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In August, the Pension Protection Act of 2006 was signed. While many of the provisions do not take effect for a couple of years, a few start this month. The new law and its changes are expected to have a major impact on small business and their employee retirement plans. Here are a few things you should be aware of:
Business owners and key personnel, who had been limited in their own 401(k) savings, can now put away more if the company enrolls employees automatically in its plan and contributes a required amount to each account. Automatic enrollment now lets an employer put all employees into the plan by default.
Auto enrollment lets business owners unlock savings for themselves and key personnel when they use it with a set of other practices. These include contributing 3 percent of salary into each employee’s account and increasing the amount by a required percentage each year for several years.
Taken together, the practices trigger a safe harbor in the law that lets owners and key personnel contribute their own maximum contributions, $15,500 for an individual this year, and an additional $5,000 for those over 50.
An unfortunate drawback is that the amount of communications with employees regarding their plans has also changed. A lot more is now needed. For example, quarterly statements to employee are now required where they weren’t before.
Small business owners who offer such retirement plans are encouraged to contact the plan’s administrators and ask for assistance in understanding the new changes and to take advantage of the new changes.
