On July 28, 2006, the House of Representatives passed H.R. 4 , the Pension Protection Act, by a vote of 279-131. The bill was passed by the Senate on August 3 by a vote of 93-5 and was signed into law by the President as P.L. 109-280 on August 17, 2006. The Pension Protection Act is the most comprehensive reform of the nation's pension laws since the enactment of the Employee Retirement Income Security Act of 1974 (ERISA, P.L. 93-406 ). It establishes new funding requirements for defined benefit pensions and includes reforms that will affect cash balance pension plans, defined contribution plans, and deferred compensation plans for executives and highly compensated employees. Prompted by the default in recent years of several large defined benefit pension plans and the increasing deficit of Pension Benefit Guaranty Corporation (PBGC), the Bush Administration in January 2005 advanced a proposal for pension funding reform, which was designed to increase the minimum funding requirements for pension plans and strengthen the pension insurance system. The Administration pointed out several weaknesses of the rules that were then in place: Sponsors of underfunded plans were not required to make additional contributions, called deficit reduction contributions , as long as their plans were at least 90% funded. Because the interest rates used to calculate current pension plan liabilities were averaged over a four-year period and asset values used to calculate minimum funding requirements could be averaged over five years, neither plan assets nor liabilities were measured accurately. Plans that were underfunded were sometimes able to amortize their funding shortfalls over periods as long as 30 years. Some sponsors of underfunded pensions were able to avoid making contributions to their plans for several years because they had made contributions beyond the required minimum in the past. The use of these so-called "credit balances" led to greater underfunding of pension plans, according to the Administration's analysis. The PBGC was created by Congress in 1974 to insure defined benefit pension plans of private-sector employers. The possibility that the termination of defined benefit pension plans with large unfunded liabilities might eventually lead to the insolvency of the PBGC lent a particular urgency to the effort to mandate improved pension plan funding. Although the PBGC receives no appropriations from Congress, it is generally acknowledged that if the agency were to become financially insolventâthreatening the retirement income of the 44 million Americans who have earned benefits under defined benefit pension plansâCongress would have little choice but to step in and engineer a financial bailout of the agency. In 2000, the PBGC recorded a $9.7 billion surplus, but several years of falling interest rates and declining stock prices and the termination of several large, underfunded pension plans led to a rapid deterioration in the PBGC's financial position. Nine of the ten largest pension plan claims for PBGC insurance occurred between 2001 and 2005. (See Table 1 .) These nine claims accounted for 63% of the total dollar value of claims made on the PBGC since the agency began operating in 1975. By 2005, the PBGC had a funding deficit of $22.7 billion, only slightly lower than the record deficit of $23.3 billion that the agency posted in 2004. In 2005, major pension reform bills were introduced in both the Senate and the House of Representatives. In the Senate, Senator Charles Grassley, Chairman of the Finance Committee, introduced S. 1783 , the Pension Security and Transparency Act. In the House, Representative John Boehner, then Chairman of the Committee on Education and the Workforce, introduced H.R. 2830 , the Pension Protection Act, which subsequently was renumbered as H.R. 4 . The legislation ultimately passed by the House and Senate and signed into law by the President on August 17, 2006, was based mainly on these two bills, with the final version being the result of conference negotiations between the House and Senate that began in March 2006 and continued through July. This report summarizes the main provisions of the Pension Protection Act (PPA) as they affect single-employer defined benefit plans, multiemployer defined benefit plans, and defined contribution plans. Since the passage of the Employee Retirement Income Security Act (ERISA) in 1974, federal law has required companies that sponsor defined benefit pension plans for their employees to prefund the pension benefits that the plan participants earn each year. If a plan is underfunded, the plan sponsor must amortize (pay off with interest) this unfunded liability over a period of years. The Pension Protection Act (PPA) establishes new rules for determining whether a defined benefit pension plan is fully funded, the contribution needed to fund the benefits that plan participants will earn in the current year, and the contribution to the plan that is required if previously earned benefits are not fully funded. In general, the new rules become effective in 2008, but many provisions of the law will be phased in over several years. Pension plan liabilities extend many years into the future. Determining whether a pension is adequately funded requires converting a future stream of pension payments into the amount that would be needed today to pay off those liabilities all at once. This amount, the "present value" of the plan's liabilities, is then compared with the value of the plan's assets. An underfunded plan is one in which the value of the plan's assets falls short of the present value of its liabilities by more than the percentage allowed under law. Converting a future stream of payments (or income) into a present value requires the future payments (or income) to be discounted using an appropriate interest rate. Other things being equal, the higher the interest rate, the smaller the present value of the future payments (or income), and vice versa. Beginning in 2008, the PPA introduces new funding requirements for single-employer defined benefit pension plans. The law establishes new rules for calculating plan assets and liabilities, and it eliminates deficit-reduction contributions for underfunded plans. When it is fully phased in, the law will require plan funding to be equal to 100% of the plan's liabilities. Any unfunded liability will have to be amortized over seven years. Sponsors of severely underfunded plans that are at risk of defaulting on their obligations will be required to fund their plans according to special rules that will result in higher employer contributions to the plan. Plan sponsors will continue to be allowed to use credit balances to offset required contributions, but only if the plan is funded at 80% or more. The value of credit balances will have to be adjusted to reflect changes in the market value of plan assets since the date the contributions that created the credit balances were made. Under the PPA, a plan sponsor's minimum required contribution will be based on the plan's target normal cost and the difference between the plan's funding target and the value of the plan's assets. The plan's target normal cost is the present value of all benefits that plan participants will accrue during the year. The funding target is the present value of all benefits, including early retirement benefits, already accrued by plan participants as of the beginning of the plan year. If a plan's assets are less than the funding target, the plan has an unfunded liability . This liability, less any permissible credit balances, must be amortized in annual installments over seven years. The plan sponsor's minimum required annual contribution is the plan's target normal cost for the plan year, but not less than zero. The 100% funding target will be phased in at 92% in 2008, 94% in 2009, 96% in 2010, and 100% in 2011 and later years. The phase-in will not apply to plans that are already underfunded to the extent that they are subject to the deficit reduction contribution rules in 2007. Those plans will have a 100% funding target beginning in 2008. Federal law prescribes the interest rate that pension plans must use to calculate the present value of plan liabilities. The PPA requires plans to discount future liabilities using three different interest rates, depending on the length of time until the liabilities must be paid. The interest rates correspond to the length of time until the obligations are due to be paid. A short-term interest rate will be used to calculate the present value of liabilities that will come due within five years. A mid-term interest rate will be used for liabilities that will come due in 5 to 15 years, and a long-term interest rate will be applied to liabilities that will come due in more than 15 years. The Secretary of the Treasury will determine these rates, which will be derived from a "yield curve" of investment-grade corporate bonds averaged over the most recent 24 months. The yield curve requirement will be phased in over three years beginning in 2007. It will replace the four-year average of corporate bond rates established under Pension Funding Equity Act of 2004 ( P.L. 108-218 ), which expired on December 31, 2005. The PPA introduces a new concept to be applied in determining a plan sponsor's required contribution to the plan. Pension plans that are determined to be at risk of defaulting on their liabilities will be required to use specific actuarial assumptions in determining plan liabilities that will increase the plan sponsor's required contributions to the plan. A plan will be deemed at-risk if it is unable to pass either of two tests. Under the first test, a plan is deemed to be at-risk if it is less than 70% funded under the "worst-case scenario" assumptions that (1) the employer is not permitted to use credit balances to reduce its cash contribution and (2) employees will retire at the earliest possible date and will choose to take the most expensive form of benefit. If a plan does not pass this test, it will be deemed to be at-risk unless it is at least 80% funded under standard actuarial assumptions.