New Pension Law has Tax Advantages

In August of 2006, an important new act was signed into law. The Pension Protection Act includes over 100 new tax provisions which have implications for clients, spouses and beneficiaries. Portions of the complex law will take effect in January 2007. To better understand these, Trusts and Estates Attorney Terrance W. Emmens explains some aspects clients should consider. Prior to the passage of the Act, a non-spouse beneficiary of a Profit Sharing, Government or Qualified Retirement Plan (e.g. 401(k), 403(b), SEP and others) was required to take as a lump sum, the entire account balance triggering enormous income tax liabilities unless the employer’s plan allowed for annuity or installment distributions. Even then, rarely did the employer’s plan allow for distributions to be spread out over the non-spouse beneficiary’s lifetime.

The new law, to become effective in January 2007, will allow non-spouse beneficiaries the opportunity to roll over qualified retirement benefits into an IRA. This is a significant change in the law and will allow for significant deferral of income tax liabilities.

The new law does not disturb the ability of the surviving spouse to roll over his or her deceased spouse’s interest in a qualified pan into an IRA.

The Pension Protection Law also encourages companies to automatically enroll workers into 401(k) plans. An employee has the choice to opt out, but this is not recommended. Effective for distribution after December 31, 2007 the new law will allow direct rollovers from a qualified retirement plan or government plan directly to a Roth IRA, provided all other conversion requirements are met (e.g. income below the $100,000 level). Hopefully, this change will encourage greater participation in retirement savings plans.

Beginning in 2008, if you are automatically enrolled in your company retirement plan, your employer should:

  • Fix automatic enrollment with an employee elective deferral contribution starting at 3 percent of his or her compensation. This percentage can increase one percent annually until it reaches 6 percent.
  • Make the employees’ contribution mandatory.
  • Provide notice to the employee of the right to opt out of the plan.


Automatic enrollment entitles owners and other highly compensated employees to take full advantage of contribution opportunities.

You should be certain the beneficiary designations for your IRA’s and qualified retirement plans are coordinated with your overall estate plan and take advantage of all income tax deferral opportunities. For further information and advice on these and other Trusts and Estate Planning issues, please contact Terrance W. Emmens on his direct line at 585-324-5713.