Current Pension Topics

Law's Public Worker Impact

By JOEL L. FRANK

The Pension Protection Act of 2006 (PPA) was signed into law by President Bush on Aug. 17. Following are some of the important provisions that affect the nation's public employees:

Provisions Beneficial to Public Employees Included in the Recently Passed House and Senate Compromise Pension Reform Legislation

Tax-Free Distributions from Eligible Plans for Public Safety Retiree Health and Long Term Care	The bill allows for pre-tax distributions of up to $3,000 from governmental pension plans to be used to purchase retiree health or long term care insurance by public safety retirees. In order to take advantage of this provision, eligible participants must be separated from service due to disability or the attainment of normal retirement age. Additionally, the employee must be separated from the employer who maintains the eligible retirement plan. Premiums, in order to be excluded from income, would need to be deducted from the distributions from the eligible retirement plan and paid directly to the insurer.
Purchase of Service Credit	The bill clarifies the rules on purchase of service credit. Service credit may be purchased for periods for which there is no performance of service (e.g. airtime) and in order to qualify for an increased benefit. Additionally, a trustee-to-trustee transfer of 403(b) and 457 funds into a governmental defined benefit plan to purchase service credit does not need to be tested under the 415(n) limits on after-tax contributions to the plan. Once 403(b)/457 funds are transferred to a governmental defined benefit plan, they take on the distribution rules of such a plan. The transfer need not be made between plans maintained by same employer. The legislation also allows defined benefit plans to accept after-tax rollovers, provided that they separately track the after-tax funds from the pre-tax funds.
Exception to 10 percent Early Withdrawal Penalty for Public Safety Employees	The legislation would make an additional exception from the 10% early withdrawal penalty for distributions from a governmental defined benefit plan to a qualified public safety employee who separates from service on or after age 50. Under current law, annuity-like distributions are exempt at any age, and lump-sum or partial-lump sum distributions are exempt from the penalty if they are paid to employees who separate from service on or after age 55.
Minimum Distribution Requirements	Requires the Department of Treasury to issue regulations under which a governmental plan shall be treated as having complied with Section 401 (a) (9) regulations if they follow a reasonable good faith interpretation.
Withdrawals for members of the Military Reserves and National Guard	The legislation waives the 10 percent early distribution penalty for military reservists and members of the National Guard who are called to active duty for at least 180 days. The amounts may be repaid to the IRA or pension plan within two years without regard to the annual limits. This provision applies to distributions made while the participant is on active duty.
Other Provisions	HR 4 provides Age Discrimination in Employment Act protections without implicating ERISA coverage on public defined benefit plans and makes permanent the numerous pension provisions enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001, which were scheduled to expire in 2010.