Retirement Plans: A Changing Landscape

Martha Hutzelman and Shirley Broz

ASBO Encounters

February 2006

Presented by Martha L. Hutzelman, J.D. Employee Benefits Counsel, Law Offices of Martha L.

Hutzelman, Burke, Virginia Member, American Bar Association Joint Committee on

Employee Benefits Fellow, American College of Employee Benefits Counsel Former Senior Attorney, Employee Benefits Division,

Office of Chief Counsel, Internal Revenue Service Member, ASBO International Legislative Affairs

Committee

Presented by Shirley Broz, CPA Director of Finance, Rockwood School

District, Eureka, MO RSBA

Cost of Living Adjustments

IRS News Release – IR 2005-120 – 10/14/05

New cost of living adjustments issued for 2006 dollar limitations for retirement plans 2006 limit on elective deferrals to 403(b) and 457(b) plans

- $15,000 2006 limit on age 50 catch-up contributions to 403(b) and

457(b) plans - $5,000 2006 limit on annual additions to defined contribution

plans - $44,000

403(b) Plans 403(b) Proposed Regulations – 11/16/04

Clarifications: Vesting is permitted – but separate accounting is required

for non-vested contributions Ordering rule for elective deferrals must be followed:

(1) Annual elective deferrals (2) Special 403(b) catch-up deferrals (3) Age 50 catch-up deferrals

5-Year post-severance contributions must be non-elective employer contributions

403(b) Plans 403(b) Proposed Regulations – 11/16/04

Clarifications (continued): 403(b) and 401(a) contributions may be disaggregated Meaningful notice required for universal availability Hardship distributions made under 403(b) plans must follow

401(k) hardship distribution rules FICA tax must be withheld on:

Employee elective deferrals One-time irrevocable employee elections Mandatory “condition of employment” employee deferrals

Life insurance contracts are subject to incidental benefit rules and new restrictions apply to new life insurance contracts after 2/15/05

403(b) Plans 403(b) Proposed Regulations – 11/16/04

New Proposed Rules: Written plan document requirement 90-24 transfers restricted to only funds offered by employer Elimination of Notice 89-23 good faith reasonable standard for non-discrimination

requirements Exclusion under universal availability for collective bargaining employees will no longer

be permitted New definition of controlled group 403(b) plan termination permitted if no contributions are permitted to another plan

for 12 months after termination and other conditions are satisfied

403(b) Plans 403(b) Proposed Regulations – 11/16/04

Comment period ended 2/14/05, but comments are still accepted ASBO Int’l submitted comments

Public hearing held 2/15/05 Clarifications were effective 11/16/04 New rules will not be effective until after final regulations are

issued – IRS anticipates effective date will be January 1, 2007

403(b), 457(b) and 401(k) Plans Post-Severance Deferrals - 415 Proposed Regulations – 5/25/05 Employees may make deferrals to 403(b), 457(b) and 401(k)

plans from post-severance compensation if: Payments are made within 2-1/2 months after termination of

employment and Employee would have received such payments if he continued

employment (e.g. payments are for compensation, bonuses, overtime, etc.) OR

Payments are for unused sick leave, vacation time, etc., that employee could have used if employment continued

Deferrals may not be made from severance pay This provision may be relied upon as of 5/25/05

403(b), 457(b) and 401(a) Plans Automatic Rollover Rules for Mandatory Cash-Out

Distributions - IRS Notice 2005-5 – 12/29/04 Plan must operationally comply by 3/28/05 and must be later of

EGTRRA remedial amendment period or December 31, 2005: Automatic rollover to an IRA for mandatory cash-out payments of

account balances of $5,000 or less, Mandatory cash-out payments of account balances of only $1,000 or

less OR No mandatory cash-out payments

Rollover contributions must be considered in these amounts

457(b) Plans

Model plan language set out in Rev. Rul. 2004-56 EGTRRA Amendments required to be adopted by

12/31/05

403(b) and 401(k) Plans Roth 403(b) and 401(k) Contributions – Proposed Regulations –

3/2/05 and 1/24/06 Effective 1/1/06 Contributions from employee after-tax dollars only Roth contribution must be designated at deferral in irrevocable election Roth contributions and earnings must be held in a separate account within

the plan Roth contributions are counted toward annual deferral limit

403(b), 457(b) and 401(a) Plans E-Sign Proposed Regulations – 7/14/05

Electronic delivery of notices to employees is permitted if either electronic consent is obtained or employee has effective ability to access computer and is advised that a paper copy is available

An electronic notarization of benefit elections and consents is valid if notary physically witnesses the acknowledged signature

Rules cannot be relied upon until final regulations are issued

403(b) and 401(k) Plans 401(k) and 401(m) Final Regulations – 12/29/04

Safe harbor hardship distributions are expanded to include: Burial expenses for employee’s parent, spouse, child or dependents Expenses to repair damage to employee’s principal residence

resulting from casualty loss Automatic enrollment is permitted if employee is given option

to elect out and receive cash Effective 1/1/06

Defined Benefit Retirement Plans Elimination of certain optional forms of benefits – 411(d)(6) Final Regulations – 8/12/05 Permits elimination of redundant or non-core

optional forms of retirement benefits included in defined benefit plans

Issued in conjunction with new rules that require employees to receive notice of the relative actuarial value of all distribution options available under the plan – notice rules effective 2/1/06

Effective 8/12/05

401(a) Qualified Plans Staggered Remedial Amendment Period for

Requesting Determination Letters for Qualified Plans – Rev. Proc. 2005-66 – 8/26/05 Individually designed plans apply for new

determination letter every 5 years Master and prototype plans apply for new determination letter

every 6 years Annual plan amendments are recommended Cycles begin 2/1/06; Governmental plan cycle begins 2/1/08

and ends 1/31/09

USERRA

Continuation coverage under cafeteria plan, including health flexible spending account (FSA), must be offered during active duty

Health insurance may be cancelled during active duty if employee does not elect or pay for continuation coverage, subject to certain limitations

Comparable leave of absence is clarified

USERRA

Deferrals permitted from differential pay during active duty

Non-matching employer contributions to retirement plan must be made up within 90 days after reemployment (or when contributions due if later)

Matching employer contributions must be paid per terms of plan

Employee make-up deferrals permitted only while employed

New Bankruptcy Act Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 –

enacted 4/20/05 Excludes from individual’s bankruptcy estate funds held in 401(a),

403(b) and 457(b) plans and IRAs Limits IRA exclusion to $1 million (excluding rollovers) Permits plan loan repayments during individual’s bankruptcy An employer in bankruptcy must continue to act as plan administrator Effective 10/17/05

IRS Circular 230 Regulations Effective 6/20/05 Governs tax advisors who practice before the IRS – including

lawyers, accountants, actuaries and administrators Provides that written advice, including e-mails and faxes, will not

be treated as a reliance opinion if practitioner prominently discloses such advice cannot be used for purposes of avoiding tax penalties

Rules not intended to apply to summary plan descriptions, enrollment materials, etc.

Fiduciary Responsibilities

Directed Trustee Duties – Field Assistance Bulletin 2004-03 – 12/17/04 Directed trustee is a plan fiduciary with respect to its limited

duties Directed trustee may not follow named fiduciary’s directions

if directed trustee knows or should know that such directions are inconsistent with terms of plan or contrary to ERISA

Directed trustee has duty to request and review all relevant plan documents

5500 Returns DOL Proposed Regulations – 8/30/05

Proposes that all Forms 5500 filed for years beginning on and after January 1, 2007 must be filed electronically

Not effective until final regulations are issued

457(f) and Other Non-qualified Deferred Compensation Plans 409A Proposed Regulations – 9/29/05

457(f) Plans must comply with both 409A and 457(f) rules

409A applies to any deferred compensation not paid out within 2-1/2 months after date it is earned

457(f) and Other Non-qualified Deferred Compensation Plans

409A Proposed Regulations – 9/29/05 409A restrictions:

Employee deferral must be made in year prior to year deferred compensation is earned

Distributions may only be made upon separation from service, disability, death, a certain date, change in ownership or unforeseeable emergency

Distributions may not be accelerated or delayed Penalty for failure to satisfy 409A – 20% penalty tax Effective – 1/1/05; Plan amendments required – 12/31/06

Hurricane Katrina and Rita Relief Katrina Emergency Tax Relief Act of

2005 – enacted 9/23/05 and Related Guidance No 10% early distribution penalty for up to

$100,000 distributed between 8/25/05 and 1/1/07

Tax-free repayment of distributions received within 3 years from distribution date

Hurricane Katrina and Rita Relief Plan loan or hardship distribution may be made to

any employee located in affected area or whose lineal ascendant or descendant, dependent or spouse is located in affected area

Plan loans permitted up to $100,000 and commencement of loan repayment may be delayed up to one year

Conforming plan amendments may be delayed until 12/31/07 for calendar year plans

Questions and Comments

Martha L. Hutzelman, Esq.

Law Offices of Martha L. Hutzelman

9025 Andromeda Drive

Burke, Virginia

Phone: 703-282-3271

mhutzelm@insight.rr.com