Earlier this month, Congress passed the Pension Protection Act of 2006, which President Bush will likely sign into law. The name of the bill describes only part of its sweeping changes in several different areas, affecting not only retirement but also charitable contributions and college savings, among other things.

Most importantly, the act helps to resolve some uncertainties about current tax law. Because many of its provisions are currently set to expire after 2010, it has been extremely difficult to plan effectively for financial needs that extend beyond that date. As is discussed in greater detail below, the act makes some important planning options a permanent part of the tax law.

Provisions of the act
In simplest terms, the act accomplishes four major tasks. First, it strengthens the rules governing defined benefit pension plans, requiring employers to avoid default by ensuring adequate funding of their pension obligations to employees. Second, it attempts to encourage greater participation by employees in 401(k) and other defined contribution pension plans, by creating new incentives and extending existing incentives for participants. Third, it allows people to make charitable contributions directly from IRAs without having to pay tax on the IRA distribution. Fourth, it makes permanent the provisions of Section 529, which provide for qualified tuition programs, also known as 529 plans.

Defined benefit pensions
The provisions dealing with defined benefit pensions affect employees with the more traditional form of pension, in which the employer is solely responsible for investing pension assets and paying retired employees a certain monthly amount. These types of pension plans have become less popular as employers replace them with defined contribution plans, in which the employee makes investment decisions and bears responsibility for building sufficient retirement assets. However, many employees, especially those in industries in which labor unions maintain a strong presence, still have access to defined benefit plans.

Although the provisions are complicated, they're generally designed to force employers to keep their pensions fully funded. In the past, many companies routinely kept their pension plans at or above full funding levels. This practice made such companies attractive takeover targets, since a potential buyer could borrow money to acquire a company, then withdraw a certain amount of money from an overfunded pension plan to help it repay the loan. In addition, when investment returns and interest rates were high, a company could use highly optimistic assumptions about future returns in choosing how much money to put into the plan. In recent times, however, interest rates have fallen precipitously, and with the downturn in the stock market in 2001 and 2002, many pension plans became dangerously underfunded. The act requires such plans to immediately accelerate employer contributions into the pension plan, to get it fully funded more quickly.

401(k) and IRA provisions
The provisions relating to retirement savings make some temporary benefits permanent while extending relief to certain groups of people. The higher contribution limits allowed for IRAs and 401(k) plans will survive beyond 2010, including the additional "catch-up" contributions available to people 50 and older. In addition, the tax credit available to low- and middle-income families who make contributions to an IRA or retirement plan will continue beyond its original termination date. Furthermore, the act waives early-withdrawal penalties for certain workers, including military personnel called to active duty and government public safety employees. The act also calls for employers to encourage employee participation in qualified plans, by permitting automatic enrollment and making investment advice available.

The act also allows beneficiaries of certain qualified plans to roll over plan assets into a separate IRA following the death of the employee. Under current law, spouses named as beneficiaries of qualified retirement plans can roll the plan assets into their own IRA tax-free. For spouses, these rollover assets are treated exactly the same way as their own personal IRA; in applying the minimum distribution rules, the spouse's age is used rather than the deceased employee's age.

The act's provision extends the ability to roll over assets to beneficiaries other than spouses. However, this non-spousal rollover does not extend all the benefits of a spousal rollover. Specifically, the beneficiary must treat the rollover IRA as an inherited IRA, which requires the beneficiary to take distributions from the account either within five years or over the expected lifetime of the beneficiary. Although the provision allows beneficiaries to lengthen dramatically the time over which they have to take distributions, it does not give equal treatment to spouse and non-spouse beneficiaries.

Charitable and educational provisions
Some additional provisions touch on issues only peripherally related to pension reform. Because many people have large amounts of money in IRAs and qualified plans, charities have long sought a way to allow donors to make distributions from these types of accounts directly to charity, without paying any income tax. The act includes a limited provision for such distributions, allowing up to $100,000 to be used for charitable purposes without incurring tax. The provision expires at the end of 2007.

Also, parents and financial planners have been concerned for some time about the potential expiration of the provision allowing for Section 529 qualified tuition programs. Because the expiration of the law would make a large part of withdrawals from such plans taxable, even if used for education, everyone had hoped that Congress would eventually make the favorable tax treatment permanent. The act grants this wish, effectively making the Section 529 provisions permanent.

Assuming that President Bush signs the act into law, the Pension Protection Act of 2006 will provide savers with more options and greater assurance that the current set of incentives will remain available.

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Fool contributor Dan Caplinger welcomes your feedback. The Motley Fool is investors writing for investors.