be included in a formal amendment, will have to be made before the first distribution in 2007.
For credit unions that use defined benefit plans, there is a phased retirement beginning in 2007, Severson said. It allows defined benefit plan providers to do in-service distribution if the person is 62 years old. Again, a formal amendment must be made to the plan with this change.
Severson said there are other "less critical" components of the legislation because they have a "delayed effective" deadline such as additional guidance coming on choosing default investment for automatic investment plans.
"It's really critical to get guidance on this," Severson said. "Another issue that is hitting the headlines is the ability to offer investment advice. That's a really gray area. The Department of Labor will provide guidance on this in six months."
Since President Bush signed PPA, CUNA Mutual has received calls from credit unions mostly asking about how the legislation really impacts defined benefit plans. Others are wanting to know more about automatic 401(k) plans. CUNA Mutual is planning to offer a series of Webinars (see page 25 for dates) on defined contribution and non-defined benefits plans and the provisions that have the greatest impact on benefits. –[email protected]
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