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Newsletter
December
2007 Volume
24 - 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:
RETIREMENT PLAN LIMITS FOR 2008 - A
summary of the limits and thresholds for 2007 and 2008. YEAR-END REMINDERS - Don’t forget
these important distribution, filing and notice requirements. AMENDMENTS TO COMPLY WITH THE PENSION PROTECTION
ACT OF 2006 - When are amendments required? STAFF NEWS This newsletter can also be
viewed online at www.prplans.com. |
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RETIREMENT PLAN LIMITS FOR 2007 AND 2008
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YEAR-END
REMINDERS
2007 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 2007 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 the 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, if the plan owns a portion of a limited partnership, which operates an X-ray facility, income from the facility would constitute UBTI. In addition, income from investments acquired wholly or partially with borrowed funds is treated as taxable to the plan. Form 990-T must be filed to report UBTI (and tax paid) by the 15th day of the 4th month following the close of the plan year. 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 70½. 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 on the amount of the RMD that was required, but not distributed to the participant. 401(k) |
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AMENDMENTS
TO COMPLY WITH THE PENSION PROTECTION ACT OF 2006 (PPA) A qualified plan must be qualified both in
form and in operation. When a law change occurs, Congress generally provides
for an extended period of time before plan amendments needed to comply with
the changes must be adopted. In the case of the Pension Protection Act, the
plan sponsor of an ongoing qualified plan has until the last day of the 2009
plan year to adopt the requisite amendment, providing the plan operation is
consistent with the law changes from and after the effective date of the
applicable changes. However, a plan that terminates before the extended
amendment date must be updated at the time of termination for all changes
that are effective as of the date of termination. As discussed in prior issues of this
newsletter, PPA amended or added several provisions affecting qualified
plans. Some of these changes are optional and require a plan amendment only
if they are implemented. Other changes are mandatory and require the plan
document to be amended. Since all of the changes effective in 2006 are
optional, a plan terminating in 2006 requires amendment only if any of the
optional provisions were implemented.
The changes effective in 2007 include both optional provisions and required
provisions. Therefore a plan which terminates in 2007 must adopt an amendment
reflecting the following provisions: Nonelective Contribution Vesting: The plan must adopt a top heavy vesting
schedule for contributions allocable in post 2006 plan years. This is
necessary for the plan document to comply in form with the PPA law changes
whether or not the employer actually makes a contribution for a post 2006
plan year. Even if the plan document contains a vesting schedule that
satisfies the top heavy requirements, it must be amended if the document
provides for use of a non top heavy schedule in years in which the plan is
not top heavy. Participant
Distribution Notification Period: PPA extended the period for completing a distribution from 90 days to
180 days after notice is given to a participant. This provision applies to
distributions made in a post 2006 plan year. Since a plan with a 2006
termination date may not make distributions until 2007, the amendment should
be adopted by all terminating plans in case a distribution is completed more
than 90 days after notice is given. After
Tax and Roth Rollovers: PPA
permits a participant to make a direct rollover of after tax contributions
and Roth deferrals to another qualified plan that separately accounts for
these amounts. Even if no after tax contributions or Roth deferrals have been
made to a plan, a plan document that allows for such contributions must be
amended to comply with the law change. Non
Spouse Beneficiary Rollovers: For distributions after December 31, 2006, a non spouse beneficiary
may elect a direct rollover to an IRA. This provision is optional, but if it
has been utilized in a terminating plan, the change must be reflected in the
PPA amendment. Qualified
Reservist Distributions/Beneficiary Hardship Distributions: PPA permits a 401(k) plan to make
available qualified reservist distributions and hardship distributions in the
event of a hardship incurred by a participant’s beneficiary. The earliest
effective date of the hardship distribution was August 17, 2006, while the
earliest effective date of the reservist distribution could be September 11,
2001. If an employer made either of these distributions, the plan must be
amended to allow them. Age
62 In-service Pension Distributions: For post 2006 plan years, PPA permits a pension plan to make
in-service distributions to a participant who has attained age 62. If a
terminating plan is a money purchase, target benefit or defined benefit
pension plan and did offer such distributions prior to termination, it must
adopt this provision. Additional
Provisions: clarify a
permissible QDRO, require divestment of employer securities, modify gap
period income requirements and provide hurricane relief provisions. Termination of a plan requires both formal
action to terminate, (e.g. a corporate resolution) and distribution of all
assets as soon as administratively feasible. The IRS generally treats one
year as a reasonable period to distribute all plan assets. However if an
employer applies to the IRS for a determination letter approving the
termination, the employer need not complete the final distribution until the
letter is received even if the process takes longer than one year. If plan does not complete distribution of the assets as soon as administratively feasible, the Internal Revenue Service may consider the date of termination to be a later date. In this event the plan would need to be amended for any changes in the law that occurred in the period ending on the extended date of termination. |
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STAFF
NEWS Jenny Park has completed the examination and work
experience requires needed to qualify for the designation of Qualified Plan
Administrator. Congratulations! |
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