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Congress Passes Pension Reform, Including Numerous Charity Provisions

August 8, 2006

Pension Reforms.  Both houses of Congress approved long-awaited pension reform in the days prior to the August recess. The bill, expected to be signed by the president in mid-August, is aimed chiefly at strengthening the pension systems that provide defined benefits to workers and retirees. The Pension Protection Act of 2006 (H.R. 4) requires employers to more fully fund defined benefit plans and also to pay increased premiums to the Pension Benefit Guaranty Corporation.The bill:

  • permits federal tax refunds to be deposited directly into IRAs;
  • makes it easier for employers to offer automatic (401)k plan enrollment;
  • makes permanent the Saver's Credit, which benefits low-income employees; and
  • makes permanent the increased pension and IRA contribution limits enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001. 

Changes for Defined Contribution Plans. H.R. 4 will make permanent the pension and retirement provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001. The relevant EGTRRA provisions, many of which would have expired at the end of 2010 or earlier, permit Americans to save more in employer plans and IRAs, ease portability among various plans, and provide significant administrative relief to employers that sponsor plans. EGTRRA increased the 415 and 402(g) limits; eliminated the maximum exclusion allowance under 403(b); established the dual limits for 403(b) and 457(b); introduced the Roth 403(b) and 401(k) plans; and provided catch-up contributions that permit older workers to save more under the plans and IRAs.

The legislation also contains new rules for providing investment advice to employees and retirees, as well as incentives for creating automatic enrollment under 401(k), 403(b), or 457 plans, where the employee would need to affirmatively “opt out.” The auto-enrollment provisions, which will become effective in 2007, will require certain minimum contributions. The Department of Labor will be developing guidance under the act.

Charitable Reforms. 
H.R. 4 also includes a package of charitable giving incentives, along with reform provisions aimed at curbing abuses by exempt organizations and the donors that support them. The final pension bill includes a wide array of charity reform provisions, many of which, in various forms, have been explored by the Senate Finance Committee over the past few years.  There are several key provisions of the bill:

  • It allows tax-free distributions from IRAs--not to exceed $100,000 per taxpayer, per year--which would otherwise be included in income. To qualify, the charitable distribution must be made to a tax-exempt organization to which deductible gifts can be made.  The provision is effective for two years, through December 31, 2007. 
  • It makes permanent the tax treatment of Section 529 college savings plans.
  • It also doubles the penalty taxes for exempt organizations engaging in self-dealing or excess benefit transactions.
  • It requires all 501(c)(3) organizations to make their Form 990-T publicly available, subject to redaction of sensitive information.
  • It also calls for recovery of tax benefits realized from the contribution of property (deductions of fair market value) that is not used for the donee organization’s exempt purpose.
  • The measure also restricts transactions of donor advised funds, taxes distributions made for noncharitable purposes, applies excess business holding rules, and increases reporting requirements to the IRS.
  • In addition, it tightens rules for Type III supporting organizations.

Other Tax Issues Stall. On a procedural vote, Senate Republicans were unable to garner enough support to begin debate of the Estate Tax and Extension of Tax Relief Act of 2006 (H.R. 5970), referred to as the “trifecta” bill.

The measure would reinstate several popular tax provisions that expired in 2005, modify the estate tax, and raise the minimum wage to $7.25 an hour.  Among the provisions that would be extended for two years (through 2007) by HR. 5970 are the deduction for state and local taxes, an expanded research and development tax credit, and the above-the-line deduction for qualified higher education expenses. 

It is unlikely that this specific combination of tax proposals will move through the Senate this fall.  As a result, advocates will be looking for other legislative vehicles that might carry one or more of these proposals to the president’s desk, either prior to the fall elections or in a lame-duck session.