The Employee Ownership Update
August 4, 2006
Congress Passes Pension Reform BillOn July 28, Congress passed the pension reform bill as approved by a House-Senate conference committee. If the bill is signed by the President, employee ownership plans will be affected in a number of ways, as outlined below.
Among the many provisions in its 907 pages, the bill provides rules that allow companies to provide outside investment advice for 401(k) plan participants and to allow for automatic enrollment with an "opt-out" provision for 401(k) and similar plans.
- 2001 Changes in Annual Addition Limits Made Permanent: In 2001, the amount that could be added to an employee's defined contribution retirement plan annually was increased dramatically to the lesser of 100% of eligible pay or $44,000 (in 2006, indexed annually). The changes were set to sunset in 2010 but now would be permanent.
- Diversification Required for 401(k) Plans in Public Companies: Public companies with stock in their 401k) plan (including KSOPs that combine an ESOP and 401(k)) would now be required to allow employees to diversify out of employer stock at any time if the stock was purchased with their own deferrals or after three years of service if purchased with employer contributions. Stand-alone ESOPs in public companies and all closely held company ESOPs would be exempted. The rules would be phased in over three years.
- Faster Vesting: All defined contribution plans would now have to vest their shares no later than after three years for cliff vesting and six years for graded vesting, starting at no less than 20% per year after two years of service. Existing ESOPs that are repaying a loan in place as September 26, 2005, however, would not be subject to these rules for shares acquired by the loan for any plan year beginning before the earlier of the date the loan is fully repaid or the date on which the loan was scheduled to be repaid as of September 26, 2005. The new rule takes effect for contributions made after December 31, 2006. Companies should consult with counsel to get their plans amended promptly.
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