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Newsletter
March
2006 Volume
23 - Number 1
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This
newsletter is addressed to our clients their attorneys, accountants and other
professional advisors. Citations may be included for those who want to refer
directly to the source material. IN THIS ISSUE:
TREATMENT OF POST-SEVERANCE COMPENSATION AND 401(K) CONTRIBUTIONS IS
CLARIFIED – We may
rely on proposed 415 Regulations governing treatment of post-severance
compensation. THE CAFETERIA PLAN (SECTION-125 PLAN) “USE IT OR LOSE IT” RULE GETS A
GRACE PERIOD –
plans may offer some relief from this draconian rule. PRIORITIES AND GOALS OF IRS AUDITS FOR EMPLOYEE PLAN EXAMINATION – The focused examination concept has
been expanded and represents a change in methodology and audit philosophy. NEW FDIC LIMITS FOR
RETIREMENT ACCOUNTS
– Insurance level increased from $100,000 to $250,000. |
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TREATMENT OF POST-SEVERANCE
COMPENSATION AND 401(k) CONTRIBUTIONS IS CLARIFIED Determining an employee’s correct
compensation for plan purposes is critical to the administration of a
retirement plan, but the proper treatment of post-severance compensation has
been unclear for many years. Severance of employment occurs when an employee
separates from service due to termination, resignation, retirement,
disability, death or other circumstances. Post-severance compensation consists
of payments received by an employee after separation from employment. A
post-severance 401(k) contribution is made from such post-severance
compensation. New regulations indicate that plan
compensation does not include amounts paid after separation from service, but
with some important exceptions: · Plan compensation can include
post-severance compensation only if it’s paid within 2½ months after
separation from service and; · The post-severance compensation
must consist of payments that would have been paid if the participant had
continued employment or; · The post-severance compensation is
for bona fide sick, vacation and other leave. The leave-related severance
payments can be included only if the employee could have used the leave had
employment continued. IRS representatives have consistently stated that
terminated participants cannot defer into a 401(k) plan. However, the new
regulations specifically allow 401(k) contributions from the post-severance
compensation exceptions outlined above. Please note that severance pay would
never be included in compensation and is not eligible for 401(k)
contributions. |
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THE CAFETERIA PLAN (SECTION-125
PLAN) “USE IT OR LOSE IT” RULE GETS A GRACE PERIOD If you have ever been on the losing
end of this rule you know first hand the frustration of thousands of flexible
spending account (FSA) participants each year. The FSA rules allow
participants to elect pre-tax, both income and payroll taxes, contributions
to their FSA. The catch is that they must spend the entire amount on bona
fide medical or dependent care expenses incurred during the year. Any amount
left unspent is forfeited. Now, Internal Revenue Notice 2005-42 provides for
the option of a grace period. A cafeteria plan may allow a grace
period of up to 2½ months after the end of the year. A participant can be
reimbursed for bona fide expenses incurred during this grace period. At the
end of the grace period the participant forfeits the unspent balance of the
FSA. Cafeteria plans are not required to provide for a grace
period. If a plan sponsor wants to add this provision, the plan must be
amended before the end of the plan year in which the grace period is to be
effective. |
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PRIORITIES AND GOALS
OF IRS AUDITS FOR EMPLOYEE PLAN EXAMINATION At the Los Angeles Benefits
Conference in January, 2006, Michael Julianelle,
the Director of Employee Plans (EP) Examinations, discussed changes in the way
his department will audit retirement plans in the future. He has a list of what he calls his
“Critical Few” priorities and goals for the year ahead and will be focusing
his resources and attention on these priorities. At the top of his list is to expand the
focused examination concept. This
concept is discussed below. Expand Focused Examination Concept. The concept is to change the methodology and audit
philosophy within EP Examinations from one that stresses a comprehensive
approach, to a more limited process that concentrates on a framework of
activities that are used to evaluate overall plan compliance. This philosophy will help to increase
examination coverage and have the agents work more productively. The idea is for the agents to spend more time
looking at the potentially non-compliant plans and close the compliant plans
more quickly. How Does This Approach Help the Plan Sponsor? The plan sponsor will only have to
gather records for the issues initially identified by the agent. Depending on the compliance level of the
taxpayer after conducting an opening interview, reviewing internal controls
and examining the few key issues, the examination will be expanded or closed
at that time. For compliant taxpayers,
this approach will save time and money. Although more plans will be
scrutinized, for plans that are clean and well documented, the period between
the opening of the audit and receipt of the closing letter will be greatly
reduced. At the Benefit Conference in The staff at Pacific Retirement
Plans has had many years of experience in representing our clients for
purposes of an IRS or a Department of Labor (DOL) audit. If you receive an audit notice from either
IRS or the DOL, please contact us for assistance. Declaration of Taxpayer Rights: Protection of Your Rights. IRS employees will explain and protect your rights as a
taxpayer throughout your contact with IRS. Privacy and Confidentiality. The IRS will not disclose to anyone the information you
give, except as authorized by law. You have the right to know why IRS is
asking you for information, how they will use it, and what happens if you do
not provide requested information. Professional and Courteous Service. If you believe that an IRS employee has not
treated you in a professional, fair and courteous manner, you should tell
that employee’s supervisor. If the supervisor’s response is not satisfactory,
you should write to the IRS director for your area or the center where you
file your return. Representation. You may either represent yourself or, with proper written
authorization, have someone else represent you in your place. Your
representative must be a person allowed to practice before the IRS. Payment of Only the Correct Amount of Tax. You are responsible for paying
only the correct amount of tax due under the law- no more, no less. If you
cannot pay all of your tax when it is due, you may be able to make monthly
installment payments. Help With Unresolved Tax Problems. The Taxpayer Advocate Service can help you if you
have tried unsuccessfully to resolve a problem with the IRS. For more
information there is a toll free number Appeals and Judicial Review. If you disagree with the IRS about the amount of your tax
liability or certain collection actions, you have the right to ask the
Appeals Office or a court to review your case. Relief from Certain
Penalties and Interest. The IRS will waive penalties when allowed by law if you can show you
acted reasonably and in good faith or relied on the incorrect advice of an
IRS employee. IRS will waive interest that is the result of certain errors or
delays caused by an IRS employee. |
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NEW FDIC LIMITS FOR RETIREMENT ACCOUNTS The
Federal Deposit Insurance Corporation approved final rules that will raise
the deposit insurance coverage on certain retirement accounts at a bank or
savings institution to $250,000 from $100,000. The increase will become
effective on April 1. The basic insurance coverage for other deposit
accounts, however, will remain at $100,000. Under
the FDIC's new rules, up to $250,000 in deposit insurance will be provided
for a variety of retirement accounts at one insured institution. Accounts
that are included in this increased coverage are traditional and Roth IRAs,
self-directed Keogh accounts, 457 Plan accounts for government employees, and
employer-sponsored defined contribution plan accounts (Primarily profit
sharing, 401(k) and money purchase plan accounts) that are self-directed. In
addition, the IRAs and other retirement accounts that will be protected under
the new rules are insured separately from other accounts at the same
institution that will continue to be insured up to at least $100,000. The
deposit limits are scheduled to increase every five years starting in 2011
based on inflation and other factors. Federal insurance protects depositors against loss if a
banking institution fails. The same law also increased the deposit insurance
coverage for retirement accounts at credit unions insured by the National
Credit Union Administration. |
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