Return to www.Rollover.net Home                                                         Second Quarter 2009

IRA ASSETS REACH $4.5 TRILLION

In the latest report published by the Investment Company Institute (ICI), it was revealed that IRA

assets reached $4.5 trillion through mid-2008. In addition, IRAs represented more than 25% of U.S.

total retirement market assets, compared with 15% twenty years ago.

Statistics for U.S. IRA-households

Key findings in the report for U.S. households owning IRAs showed that:

• Four out of 10 households owned IRAs in 2008, and more than 75% of them also had employer-

sponsored retirement plan accumulations.

• Nearly 37.5 million households, or 33%, had traditional IRAs, followed by Roth IRAs and

employer-sponsored IRAs.

• Over 50% indicated that their IRAs contain rollovers from an employer-sponsored retirement plan.

• Over 70% of all U.S. households had some type of formal, tax-advantaged retirement savings

(includes defined contribution and defined benefit plans).

• Only 14% of U.S. households contributed to any type of IRA for the 2007 tax year, and very few

who were eligible made “catch-up" contributions to traditional or Roth IRAs.

• Only 22% of traditional IRA households took a withdrawal in 2007, and 82% of these distributions

were taken by retired individuals.

• Households not making withdrawals generally indicated that they do not intend to do so until age 70 ½.

IRAs continue to grow

In 1990, there were $637 billion in IRAs, and that figure has grown to $4.5 trillion. With current con-

tribution limits at $5,000 plus $1,000 “catch-up," if applicable, and the continued growth of rollovers,

it’s obvious that IRAs have become an important savings vehicle.

The complete report can be viewed at: http://www.ici.org/pdf/fm-v18n1.pdf

TWO KEY BARRIERS ELIMINATED

Prior to the Pension Protection Act of 2006 (PPA ’06), only spouse beneficiaries were allowed to roll

inherited qualified retirement plan (QRP) assets into their own IRA, while inherited QRP assets for

non-spouse beneficiaries remained within the plan subject to its rules and regulations. However, under

a provision in PPA ’06, non-spouse beneficiaries of QRPs, including governmental 457(b), 403(a), and

403(b) plans, are now permitted to roll inherited QRP assets into beneficiary IRAs only if plan spon-

sors adopted this provision.

Restriction eliminated

As written, the provision restricts “direct rollovers" to a select group of non-spouse beneficiaries.

However, in December 2008, H.R. 7327 – The Worker, Retiree, and Employer Recovery Act of 2008,

was signed into law. The Act contains a number of technical corrections for PPA ’06, including relief

for non-spouse beneficiaries. It states, “For any distribution that is eligible for rollover, an employer-

provided tax-qualified retirement plan must offer the distributee the right to have the distribution

made in a direct rollover and, before making the distribution, the plan administrator must provide the

distributee with a written explanation of the direct rollover right and related tax consequences." These

requirements are effective for 2010 and beyond.

Note that a direct rollover for a non-spouse beneficiary must be completed as a “trustee to trustee"

transfer with the assets transferred directly to an inherited beneficiary IRA. Non-spouse beneficiaries

are not permitted actual rollovers.

Roth-type QPs to Roth IRAs

Another provision in PPA ’06 allows distributions from designated Roth accounts (Roth 401(k) /

Roth 403(b)) to be “directly rolled" (converted) to Roth IRA accounts for plan distributions after

December 31, 2007. However, the provision did not address the $100,000 maximum AGI eligibility

Retirement

Plans Quarterly

2nd Quarter 2009

restriction for individuals converting other types of eligible retire-

ment plans and IRAs to Roth IRAs, and whether it applies to those

who do direct rollovers of designated Roth accounts to Roth IRAs.

As a result, most IRA and QP plan specialists advise that the AGI

restriction still applies.

In H.R. 7327, a technical explanation states that, “the provisions

provided that a rollover from a Roth designated account in a tax-

qualified retirement plan or tax-sheltered annuity to a Roth IRA

is not subject to the gross income inclusion and adjusted gross

income conditions." In other words, the $100,000 eligibility bar-

rier does not apply to direct rollovers of designated Roth accounts

to Roth IRAs, retroactively effective January 1, 2008.

A complete explanation of the provisions and TCs in H.R. 7327 –

The Worker, Retiree, and Employer Recovery Act of 2008 can be

reviewed at www.irs.gov.

SELF-EMPLOYED CONTRIBUTION DEDUCTION AID ON-LINE

The Internal Revenue Code provides significant tax incentives for

employers that establish and maintain retirement plans that comply

with the requirements of the Code. Such plans include Simplified

Employee Pension (SEP) plans and Savings Incentive Match Plan

for Employees Individual Retirement Account (SIMPLE IRA)

plans. Generally, under these plans, contributions that are set aside

for retirement may be currently deductible by the employer, but are

not taxable to the employee until distributed from the plan.

If a self-employed individual contributes to their own SEP IRA,

they must make a special computation to calculate the maximum

deduction for these contributions. When figuring the deduction for

contributions made to their own SEP IRA, compensation con-

sidered is “net earnings from self-employment" which takes into

account both of the following deductions:

• Deduction for one-half of their self-employment tax.

• Deduction for contributions to their own SEP IRA.

IRS offers guidance

To help in this special computation, the IRS has issued FS-2008-24.

In addition, FS-2008-24 also reviews the qualifications for deduc -

tions, deduction limits, income tax schedules to be used, the timing

of the deduction, and the IRS Forms to be used for filing.

The Fact Sheet is available for public review at the IRS web site,

www.irs.gov.

FINAL REQULATIONS ISSUED FOR AUTOMATIC

CONTRIBUTION ARRANGEMENTS

On February 24, 2009, the IRS and Treasury released Final Regu -

lations on Automatic Contribution Arrangements. An automatic

contribution arrangement is a retirement plan feature that allows an

employer to automatically reduce an employee’s pay by a default

percentage stated in the plan and contribute that amount to the em-

ployee’s plan account, unless the employee affirmatively chooses

not to contribute or to contribute a different amount.

Types of Automatic Contribution Arrangements

A qualified automatic contribution arrangement (QACA) is an

automatic contribution arrangement that must provide notice and

meet certain “safe harbor" provisions that exempt it from annual

actual deferral percentage and actual contribution percentage test-

ing. A QACA must have a specified schedule of minimum default

percentages starting at 3% and gradually increasing to 6%. The

default percentages can be higher but cannot exceed 10%. The

default percentage must be applied uniformly to all employees,

and the employer must make either a:

a) matching contribution of 100% of an employee’s elective con-

tributions up to 1% of compensation and a 50% match for all

elective contributions above 1% and up to 6% of compensation;

or

b) a non-elective contribution of 3% of compensation to all par-

ticipants, including those who choose not to make any elective

contributions.

An eligible automatic contribution arrangement (EACA) is an

automatic contribution arrangement that may allow employees

to withdraw automatic enrollment contributions, up to 90 days

from the date these contributions first start, without incurring the

10% early withdrawal tax. The default percentage must be applied

uniformly to all eligible employees, and they must be given notice

before each plan year or when eligible to join the plan if that oc-

curs after the beginning of the plan year.

A plan may not distribute these matching or non-elective contri-

butions, nor any of their earnings, on account of an employee’s

hardship.

In general, the regulations for QACAs are effective January 1,

2008, and the regulations for EACAs are effective January 1,

2010. Prior to 2010, a plan sponsor must administer an EACA

based on “good faith" interpretation of Internal Revenue Code

Section 414(w). Compliance with the proposed or final regula-

tions in administering an EACA constitutes good faith interpreta-

tion. What follows are the changes and clarifications in the final

regulations for both QACAs and EACAs:

QACAs:

Minimum default percentage requirement

An employee’s “initial period" determines when an employee’s de-

fault percentage increases. The regulations clarify that an employ-

ee’s initial period in a QACA is based on the date that an employee

first had any automatic enrollment contributions made to the plan,

even if terminated and then rehired. However, the plan may treat

an employee who has not had any automatic enrollment contribu-

tions for an entire plan year as a new employee. A participant who

terminates and is rehired after at least one plan year will begin a new

initial period and may begin automatic enrollment contributions at

the minimum default percentage instead of an escalated one.

Expiration of affirmative elections

The regulations clarify that a QACA may exclude only those eli -

gible employees from an automatic contribution arrangement that

have affirmatively elected not to participate. However, plans can

specifically provide that an employee’s affirmative election can ex -

pire either annually or upon some stated event. It can then require

an employee to make a new affirmative election before automati-

cally enrolling that employee in the plan’s automatic contribution

arrangement.

Uniformity requirement

The regulations state a QACA meets uniformity requirements

even if it bases the default percentage on the number of complete

or partial years an employee has had automatic enrollment contri-

butions. A plan may also increase the default percentage mid-year,

as long as it meets additional requirements.

Compensation

For plan years beginning on or after January 1, 2010, compensa-

tion used for purposes of determining default contributions must

be the “safe harbor compensation" used in traditional ADP safe

harbor testing.

Timing requirement for notices

An automatic contribution arrangement notice will be timely if

provided to eligible employees at least 30 days (and no more than

90 days) before the beginning of each plan year. If an employee

becomes eligible to join the plan after the 90th day before the plan

year begins, the plan must give the notice no more than 90 days

before and no later than the date the employee becomes eligible.

EACAs:

Covered employees

The final regulations modify the coverage rules in the proposed

regulations and now require that an EACA plan document state

which employees the plan will cover, including whether it will

consider an employee who made an affirmative election to be a

“covered employee." An EACA is not required to provide a non-

covered employee with EACA notices.

Uniformity requirement

The regulations provide that the automatic enrollment contribu-

tions under an EACA be uniform for all eligible employees, but a

plan may have multiple EACAs, each covering a separate group of

employees. To ensure the automatic enrollment contributions are

uniform, the plan must aggregate all EACAs in the plan. However,

aggregation is considered after applying the mandatory disaggrega-

tion rules in Code §410(b). For example, if multiple EACAs cover

different groups of collectively bargained employees or different

employers in a multiple employer plan, they do not have to be ag-

gregated and could use different default percentages.

Permissible withdrawals

The regulations allow EACAs to set a period of less than 90 days

(but no less than 30 days) for an employee to elect to withdraw

his or her automatic enrollment contributions, measured from the

date of the first of these contributions. If an employee elects to

withdraw his or her automatic enrollment contributions, then the

election becomes effective no later than the earlier of:

• the pay date for the second payroll period after the election, or

• the first pay date at least 30 days after the employee’s election.

The plan must use its ordinary procedures when processing per-

missible withdrawal distributions and not charge higher fees than

those charged for other distributions.

Other Topics:

Timing of the EACA and QACA Notice for New Hires Plans With

Immediate Eligibility

The IRS modified the final rules to permit more flexibility in the

delivery of notices to new hires in plans with immediate eligibil-

ity. Under the proposed regulations, the deadline for the notice

was the eligibility date, which in effect was the hire date for new

employees in plans providing immediate eligibility. The final

regulations permit the notice to be provided as soon as practicable

after the eligibility date, as long as the employee is allowed to

elect to defer from all types of compensation that may be deferred

under the plan which is earned starting on the employee eligibil-

ity date. Therefore, an employer must provide the notice to the

employee before the pay date for the payroll period that includes

the date the employee becomes eligible.

Hardship withdrawals

The final regulations clarify that the safe harbor non-elective and

matching contributions made under a QACA are not eligible for hard-

ship withdrawal. Also, automatic contributions that were suspended

after a hardship withdrawal must resume after the expiration of the

suspension period absent an affirmative election by the participant.

Eligibility for safe harbor contributions

The final regulations retain the requirement in the proposed regula-

tions that all eligible employees must receive an employer safe harbor

contribution, including those with affirmative deferral elections.

Conclusion/Impact:

• Under the final rules, employers that offer an EACA may

choose to enroll select groups of employees, such as only those

employees who are hired on or after a certain date or only those

who are non-union employees, which was not clear under the

proposed regulations. The notice need only be provided to

those covered employees.

• The final rules clarify that any employees who opt out of auto-

matic enrollment within 90 days will not be entitled to collect

a matching contribution, thereby providing the employer with

some cost savings.

• The final rules simplify the administrative procedures for rehired

employees enrolled in QACAs in that the plan is permitted to treat

a rehired employee as if he or she didn’t have any automatic con-

tributions if he or she didn’t have one during the prior plan year.

• The plan may provide for increases in QACA percentages mid-

year to better coordinate with other administrative procedures,

such as salary increases.

• Plans may establish separate EACAs for certain disaggregated

groups, allowing much needed flexibility for plans that cover,

for example, union and non-union employees.

Automatic contribution arrangements are becoming a focal point

for many plan sponsors. The issuance of final regulations on this

topic now allows plan sponsors to feel that they have the regula-

tory guidance to allow their employees to “do what’s good for

them," namely saving money for retirement.

UNCHANGED BEHAVIOR

Is the ongoing market volatility changing the behavior of your

Defined Contribution (DC) plan participants. Many DC experts

say “no" and that participants are not making rash decisions. A

study involving data from T. Rowe Price Retirement Plan Services

shows various trends in plan activity and investment activity. The

research analyzes call center and web site activity from plan spon-

sors across the country and concludes there was a spike in activity

during the last few months of 2008, but activity returned to its

historical average by January 2009.

Perhaps participants are not as worried as plan sponsors may

think. Or, by not making any significant changes to their al-

location or level of contribution, might participants appear to be

experiencing a fear of regret. The participant will have no regrets

if they don’t make a knee-jerk reaction. This was confirmed

when plan transfer activity was reviewed. Transfer activity from

equities into other asset classes in the fourth quarter was below

average as measured by the Callan DC Index.

Companies can take this opportunity to provide education to par-

ticipants about the advantages 401(k) plans provide and to encour-

age their patience. Plan sponsors can encourage employee contri-

butions while emphasizing the potential “ride back up" when the

economy turns around. Other companies may counter employee

inertia and nudge participants into saving more. Companies may

look to implement automatic escalation, hoping for increased em-

ployee deferrals. With auto escalation, an employee's contribution

rate is automatically increased each year by a specified amount.

Given a scenario where an employer installs auto enrollment and

auto escalation, employee contributions can grow significantly.

Automatic rebalancing may be another tool used to promote sys-

tematic management of employees’ savings. Plan participants may

not know about this and other tools. Auto rebalancing is a realign-

ment process of the participant’s asset allocation. This realignment

is accomplished by selling shares of an investment that has grown

larger in proportion than the participant’s intended designation and

using the proceeds to bring the other investments back up to the

intended proportion. Auto rebalancing can give participants confi-

dence in their account balances, especially if there's been a reduc-

tion in the company match or profit sharing.

Although problems still may be out there, plan participants are

benefiting from continued contributions, and the data suggests that

participants have “played it cool" during a time of financial crisis.

PROTECTING RETIREMENT ACCOUNTS FROM CREDITORS

Even at today’s depressed values, retirement accounts remain

among many people’s most valuable asset. The protection pro-

vided to these accounts will depend on the type of account, the

state of residence, and whether the assets are inherited or not.

Most employer-sponsored plans, including 401(k)s, are covered

by the Employee Retirement Income Security Act, known as

ERISA. In bankruptcy, ERISA plans are completely protected

from creditors. However, they are subject to former spouses and

the IRS. Plans not covered by ERISA, such as an IRA, have only

limited federal protection. In bankruptcy, federal law protects up

to $1 million in an IRA that’s been contributed to directly, and

protects the entire account balance if the money was rolled over

into an IRA from a company plan.

Anything short of bankruptcy, individual state law will determine

whether IRAs (including Roth IRAs) are shielded from creditors’

claims. Some states, including New York and New Jersey, exempt

100 percent of the assets while in the account. But laws in other

states vary widely on whether withdrawals are covered, whether

protections extend to inheritors as well as the initial owner, and

whether former spouses can reach the funds. Some states vary on

the limit of how much is exempt. Some set a dollar limit, such as

Nevada at $500,000, while other states exempt only what is “rea -

sonably necessary" to support the owner and her dependents. Such

wording is, inevitably, an invitation to lawsuits.

If, for example, you have been laid off or are retiring, rolling over

assets from a qualified plan, like a 401(k), into an IRA has estate

planning benefits. However, if you live in or are moving to a state

where IRAs are not protected from creditors, you may be better off

leaving the assets in the company plan. So, you should consult a

lawyer familiar with the rules of the state where you plan to live. If

you have at least $5,000 in a company plan, the company must allow

you to leave the money there until you are 70 ½, but it is not required

to let you take partial withdrawals or borrow against the account.

As with money coming out of a 401(k), you can defer the income

tax until you make withdrawals by rolling over the money into

an IRA, but, again, your protection from creditors will depend on

the state where you live. For example, you might be returning

to work after a period of unemployment and have rolled over an

IRA when you left your previous employer. Some companies may

allow you to transfer that money directly into their plans as you

come on board. You might want to do that either for asset protec-

tion or to take advantage of investment offerings. This strategy

may also work for people who are starting their own businesses

and setting up 401(k)s.

Be aware that state and federal laws against fraudulent convey-

ance prohibit transfers intended to hinder, delay, or defraud

creditors. As a rule, such transfers must be in place before there

is even a hint of potential trouble to be sure they are protected.

If you plan to leave at least some of your IRA to your family,

remember that the assets may not be protected from your benefi-

ciaries’ creditors, depending on where the beneficiaries live. But

you may be able to shield the assets by leaving an IRA to a trust.

The information contained in this newsletter has been carefully compiled from sources believed to be reliable, but the accuracy of the information is not guaranteed.

This newsletter is distributed with the understanding that the publisher is not engaging in any legal or accounting type of work such as practicing law or CPA services.

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