Return to www.Rollover.net Home                                                         Fourth Quarter 2009

IRS ISSUES ADDITIONAL 2009 RMD WAIVER GUIDANCE

On September 24, 2009, the IRS issued Notice 2009-82, which includes additional guidance on the waiver

of required minimum distributions (RMDs) from IRAs and employer-sponsored retirement plans for 2009.

The initial waiver was contained in the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA)

and was intended to aid taxpayers whose retirement accounts may have been adversely affected by the

U.S. economic downturn.

Following are a few of the highlights of Notice 2009-82:

• The 60-day rollover rule is extended. Normally, an individual must complete a rollover within 60 days

of the receipt of the distribution. However, the IRS has extended this restriction for 2009 RMDs (only)

from retirement plans and IRAs. Individuals now have until November 30, 2009, to roll 2009 RMDs

back to the plan (if the plan allows) or to an IRA. Note that 2009 RMDs may be rolled over after

November 30, but they are subject to the 60-day rollover requirement. For example, an RMD that was

taken on October 15, 2009, must be rolled back by December 14, 2009.

• The one-rollover-per-year rule still applies to IRAs, and no more than one 2009 RMD will be allowed a

rollover using the new extension.

• IRA owners who take monthly RMDs may not aggregate their RMDs as one, and therefore, may

choose only one monthly distribution for this relief. However, multiple 2009 payments to employer-

sponsored retirement plan participants may be aggregated and rolled if they equal the 2009 RMDs, or

are one or more payments in a series of substantially equal distributions expected to continue for the

life of the participant, joint lives of the participant and beneficiary, or for a period of at least ten years.

• Distributions other than RMDs may not be considered in this rollover relief, including any amounts dis-

tributed in 2009 that exceed the RMD amounts. Ordering rules determine whether a distribution is an

RMD, and the first distribution in 2009 is considered to be any undistributed RMD(s) from prior years,

followed by 2009 RMD amounts. All other distributions, including a distribution that consists partly of

2009 RMDs, such as a lump-sum distribution, are not eligible for this RMD rollover relief.

• Substantially equal periodic payments (72(t)) taken by those under age 59½ (in order to avoid the 10%

premature distribution penalty tax) and using the safe harbor “RMD method" of calculation are not

eligible for a 2009 suspension of distributions.

• The date for determining “designated beneficiaries" (September 30 of the year after the death year) has

not been extended.

• When an IRA holder dies, a beneficiary must generally elect a method of payment (life expectancy pay-

ments or the five-year rule) either by the earlier of December 31 of the year life expectancy payments

are required to commence, or December 31 of the year containing the fifth anniversary of death. Ben-

eficiaries whose applicable deadline is December 31, 2009, have a one-year extension and must make

such election on or before December 31, 2010.

These are just a few of the highlights of Notice 2009-82. For complete detail, go to: http://www.irs.gov/

pub/irs-drop/n-09-82.pdf.

ROTH IRA CONVERSIONS – QUALIFIED PLAN “FILTER"

Next year, many people are looking to simply convert their traditional, SEP, and/or SIMPLE IRAs into the

Roth IRA due to the removal of the $100,000 AGI cap for converting. This is an excellent step forward

in an attempt at securing tax-free retirement income. Currently, some individuals cannot convert to a Roth

IRA due to the income limitations. These individuals may be best suited by contributing after-tax dollars

to their traditional IRA. By doing so, yes, they are commingling taxable and tax-free assets. Also, they

must file a Form 8606 with the IRS to keep track of the after-tax contributions. This helps the individual

keep track of pre-tax and post-tax dollars. It does mean that distributions and conversions will have to

happen on a pro rata basis. However, this discipline will help build assets to convert to their Roth IRAs in

2010 when the AGI cap is lifted.

Retirement

Plans Quarterly

4th Quarter 2009

Here’s where the discipline of filing a Form 8606 will be of benefit.

The individual can implement a rollover strategy to help reduce the

pre-tax dollars in their IRAs so that when they convert there will be

a tax bill only on earnings of the post-tax dollars. If the individual

has a qualified plan that allows for rollovers of taxable IRA dollars

into the qualified plan, they can use this qualified plan as a “filter"

for their IRAs (see example below). Essentially the individual’s IRA

will hold a balance of only post-tax dollars, thus creating an after-tax

traditional, SEP, and/or SIMPLE IRA with potentially no taxes due

on the conversion. If they do not have a qualified plan, they could

establish a plan (if they have an income-generating business) to

move pre-tax assets out of the IRAs. Keep in mind, by establishing

a qualified plan, an individual will be subject to administration and

5500 reporting for tax purposes. Individuals should consult with

their tax advisor before utilizing this strategy.

For example:

An individual has been contributing to a traditional IRA with pre-

tax and after-tax dollars. They have no other traditional, SEP, or

SIMPLE IRA established. Also, they have been diligently keeping

track of after-tax contributions with Form 8606. Their traditional

IRA contains $75,000 pre-tax dollars and $25,000 after-tax

dollars. That brings the total value to $100,000 for the traditional

IRA. Also, assume that the individual works for an employer that

offers a 401(k) and that this 401(k) allows rollovers of taxable

IRA dollars into the plan. ($75,000 rolls to the 401(k)). Total value

of traditional IRA = $25,000. Since this diligent person has kept

track of their after-tax dollars with the Form 8606 by rolling the

pre-tax dollars into the 401(k), they have isolated their after-tax

dollars in the traditional IRA. After completing the rollover of the

pre-tax funds, the individual can now convert the after-tax dollars

($25,000) that remain in their traditional IRA into a Roth IRA. By

taking these extra steps, an individual has converted funds from

their traditional IRA without experiencing the tax bill that usually

comes with converting.

Consider the comparison of keeping the funds commingled and

isolating the funds and converting both:

Once again, individuals interested in implementing this strat-

egy are strongly encouraged to consult with their tax advisor.

Totals

Pre-tax funds

After-tax funds

Pro rata ratio

Convert full amount

Taxable portion

of IRA

Not rolling

pre-tax funds to

qualified plan

Commingled

Traditional IRA =

$100,000

$75,000

$25,000

$75,000/$100,000 =

75% taxable

$100,000

$75,000

Rolling

pre-tax funds to

qualified plan

Isolated After-Tax

Traditional IRA =

$25,000

$0

$25,000

$0/$100,000 =

0% taxable

$25,000

$0

IRS ISSUES GUIDANCE ON EMPLOYER PLAN

ROLLOVERS TO ROTH IRAS

On September 5, 2009, the IRS issued Notice 2009-75, Rollovers

From Employer Plans to Roth IRAs. This guidance addresses the

federal income tax consequences of rolling over an eligible roll-

over distribution from a 401(k), 403(b), or governmental 457(b)

plan to a Roth IRA, and related issues.

Prior to the Pension Protection Act of 2006 (PPA), participant ac-

count balances, other than designated Roth accounts, were rolled

into a traditional IRA account first and then converted to a Roth

IRA. Provisions of the PPA allow rollover and conversion in a

single step. Unfortunately, there was a complication concerning

rollovers of designated Roth account balances. The problem lies

in that designated Roth account balances were still subject to the

filing status and income limitations that were historically applied

to conversions of traditional IRAs to Roth IRAs.

The Worker, Retiree, and Employer Recovery Act of 2008

(WRERA) retroactively eliminated this obstacle. Notice 2009-75

clarifies the rules for amounts from a designated Roth account in

an employer plan and for rollovers that do not come from a desig-

nated Roth account.

Distributions from a Designated Roth Account

• Amounts rolled over are not included in gross income, regard-

less of whether the distribution from the designated Roth ac-

count is qualified (nonqualified amounts continue to “age" and

potentially become qualified Roth IRA distributions).

• The income limitation ($100,000) and tax-filing status limita-

tion (jointly, if married) do not apply to rollovers from a desig-

nated Roth account to a Roth IRA.

Distributions Not From a Designated Roth Account

• For taxable years before 2010, the ability to execute a one-step

rollover transaction is limited to taxpayers with incomes not

exceeding $100,000, and, if married, filing tax returns jointly.

(Both the income and filing status limitations sunset after 2009.)

• Although this rollover transaction is taxable, mandatory with-

holding requirements do not apply.

• The amount rolled over is taxable to the same extent that it

would be taxed if it were simply distributed or if rolled over to

a Traditional IRA and subsequently converted to a Roth IRA

(only pre-tax amounts are subject to taxation).

Another feature of rolling over non-designated Roth accounts

to Roth IRAs is the reduced cost basis on the account. If your

prior 401(k) or profit sharing balance suffered losses in the recent

financial downturn, you will pay tax on the reduced amount you

actually roll over. Paying tax on the lower amount makes it a good

time to convert.

Although this option is supposed to be mandatory for 2010, some

plans still allow this on a voluntary basis. Employers should

check that their retirement plan provides for this distribution op-

tion by reviewing the plan’s documentation.

To see Notice 2009-75, please go to: http://www.irs.gov/pub/irs-

drop/notice_2009-75.pdf.

IRS ANNOUNCES COST-OF-LIVING ADJUSTMENTS FOR 2010

On October 15, the Internal Revenue Service announced cost-of-living adjustments applicable to dollar limitations for pension plans and

other items for tax year 2010. Due to the decrease in the cost of living index, for 2010, there were no increases for many of the contribu-

tion and catch-up limits, such as the elective deferrals of $16,500. Also, compensation amounts such as the Social Security Wage Base

($106,800) and the Annual Compensation limit ($245,000) remained the same.

EMPLOYEE STOCK OWNERSHIP PLANS

Employee Stock Ownership Plans (ESOPs), as a general concept,

are probably familiar to most senior executives. Understanding

the features of these plans can be beneficial to a business owner.

History and application

Conceived back in the 1950s as a way to allow workers to partici-

pate in the ownership of a company, ESOPs expanded dramatically

with the enactment of the Employee Retirement Income Security

Act of 1974 (ERISA). Under ERISA, business owners were offered

concrete financial incentives to share ownership with employees.

One of those incentives relates to a closely held company seeking

to transition from the current owner(s). For example, assume the

founder and owner of a closely held company is nearing retire-

ment. He’s faced with the dilemma of not having anyone to pass

his business onto (his child is not interested). He truly values the

employees who have helped make his business a success. Selling

the business outright, while providing a quick solution, could result

in the elimination of many of those valued employees. Instead, he

is considering selling the company in stages, or partially, to his em-

ployees. This, in his opinion, would be the best outcome for both

the employees and the business. An ESOP could provide a way to

accomplish this goal in a tax-advantaged manner and, at the same

time, allow for a very effective management of the sale process.

Tax implications

Adopting an ESOP would result in the owner selling his ownership

stake to the ESOP, which would then convert it into company stock

at a fair market value, as determined by an independent appraiser.

The company itself could finance the purchase by the ESOP, or the

company could obtain a loan from a commercial lender. If the latter,

then the money from that loan would then be borrowed by the ESOP.

The company’s debt to the commercial lender, and the ESOP’s debt

to the company, is normally repaid over five to seven years, with tax-

deductible contributions to the ESOP by the company.

The result of the ESOP purchasing the owner’s stake is that the

owner can indefinitely defer taxation on any gain resulting from

the sale. Tax on the sale is deferred if the selling shareholder rein-

vests the proceeds within 12 months in stocks and bonds of other

American companies. After that, no tax is paid unless and until

the securities in which the assets are reinvested are sold. Mean-

while, the ESOP plan can now distribute company stock shares

to employees, rewarding them for their service in helping to grow

the business and providing significant future incentives.

Where to start

So how does a closely held business owner find out if establishing

an ESOP makes sense in conjunction with selling his or her share

of a business. The first step is to undertake a feasibility study,

which establishes whether the characteristics of the company

make sense as far as a sale to an ESOP. This may just involve

some discussions with a qualified ESOP attorney, or a more fully

prepared written study prepared by an investment banker.

If the feasibility study concludes that an ESOP approach makes

sense, the next step is to obtain a professional valuation of the

company. A valuation by an independent appraiser is needed

when a transaction takes place between an ESOP and owner(s)

of a company. The appraisal is then used by an ESOP fiduciary

Code Section

2010

2009

2008

2007

2006

Annual Compensation Limit

245,000

245,000

230,000

225,000

220,000

Elective Deferrals Limit (401(k), 403(b) & 457)

16,500

16,500

15,500

15,500

15,000

Catch-up Contributions (401(k) & 403(b))

5,500

5,500

5,000

5,000

5,000

SEP Minimum Compensation

550

550

500

500

450

SIMPLE IRA Deferral Limit

11,500

11,500

10,500

10,500

10,000

Catch-up Contributions (SIMPLE IRA)

2,500

2,500

2,500

2,500

2,500

IRA Contribution Limit

5,000

5,000

5,000

4,000

4,000

IRA Catch-Up Contributions

1,000

1,000

1,000

1,000

1,000

ESOP Limits

985,000

195,000

985,000

195,000

935,000

185,000

915,000

180,000

885,000

175,000

HCE Compensation

110,000

110,000

105,000

100,000

100,000

Annual DB Benefit Limit

195,000

195,000

185,000

180,000

175,000

Annual DC Contribution Limit

49,000

49,000

46,000

45,000

44,000

Key Employee Compensation Limit

160,000

160,000

150,000

145,000

140,000

Social Security Wage Base

106,800

106,800

102,000

97,500

94,200

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.

Member SIPC and New York Stock Exchange, Inc.

National Headquarters: One Financial Plaza • 501 North Broadway • St. Louis, Missouri 63102

(314) 342-2000 • www.stifel.com

Investment Services Since 1890

(e.g., an institutional trustee) to conduct proper due diligence in

determining that the ESOP is paying a fair market value for owner

shares. At the same time, an ESOP plan document and trust

agreement should be designed and implemented. Then, the ESOP

can be established and funded in order for the purchase of owner

equity to proceed.

Conclusion

When properly established, ESOPs can be a powerful corporate

finance tool, a tool that business owners should consider when

looking to transition a company into the hands of highly valued

employees.

RETIREMENT PLAN SPONSOR YEAR-END DEADLINES

As we head into the upcoming year, below is a chart listing a few approaching deadlines for retirement plan sponsors, depending on the

type of plan or plan features. This chart assumes that we are dealing with calendar year plans.

Topic

Due Date

Description

Plans Affected

401(k) Safe-Harbor Annual Notice –

Final Due Date

12/1/09

Must be provided between 30-90

days prior to the beginning of the

next plan year

401(k) plans looking to avoid ADP and

ACP discrimination testing

ACA Annual Notice Deadline – automatic

enrollment annual notice to allow the right

to “opt out" of automatic plan deferrals

and the qualified default investment

12/1/09

Must be provided between 30-90

days prior to the beginning of the

next plan year

401(k), 403(b), or 457(b)plans that

include an “automatic contribution

arrangement"

QACA Safe Harbor “Annual"

Notice Deadline – Notice for a new qualified

automatic contribution arrangement (QACA)

12/1/09

Must be provided between 30-90

days prior to the beginning of the

next plan year

401(k) plans looking to avoid ADP and

ACP discrimination testing through the

automatic enrollment safe harbor

QDIA Annual Notice Deadline – required

annual notice to satisfy qualified default

investment alternative (QDIA) rules

12/1/09

Must be provided between 30-90

days prior to the beginning of the

next plan year

Participant-directed defined contri-

bution plans providing a QDIA for par-

ticipants who fail to make an election

SAR Extension – summary annual report

(SAR) if filing of Form 5500 has been

extended

12/15/09 Two months after the extension date

Defined contribution and 403(b) plans

subject to ERISA, and defined contribu-

tion plans not covered by the PBGC

“Wait and See" Safe-Harbor Notice –

Notice to participants that a plan sponsor

is waiting until upcoming plan year-end to

avoid discrimination testing through a 3%

non-elective contribution

12/31/09 Prior to beginning of next plan year 401(k) plans looking to possibly avoid

ADP and ACP discrimination testing

PPA Amendment – An interim amendment

for provisions of the Pension Protection Act 12/31/09 Last day of plan year

Qualified and 403(b) plans

ADP/ACP Refund Deadline – ADP/ACP

discrimination testing refund (for the 2008

plan year) to keep plan in qualified status

12/31/09 Must refund by 12 months after plan

year-end

401(k) plans

401(k) Deferral Election for Self-Employed

Owners – Self-employed owner’s salary

deferral election deadline

12/31/09 Last day of partnership, sole propri-

etorship, or LLC tax year

401(k) plans sponsored by self-

employed owners

Written Plan Document Deadline for

403(b) plans

12/31/09 To comply with recently updated

403(b) legislation

Sponsors of 403(b) plans must update

existing plan documents or adopt

new ones to comply with final 403(b)

regulations