|
|
Newsletter
December
2006 Volume
23 - Number 4
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
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:
RETIREMENT PLAN LIMITS for 2007 - Limits
and thresholds side by side for 2006 and 2007.
YEAR-END REMINDERS - Included are the standard reminders for every
calendar year and some unique to 2006.
ROLLOVER
TO AN INHERITED IRA - The Pension Protection Act of 2006
("PPA") added new rules effective January 1, 2007 allowing the
benefits payable to a non-spouse beneficiary to be transferred in a direct
rollover to an Inherited IRA. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
RETIREMENT
PLAN LIMITS FOR 2007
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
YEAR-END REMINDERS
This
recap is not intended to cover all of the issues that apply to your plan, or
to be a comprehensive discussion of those issues. It is simply intended to
alert you to some matters that arise at year-end. If you have further
questions, feel free to contact us for more information. 2006
Plan Distributions: A Form 1099-R must be filed with the
Internal Revenue Service for each plan participant or beneficiary who
received a distribution during the 2006 calendar year. Amounts that must be reported
include: 1) Distributions of $10 or more, 2) The cash value of any insurance
contract distributed to the participant, 3) A direct rollover or transfer to
an IRA or other qualified plan, 4) The cost of current life insurance
protection provided under a qualified plan, 5) Payment due to a Qualified
Domestic Relations Order. Deemed Distributions and Loan Offsets:
The deemed distribution of
a defaulted participant loan must also be reported to IRS on Form 1099-R.
Note that a participant loan may become due and payable upon the
participant’s termination of employment and failure to repay the balance of
the loan results in default and a loan offset, which is considered an actual
distribution as opposed to a deemed distribution. Check participant loans to be
certain that any defaulted loans, whether due to termination of the
participant or lack of payment are properly deemed as distributions or
offsets and are reported with Form 1099-R in the correct year. Form 990-T Exempt Organization Business
Income Tax Return: This
form must be filed if a plan has unrelated business taxable income (UBTI).
UBTI is income from an unrelated trade or business carried on by a qualified
plan. For example, income from a limited partnership, which operates an X-ray
facility would constitute UBTI. In addition, income from investments acquired
wholly or partially with borrowed funds is treated as taxable to the plan.
Form 990T must be filed to report UBTI (and the appropriate tax paid) by the
15th day of the 4th month following the close of the
plan year. Since this office does not prepare 990Ts, plan sponsors should
consult their tax advisors with respect to this filing. Age 70½ Required Minimum Distributions
(RMD): The first RMD is for
the year in which a participant attains age 70 ½. This must be made no later
than April 1st of the following year. All subsequent RMDs must be
made by December 31st of each year. If the first RMD is made in
April, a second distribution would be required by December 31 of the same
year. Participants who are not more than 5% owners may have to defer
commencement of distributions until actual retirement. The amount of the RMD
is determined on the basis of the participant’s account balance or accrued
benefit and his or her life expectancy. Please note that there is a 50%
penalty for noncompliance with this requirement. The penalty is 50% of the
RMD that was required but was not distributed to the participant. 401(k) Safe Harbor Notices for 2007: Ongoing calendar year safe harbor 401(k)
plans must provide the safe harbor notice to eligible employees by December
1, 2006 in order to meet the 30-day notice requirement for plan years
beginning January 1, 2007. Employers establishing a new safe harbor 401(k)
plan have until the first day of the first plan year to provide the notice to
eligible employees. In addition, safe harbor notices must include the
expanded information required by the final 401(k) regulations. The notices
must now include a summary of the vesting and distribution provisions of the
plan where in the past the notice could simply reference the summary plan
description. Amendment for the Final 401(k)/(m)
Regulations: The
regulations are generally effective for years beginning in 2006 and apply to plans
that offer participants voluntary contributions such as 401(k) salary
reduction and voluntary after tax contributions. The amendment for final
401(k)/(m) regulations is a required amendment for plan qualification
purposes. As such, it must be adopted by the later of the last day of the
plan year or the due date of the employer’s tax return including extensions.
However, some aspects of the amendment may be considered a discretionary
change and any amendment containing a discretionary change must be adopted by
the last day of the year at the latest. To be on the safe side, employers
should adopt the final 401(k)/(m) regulation amendment by the last day of the
plan year. That’s December 31, 2006 for calendar year plans. IRS Form
8905 Certification of Intent to Adopt a Pre-Approved Plan: From time to time IRS requires that all qualified
retirement plans must perform a complete update of their plan documents to
comply with law changes. The purpose of Form 8905 is to demonstrate intent to
adopt a pre-approved plan and qualify for the 6-year remedial amendment
cycle. A pre-approved plan is a plan utilizing a prototype or volume
submitter plan document which has been pre-approved by IRS. Pre-approval is
evidenced by a favorable opinion letter issued by IRS. The 6-year remedial
amendment cycle was recently established by IRS to create a recurring
deadline for updating plan documents for law changes. The first deadline
under the 6-year cycle is scheduled for January 31, 2011. Plans that do not
fall under the 6-year cycle must complete the document update under a 5-year
remedial amendment cycle. The first deadline under the 5-year cycle is
January 31, 2007. To be on the safe
side, employers should execute a completed copy of Form 8905 before January
31, 2007. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
ROLLOVER
TO AN INHERITED IRA The Pension Protection Act of 2006 ("PPA") added
new rules effective January 1, 2007 allowing the benefits payable from a
qualified retirement plan, 403(b) program, or governmental 457(b) plan to a
non-spouse beneficiary to be transferred in a direct rollover to an Inherited
IRA. Background: A spouse
beneficiary is treated much like the participant when it comes to the options
for taking a distribution from the plan: rolling the benefit into an IRA,
leaving the benefit in the plan and withdrawing required minimum
distributions at age 70½. A non-spouse beneficiary is generally required to
either 1) withdraw the entire benefit from the plan within 5-years or 2)
within a year begin installment payments over the life expectancy of the
beneficiary. These distribution options for the non-spouse beneficiary were
not eligible for rollover and could be further restricted by the distribution
options available under the plan. Inherited
IRA Rollover: A non-spouse beneficiary rollover is not the same
as a rollover by a participant or spouse beneficiary. Unlike a spouse
beneficiary, the non-spouse beneficiary will not have the option of delaying
distributions from the IRA until reaching age 70½. The Inherited IRA
established for a non-spouse beneficiary must make distributions according to
the same required minimum distribution rules that apply to distributions to a
non-spouse beneficiary under a plan. Typically, the IRA balance either will
have to be distributed in installments over the life or life expectancy of
the non-spouse beneficiary commencing by the end of the calendar year after
the participant's death, or else will have to be distributed in full by the
end of the fifth calendar year following the year the participant died.
However, if the deceased participant was already required to begin age 70½
minimum distributions, then distributions from the IRA to the non-spouse
beneficiary following a rollover will have to be made at least as rapidly as the
minimum schedule that would have applied under the plan. A non-spouse beneficiary rollover must be transferred in a
"direct rollover" from the trustee or custodian of the plan to the
trustee or custodian of the IRA. If the non-spouse beneficiary receives a
distribution from the plan, he or she cannot then make a rollover to an IRA,
even if it’s within the 60 days normally allowed for participant rollovers. A
non-spouse beneficiary must keep an inherited IRA separate from any other IRA
the individual may have, and cannot make a rollover out of the inherited IRA
into another IRA. Those Likely to Benefit: The main
benefit of this new rollover will be for non-spouse beneficiaries under plans
that only allow lump sum distributions. The non-spouse beneficiary rollover
would enable a beneficiary under a lump-sum-only plan to reduce taxes by
taking several IRA payments spread over the five years following the
participant's death, or to defer taxes for as long as possible by arranging
for immediate installment distributions from the IRA over the life
expectancy. Even in the case of a plan that allows installment distributions
to non-spouse beneficiaries, the rollover may be attractive for someone who
wants different investments than the plan offers. The new rollover also benefits plan sponsors that wish to
keep plan administration simple by promoting the Inherited IRA for the
purpose of arranging for periodic payments to non-spouse beneficiaries as
opposed to maintaining the beneficiaries account in the plan and processing
any periodic payments elected by the non-spouse beneficiary. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
