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ROLLOVER
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| STIFEL |
Retirement |
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Plans Quarterly |
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Second Quarter 2008
QRP ROLLOVER OPTION FOR NON-SPOUSE
BENEFICIARIES REVERSED
Under a provision in the Pension
Protection Act of 2006, non-spouse beneficiaries of qualified
retirement plans (QRPs), including governmental 457(b), 403(a), and
403(b) plans, are now permitted to roll inherited QRP assets into
beneficiary IRAs. However, in IRS Notice 2007-7, dated January 29,
2007, it states, "A plan is not required to offer a direct rollover
of a distribution to a non-spouse beneficiary pursuant to 402(c)(11)."
QRPs could, but were not required to, offer this option.
IRS changes guidance
It was not the intention of the provision
to restrict "direct rollovers" to a select group of non-spouse
beneficiaries, and IRS-published 2007 Interim and Discretionary
Amendments (402(c)(11) (Discretionary)) clarified the situation by
stating, "Pursuant to an impending technical correction, non-spouse
beneficiary rollovers will be required for plan years beginning
on or after January 1, 2008." QRPs were now required to offer
non-spouse beneficiaries the option to select direct rollovers to
inherited IRAs.
IRS reverts to optional position
Because a technical correction addressing
this issue was not enacted in 2007, in Notice 2008-30, the IRS has
reverted to its original optional language, whereas, "plans may,
but are not required" to offer non-spouse beneficiaries the option
of direct rollovers to inherited IRAs.
Again, a technical corrections bill is
pending, and if enacted, QRPs would be required to offer the direct
rollover option to non-spouse beneficiaries, effective for 2009 and
beyond.
NON-SPOUSE BENEFICIARIES OF QRPs ALLOWED
ROLLOVERS TO ROTH IRAs TOO
In IRS Notice 2008-30, Q&A-7, the
following question is asked: Can beneficiaries make qualified rollover
contributions to Roth IRAs?
Answer: Yes. In the case of a distribution
from an eligible retirement plan other than a Roth IRA, the MAGI
(modified adjusted gross income) and filing status of the beneficiary
are used to determine eligibility to make a qualified rollover
contribution to a Roth IRA.
According to Q&A-7, a non-spouse
beneficiary of a qualified retirement plan may execute a distribution
from a deceased participant�s QRP and convert those assets directly to
a Roth IRA. Note that QRPs may, but are not required to permit
rollovers by non-spouse beneficiaries to IRAs. However, if permitted,
the rollover must be executed in the form of a direct
trustee-to-trustee transfer.
Non-spouse beneficiary limitations |
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2nd Quarter 2008 |
If QRPs do permit direct conversions to
Roth IRAs, it is important to note two important conversion
limitations:
1. The new benefit is not available
to non-spouse beneficiaries of Traditional IRAs (SEP and SIMPLE
included), as IRA beneficiaries (other than spouse beneficiaries)
are not permitted rollovers of distributions received.
2. Only those QRP beneficiaries whose
MAGI is under $100,000 (single or married filing a joint return) are
eligible for Roth IRA conversions in 2008 or 2009. This $100,000
eligibility rule will be eliminated in 2010 and beyond.
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Spouse beneficiary allowed Roth IRA
Even though the Pension Protection Act
of 2006 added non-spouse direct rollover benefits to beneficiary
IRA accounts, it does not specifically address the issue of
permitting QRP spouse beneficiaries this same option and a
technical correction is expected. However, in Notice 2008-30,
Q&A-7, it states, "A surviving spouse who makes a rollover to a
Roth IRA may elect either to treat the Roth IRA as his or her own
or to establish the Roth IRA in the name of the decedent with the
surviving spouse as the beneficiary." In other words, a QRP spouse
beneficiary will also be permitted to roll (convert) the QRP
assets into a Roth inherited beneficiary IRA.
Note: A non-spouse beneficiary cannot
elect to treat the Roth IRA as his or her own.
Conclusion
It should be noted that while
Notice 2008-30 offers partial clarification for QRP non-spouse
beneficiaries, more guidance is expected in pending technical
corrections.
PENALTY-FREE WITHDRAWALS
If a Traditional IRA owner wishes to
take a distribution from an IRA before reaching age 59 1/2, a 10
percent premature withdrawal penalty will be charged on the
untaxed portion of that distribution. However, several exceptions
to the general rule exist, and one such exception is found under
IRC Sec. 72(t)(2)(A)(iv), commonly referred to as "the 72(t)
exception." This rule allows an individual to receive
substantially equal periodic payments penalty-free before reaching
age 59 1/2, as long as the payments are calculated in one of the
three IRS-approved methods and continue, without modification,
until the later of five years or age 59 1/2.
NOTE: Qualified retirement plan (QRP)
participants have this option, but may not begin until they
separate from service.
Guidelines for the program
The following terminology and
conditions in regard to establishment and maintenance must be
followed:
� Account balance � The account
balance that is used to determine payments must be "determined in
a reasonable manner based on the facts and circumstances." For the
first year, any valuation date between the prior year-end balance
and the date of the first distribution may be used. For subsequent
years, under the Required Minimum Distribution method, it would be
reasonable to use the prior year-end balance or an account balance
that is "within a reasonable period before that year�s
distribution."
� Life expectancy tables � An
individual may determine payments using the uniform lifetime
table, single life expectancy table in IRC Reg. 1.401(a)(9)-9,
Q&A-1, or the joint and last survivor table in IRC Reg.
1.401(a)(9)-9, Q&A-3.
� Beneficiary under joint tables
� If the joint life and last survivor table is used, the
survivor must be the actual beneficiary with respect to the
account for the year of the
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distribution. If there is more than
one beneficiary, the identity and age of the oldest beneficiary
must be established as determined under the designated beneficiary
rules.
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Interest rates
� The definition of the "rate of return" is any
interest rate that is not
more than 120 percent of the federal mid-term rate
for either of the two months immediately preceding
the month in which the distribution begins.
� Complete depletion of assets � If,
as a result of following an acceptable method of determining
substantially equal periodic payments, assets in an individual
account plan or an IRA are exhausted, the cessation of payments
from a depleted account will not be treated as a "modification" of
the series of payments.
� Account modification � The following
is regarded as a modification of payments:
- Additions to the account that are
other than gains or losses, including the receipt of
contributions, transfers, or rollovers.
- The transfer of any non-taxable
portion of the account balance to another retirement plan.
- The rollover of a substantially
equal periodic payment that will result in such payment becoming
non-taxable.
Relief for depreciating accounts
Under Revenue Ruling 2002-62, if
substantially equal periodic payments are no longer supported by a
depreciating account balance, individuals are offered relief by:
1. Allowing a one-time switch to
change their distribution method.
2. Allowing that a complete depletion
of the IRA assets will
not be treated as a "modification" of
payments.
One-time change of calculation method
An individual who began distributions
based on the amortization or annuitization method will be allowed
in any subsequent year to switch to the Required Minimum
Distribution (RMD) calculation method for the year of the switch
and for all subsequent years.
Conclusion
There are specific IRS guidelines that
govern the "substantially equal periodic payment" program, and
once the program is initiated by an individual, it cannot stop (or
be modified) until the conclusion of the program. It is always
recommended that individuals who are considering this program seek
the aid of a competent tax advisor or attorney before making any
decisions.
FORM 5500 DEADLINE APPROACHES FOR
CALENDAR YEAR PLANS
ERISA generally requires the
administrator of an employer-sponsored Qualified Retirement Plan
to submit an annual report which contains information on the
characteristics and financial operations of the plan. This annual
report is completed on Form 5500 and is filed with the Department
of Labor�s Employee Benefits Security Administration (EBSA). EBSA
provides information from the reports to the IRS and Pension
Benefit Guaranty Corporation (PBGC) for use in enforcement. |
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The Form 5500 is
generally due by the last day of the seventh month after the end
of the plan year. Thus, the deadline for 2007 calendar year plans
is July 31, 2008. One of the most serious offenses that a plan
sponsor or plan administrator can commit is failure to file Form
5500. The IRS can impose a penalty of $25 per day up to $15,000,
and the Department of Labor and the PBGC can each charge up to
$1,100 per day. Also, any incorrect or inconsistent data could
trigger an audit of the plan and could ultimately disqualify the
tax-deferred status of the plan.
Owner-only plans with less than
$250,000 in plan assets are exempt from filing IRS Form 5500.
For more information about the Form
5500 filing, go to the EBSA web site at www.dol.gov/ebsa or call
(866) 444-3272.
IRS AND DOL FORM 5500 FILING TIPS
The IRS and Department of Labor (DOL)
have compiled a list of the most frequent Form 5500 filing errors.
� Failure to sign and date the form
and any schedules that require a signature.
� Failure to provide the proper
Employee Identification Number (EIN) and Plan Number.
� Filing for a period of more than 12
months.
� Filing a Form 5500 as a "Final
Return/Report" if the plan has assets, liabilities, or
participants at the end of the plan year.
� Failure to provide a proper business
code � a listing of business codes is provided in the Form 5500
Instructions booklet.
� Failure to provide the correct plan
characteristic codes � a listing of characteristic codes is
provided in the Form 5500 Instructions booklet.
� Failure to file all applicable
schedules and attachments.
� Failure to file the appropriate
Financial Information schedule. Schedule I is generally for plans
with 100 or fewer participants, while Schedule H is for plans with
more than 100 participants.
� Incomplete Form 5500.
Additional information can be found in
the DOL�s Trouble Shooter�s Guide to Filing the ERISA Annual
Report (Form 5500), which is available on the DOL website at
www.dol.gov/ebsa.
DOL PROPOSES DEFERRAL DEPOSIT SAFE
HARBOR
The Department of Labor (DOL) issued
proposed regulations at the end of February that will provide
retirement plans with fewer than 100 participants a safe harbor
period of seven business days to deposit employee salary
deferrals.
Under the current rules, employers of
all sizes must transmit employee contributions to retirement plans
as soon as they can reasonably be segregated from the general
assets of the employer, but no later than the 15th business day of
the month following the month in which contributions are received
or withheld by the employer.
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The proposed rule would amend the employee salary deferral rules
by creating a safe harbor period under which employees� deferrals
to a small plan will be deemed to be made in compliance with the
law if those amounts are deposited to the plan within seven
business days of receipt or withholding.
Before the effective date of the final regulation, the DOL will
not assert a violation of the Employee Retirement Income Security
Act regarding participant contributions where such contributions
are deposited with small plans within the seven-business-day safe
harbor period.
In addition, the DOL requests information and data regarding a
possible safe harbor for plans with 100 or more participants to
enable it to evaluate the current contribution practices of these
large employers.
It is no surprise that the DOL is seeking to ensure that
contributions are deposited in a timely manner. For the last
couple of years, the DOL has been using seven days as a benchmark
when auditing a plan�s contributions.
RESTATEMENT FOR PROTOTYPE DEFINED CONTRIBUTION PLANS IS COMING
In 2005 the IRS formally issued new procedures for mandatory
plan document restatements. Plan document restatements become
necessary as various tax laws are passed, and those laws must be
incorporated into the plan document.
Most plans use pre-approved documents (i.e., master, prototype,
and volume-submitter plans) and are subject to a six-year
restatement cycle, while individually designed plans are subject
to a five-year restatement cycle.
Plan document providers were required to submit their plan
documents to the IRS for the upcoming EGTRRA restatement by
January 31, 2006. The procedure allows the IRS two years to review
the submitted documents before opening the restatement window,
which will generally last 24 months.
The IRS began issuing opinion letters to pre-approved plan
document providers on March 31, 2008, which means that the
mandatory restatement window has opened for pre-approved defined
contribution plans. This means that plan sponsors must restate
their pre-approved defined contribution plan documents prior to
April 30, 2010.
The defined benefit restatement cycle will open in 2010.
Although the restatement window has opened, you should not
expect to be contacted by your plan document provider until later
this year. If you have any questions about your plan document
restatement, please consult your plan document provider.
COURT SAYS UNPAID CONTRIBUTIONS CONSTITUTE THEFT
The 4th U.S. Circuit Court of Appeals upheld a lower court�s
conviction of two retirement plan administrators for Employee
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Retirement Income Security Act (ERISA) theft due to unpaid plan
contributions.
John Alvis Jackson, Jr. was the
President and CEO of The Burruss Company, and Larry Andrew Carey
was it Chief Financial Officer. When the company fell into
financial trouble, the two made false financial statements, became
delinquent on vendor payments, and increasingly borrowed to pay
expenses.
During this time, Jackson and Carey
failed to submit contributions to two of the company�s pension
plans for employees, but submitted IRS Form 5500s indicating the
contributions had been made. When initially questioned, the two
claimed that they had submitted the checks but they must have been
misplaced.
Jackson and Carey would later admit
that they stopped making contributions to the plans even though
the plans were never officially terminated. The plans were still
owed contributions for 1998 and 1999 of over $329,000.
In its opinion, the 4th Circuit Court
said contributions become plan assets when they are due and
payable. The defendants argued that employer contributions to the
plans were not plan assets until they were paid, and thus they
could not be guilty of theft of plan assets.
The 4th Circuit Court cited the prior
opinion of the 10th Circuit Court, which stated that "when an
ERISA employer has paid wages or salaries to its employees, it is
contractually bound to contribute to any ERISA plan that it
maintains" and "an employer must comply with it contractual
obligations to make contributions to its ERISA plan, and such a
contractual obligation constitutes an �asset� of the ERISA plan."
The defendants also argued that theyÎ<1Ã
were not fiduciaries and, thus, could not be convicted of theft of
plan assets, but the 4th Circuit Court pointed out that Title 18
Section 664 of the U.S. Criminal Code clearly states that "any
person" convicted of |
stealing from an ERISA plan shall be fined and/or imprisoned
regardless of fiduciary status.
Jackson was sentenced by the lower courts to nine years in
prison, while Carey was sentenced to seven years and three months
in prison. The Burruss Company eventually filed bankruptcy.
ADDING SAFE HARBOR TO 401K PREVENTS HCE REFUNDS
Did your company have to refund excess contributions made to
your 401K plan by Highly Compensated Employees (HCEs)? While
most employees would be happy at the thought of a refund check
from their employer, HCEs cringe at the thought of a refund check
at the beginning of the year. Why? HCEs� maximum 401K
contribution is dependent on the Non-HCEs� participation. The
refund check represents an excess salary deferral made by HCEs to
the 401K plan due to low participation by Non-HCEs. This
"refund" is now considered taxable income. Corrected W-2s must be
issued and 1040s amended. However, there is a solution that can
allow HCEs to contribute up to the $15,500 (2008) salary deferral
limit, even if non-HCEs� contributions are low.
Safe Harbor 401K plans are becoming an increasingly popular
choice among retirement plan sponsors. By using the Safe Harbor
provision, a 401K will automatically pass the non-discrimination
tests and allow the HCEs to defer the maximum with no threat of
refunds. In order to automatically pass the tests, the employer
must make a mandatory, immediately vested employer contribution of
either 3% to everybody that is eligible for the plan or a matching
contribution which is 100% of the first 3% deferred and 50% of the
next 2% deferred.
Please consult your plan�s third-party administrator to
determine if the Safe Harbor provision would be appropriate for
your 401K plan.
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The information contained in this
newsletter has been carefully compiled from sources believed to be
reliable, but the accuracy of the information is not guaranteed.
This newsletter is distributed with the understanding that the
publisher is not engaging in any legal or accounting type of work
such as practicing law or CPA services.
S TIFEL,
NICOLAUS &
COMPANY,
INCORPORATED
Member SIPC and New York
Stock Exchange, Inc.
National Headquarters: One
Financial Plaza � 501 North Broadway � St. Louis, Missouri 63102
(800)434-401K � www.stifel.com
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