Accounting practices Featured

7:00pm EDT December 31, 2006

When the leaders of Enron and WorldCom looted their companies’ accounts, not only did they destroy their companies but they eliminated the pensions that their employees had worked for and saved to carry them through retirement.

On Aug. 17, 2006, President Bush signed into law the Pension Protection Act of 2006 to help reduce the likelihood of future pension looting. “The Pension Act is being touted as the most sweeping reform of America’s pension laws in more than 30 years,” says Brent Saunier, CPA and senior tax manager at Tauber & Balser, P.C.

Smart Business talked to Saunier about the Pension Protection Act and the people it seeks to protect.

What do you feel was the underlying reason the Pension Protection Act was created?

In the wake of Enron and other accounting scandals, the under-funding of traditional pension plans took center stage on the 2005-2006 agenda of Congress. The Pension Act was created to help protect pension plan participants and promote individual savings. The Pension Act seeks to ensure that employers make greater contributions to pension funds, ensure their solvency, and avoid the negative results of scandals like Enron. It also repeals many of the ‘sunset provisions’ in the Economic Growth and Tax Relief Act of 2001 that related to pension plans.

Does this law only affect people with traditional pension plans?

The Pension Act not only contains provisions that impact traditional pension plans, but also contains a number of provisions impacting charities and charitable donations, miscellaneous provisions and technical corrections. The new law will affect most everyone whether you’re retired or still working to build your nest egg.

How will the Pension Act affect charitable donations?

The Pension Act toughens the tax laws for charitable donations. Under the new law, taxpayers must show a receipt from charity, a canceled check or credit card statement to prove their donation.

The new law also is stricter regarding the rules for noncash donations. A deduction for charitable contributions of clothing or household items will only be permitted if the item is in good used condition or better. This provision reflects the IRS’s and Congress’s concern that taxpayers are abusing the clothing and household deduction provisions.

Finally, the new law will allow IRA owners who are age 70 1/2 and over to make tax-free distributions of up to $100,000 directly to tax-exempt charities in 2006 and 2007. This could prove to be an important planning tool for IRA owners who struggle to meet the minimum distribution requirements.

Will the new law require all employees to participate in their respective employers’ 401(k) plan?

The Pension Act allows employers to automatically enroll their employees in a 401(k) retirement plan with default contribution levels. Employees will need to opt out of the 401(k) plan if they don’t want to participate. The new law appears to send a clear signal by Congress of its intent to encourage the expansion of individual and employer sponsored savings accounts. While this provision takes effect in 2008, many employers have already implemented automatic enrollment as part of their 401(k) retirement plans.

Could you highlight any of the other key provisions?

An important new provision for nonspouse beneficiaries of qualified retirement plans took effect Jan. 1. The new law allows non-spouse beneficiaries to roll over assets inherited from a qualified retirement plan into an IRA. The beneficiary will not only avoid taxes on the rollover, but they will only be taxed when the assets are withdrawn. Under the old law, this favorable tax treatment was only available for people who inherited retirement assets from a deceased spouse. The new law allows a great deal of flexibility in retirement and estate planning for nonspouse beneficiaries.

I want to ensure the impact of this provision is not understated. For example, assume John Doe was to inherit $500,000 from his father’s 401(k) retirement plan. In the past, this would mean John would have to take all the money out and pay taxes on it. Thanks to the Pension Protection Act, the $500,000 could now be rolled into an ‘inherited IRA’ and stretched out over John’s lifetime. The $500,000 could virtually turn into millions of dollars.

The above items are only a few of the many changes in the tax law from the Pension Protection Act of 2006. Please consult your tax adviser to see how these and other provisions may apply to you.

BRENT SAUNIER, CPA, is a senior tax manager at Tauber & Balser, P.C. with over 10 years of experience in accounting operations and financial management. He has worked extensively in industries such as distribution, health care, manufacturing, professional services, retail service and trucking. Reach him at (404) 814-4960 or bsaunier@tbcpa.com.