August 8, 2006
Summary: The 907 page law primarily deals with defined benefit plan law; however a few provisions will impact sponsors of ESOPs. President Bush has signed the act into law August 17, 2006.
Changes pertaining to ESOPS:
Sec. 811. Pensions and individual retirement arrangement provisions of Economic Growth and Tax Relief Reconciliation Act of 2001 made permanent.
Positive laws for defined contribution plans (including ESOPs) were enacted as temporary measures in Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) which substantially increased pension and individual retirement account (IRA) contribution limits through 2010. These provisions are made permanent; the amount that can be added to an employee’s defined contribution retirement plan annually is the lesser of 100% of eligible pay or $44,000 (in 2006, indexed annually).
Sec. 904. Faster vesting of employer non elective contributions
Minimum vesting requirements for ESOPs and non-contributory stock bonus plans (ESOPS are a stock bonus plan) become three year cliff or six year graded compared to five year cliff or seven year graded, except ESOPs with a outstanding securities acquisition loan may use five or seven schedule until the loan is paid. Existing ESOPs that are repaying a loan in place as of September 26, 2005, however, would not be subject to these rules for shares acquired by the loan for any plan year beginning on 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
According to Corey Rosen, the executive Director of the National Center for Employee Ownership, addressing the vesting change, “ESOP companies really should not lose any sleep over this change….Very few companies of any kind, but especially companies with already low turnover, have more than a tiny percentage of the workforce leaving in years four or five (for cliff vesting) or year seven. Employees who work for three years generally work for many more. The impact is so small, in fact that most companies will want to apply the new rules to all contributions.”
SEC. 622. Increase maximum bond amount for plan years beginning after December 31, 2007, trustee bond requirements are increased from $500,000 to
$1,000,000.
SEC. 901. DEFINED CONTRIBUTION PLANS REQUIRED TO PROVIDE EMPLOYEES WITH FREEDOM TO INVEST THEIR PLAN ASSETS.
Public company K-SOPs must offer diversification of company stock after three years.
Actions to take:
Companies should consult with counsel regarding updating existing plans.