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Newsletter
August
2006 Volume
23 - Number 2
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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:
THE PENSION PROTECTION ACT OF 2006 (PPA) – Was signed by
President Bush on August 17, 2006. This article summarizes some of the major
changes included in the Act. DEPARTMENT OF LABOR UPDATES THE VOLUNTARY
FIDUCIARY CORRECTION PROGRAM - In April of this year, the Department of
Labor (DOL) issued an updated version of the Voluntary Fiduciary Correction
Program (“VFC” or the “Program”) by adding additional transactions that can
be corrected under the Program and expanding the opportunity to obtain
additional relief from prohibited transactions (PT). PACIFIC RETIREMENT PLANS STAFF NEWS – Congratulations are in order! |
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THE
PENSION PROTECTION ACT OF 2006 (PPA) PPA was signed
into law on August 17, 2006. The Act makes many significant changes to the
rules governing retirement plans. The following is a brief summary of some of
the significant changes. We expect to provide more details in future
newsletters. EGTRRA permanency
– EGTRRA provisions first became effective in 2002, but were set to expire
after 2010. PPA makes all EGTRRA provisions permanent. These include the
increased 401(k) dollar limit ($15,000 for 2006) and individual annual limit
($44,000 for 2006), the ability to make 401(k) catch up contributions ($5,000
for 2006), the increased deduction limit for profit sharing plan
contributions (25%) and the Roth 401(k) option. Defined Benefit
Plan Funding– Numerous changes have been made to how plans are required to
determine the minimum annual contribution to fund plan benefits. These
changes are effective in 2008 and will have the effect of accelerating
contributions to “under funded” plans. In addition, limitations are placed on
plans that do not meet certain funding levels. Such limitations affect the
funding calculation, restrict distributions, prohibit benefit increases and
eliminate additions to non-qualified executive deferred compensation
arrangements. Deduction Limits –
PPA has increased this limit for defined benefit plans. The Act also allows
for a deductible profit sharing contribution of up to 6% of compensation for
plans that would normally be restricted by the combined plan limit and allows
for certain non-deductible employer matching contributions not subject to
excise tax. Beginning in 2008, contributions to a defined benefit plan
covered by PBGC would not be included in the combined plan deduction limit. Defined Benefit
401(k) Plan (DB(k)) – Effective in 2010, an employer can adopt a new DB(k)
plan which must have a 1% of pay formula or cash balance formula that
increases with age. The plan must
also contain ADP/ACP safe harbor provisions including 401(k) automatic
enrollment and a fully vested matching contribution of 50% of the first 4% of
compensation deferred as 401(k) contribution. Cash Balance and
Other Hybrid Plans – The Act clarified that these plans are not inherently
age discriminatory, but provides that certain minimum vesting and benefit
requirements must be satisfied. Automatic 401(k)
Enrollment – PPA clarifies that federal law under ERISA preempts any state
law that would otherwise regulate automatic enrollment withholding from an
employee’s paycheck. This means 401(k) plans operating in California and
certain other states can add automatic enrollment without fear of violating
state payroll law. Changes effective in 2008 include new safe harbor
(elimination of ADP and ACP testing) options for plans with automatic
enrollment that also satisfy certain contribution, vesting, automatic
deferral increase and notification requirements. Minimum Vesting
Requirement - In 2007, all employer accounts in most defined contribution
plans must vest at least as rapidly as the current top heavy minimum vesting
schedules of either 6-year graded or 3-year cliff. Limited exceptions apply. Employer Stock
Diversification – Defined contribution plans holding publicly traded employer
securities must allow participants to diversify their investment in such
securities. Exceptions apply for ESOP and other plans. Form 5500 - Beginning
in 2008, DOL will post filed 5500 Forms on their website. The minimum threshold
for filing Form 5500-EZ increases from $100,000 to $250,000. Simplified
reporting will be made available for certain “smaller” plans with 25 or less
participants. There are numerous other changes we expect to cover in future newsletters.
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DEPARTMENT
OF LABOR UPDATES THE VOLUNTARY FIDUCIARY CORRECTION PROGRAM In April of this
year, the Department of Labor (DOL) issued an updated version of the
Voluntary Fiduciary Correction Program (“VFC” or the “Program”) by adding
additional transactions that can be corrected under the Program and expanding
the opportunity to obtain additional relief from prohibited transactions
(PT). The following
three new transactions have been added: 1.
Participant loans: Under ERISA, it is a prohibited transaction for a
plan fiduciary to permit a loan by a plan to a party-in-interest, including
plan participants, unless there is an exemption. Loans to participants are
exempt so long as they meet the applicable conditions. Transactions already
covered under the VFC are (i) participant loans that exceed the maximum limit
under Internal Revenue Code (IRC) Section 72(p), (ii) participant loans with
repayment terms that exceed the maximum under IRC Section 72(p); and (iii)
participants loans that met the requirements at inception, however the terms
were not followed due to failure of a party responsible for the administration
of participant loans to properly withhold loan repayments from the
participant’s compensation as required. The transaction that has been added
covers the breach of fiduciary duty for failure to meet the level
amortization requirement for participant loans. Correction. This defect must first be corrected under
the IRS Voluntary Compliance Program of the Employee Plans Compliance
Resolution System (EPCRS; Rev. Proc. 2006-27) since the defect generally
results in a failure to follow the terms of the plan and therefore subjects
the plan to disqualification. The compliance statement issued under VCP must
be submitted with the VFC application, along with proof of payment of any
penalties required under the Voluntary Compliance Program. Hopefully, in the future
DOL will modify the requirements of this procedure to permit a single
application to be filed with both IRS and DOL simultaneously. 2.
Improper payment of expenses from the plan. This breach of fiduciary duty occurs if plan assets are used to
pay expenses, including commissions or fees which should have been paid by
the plan sponsor. Correction: The fiduciary must restore to the plan
the principal amount, plus the greater of the lost earnings or restoration of
profits. 3.
Illiquid assets. If a plan holds an illiquid asset that the plan
fiduciary determines is contrary to the best interests of the participants
and beneficiaries, the plan may now sell the asset to a party in interest if
it was acquired under one of the following circumstances (i) the plan purchased
the asset from a party-in-interest in an acquisition for which relief was
available under a statutory or administrative PT exemption; (ii) the plan did
not pay more than fair market value for the asset but it was a PT because the
seller was a party-in-interest; (iii) the plan purchased the asset from an
unrelated third party, but the fiduciary failed to discharge his or her
duties with respect to the purchase, as for example he or she did not conduct
a prudent analysis of the purchase; or (iv) the plan purchased the asset from
an unrelated third party who was not a party-in-interest. Correction: To sell the asset to a party-in-interest
provided the plan is made whole by receiving the greater of the fair market
value of the asset at the time of resale or the principal amount plus lost
earnings. The principal amount is the original purchase price plus any
transaction cost in acquiring the asset. The above is not
intended to be an in-depth discussion of the 2006 changes to the VFC
program. We recommend that a plan
sponsor who wishes to obtain additional information on any one or more of the
above transactions contact the plan’s legal counsel.
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PACIFIC RETIREMENT PLANS STAFF NEWS We are proud to
announce! Jenny Park successfully completed all three parts of
the American Society of Pension Professionals and Actuaries (ASPPA) Pension Administrators Course and has passed the Defined
Contribution Administrative Issues Basic Concepts Exam and is well on her way
to earning the Qualified 401(k) Administrator (QKA) designation. Carol Youshock and Chris
Martin both passed the Defined Contribution
Administrative Issues Compliance Exam and have completed the requirements for
the ASPPA Qualified 401(k) Administrator (QKA) designation. Detlef Braun passed the IRS Special Enrollment
Exam and obtained the Enrolled Agent (EA) designation. An Enrolled Agent (EA)
is a federally-authorized tax practitioner who is empowered by the Department
of the Treasury to represent taxpayers before all administrative levels of
the Internal Revenue Service for audits, collections, and appeals. Last but definitely not least! It gives us great pleasure to welcome Michelle Zhang back from maternity leave and to congratulate her on the birth of her son, Aidan. Aidan joins his big brother, Ryan, in making sure that Michelle never has a dull moment when she’s out of the office! |
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