Return to www.Rollover.net Home                                                         First Quarter 2010

WITHDRAWALS AFTER 2010 CONVERSIONS

Under a provision in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), as of January 1,

2010, the $100,000 AGI restriction has been eliminated for Roth IRA conversions. This will allow taxpayers

with AGI of $100,000 or more to convert their traditional, SEP, or SIMPLE IRAs (after two years), or retire-

ment plan assets to Roth IRAs in 2010 and beyond.

Tax considerations

Three key tax points should be addressed for those who are considering a conversion to a Roth IRA. First,

ordinary income tax will be due on all pre-tax dollars that are converted. Secondly, the year 2010 is the last

year for the current low income tax rates before they sunset in 2011. Thirdly, for conversions in the year 2010

(one year only) taxes can be deferred. Unless a taxpayer affirmatively elects full taxation in 2010, a 2010 Roth

IRA conversion will be taxed “ratably" by reporting 50% of the taxable amount converted on the 2011 return

and 50% on the 2012 return.

Accelerated taxation for distributions

TIPRA includes a provision intended to discourage the withdrawal of converted assets until their 2011 and

2012 tax obligations are satisfied.

Under the provision, if a 2010 converted amount is subsequently withdrawn in 2010 or 2011, the amount of

the distribution will be added as ordinary income to the IRA holder’s taxable income reported in the year of

the distribution. The same amount will be subtracted from the income that would have been reported in the

individual’s 2012 tax filing.

Accelerated Taxation for Pre-2012 Distributions

Year

Action

Income Reportable

in 2010

Income Reportable

in 2011

Income Reportable

in 2012

2010 Converted $100,000

(50/50 taxation)

$0

$50,000

$50,000

2010 Withdraw $25,000*

(50/50 taxation)

$25,000

$50,000

$25,000

2011 Withdraw $25,000*

(50/50 taxation)

$0

$75,000

$25,000

2012 Withdraw $25,000*

(50/50 taxation)

$0

$50,000

$50,000

*10% pre-mature penalty applies if under 59 ½ years of age

Distribution ordering rules

Assets must be distributed from Roth IRAs in a defined order. Annual contributions must be distributed first, fol-

lowed by taxable conversions, non-taxable conversions, and lastly earnings. In the event that a Roth IRA owner has

other assets held in Roth IRAs, in addition to amounts converted in 2010, the individual must determine (according to

these ordering rules) what portion, if any, of a distribution in 2010 or 2011 is subject to the accelerated 2010 conver-

sion taxation rules. Note that all Roth IRAs owned by the individual must be taken into consideration.

Non-Roth employer plan conversions

In addition to conversions from traditional, SEP, or SIMPLE (after two years from the first contribution date)

IRAs, the two year ratable 50/50 taxation option is available for 2010 conversions from non-Roth type

employer-sponsored plans. The tax acceleration rules for pre-2012 distributions will also apply.

Consideration for conversions

If an individual intends to do a 2010 conversion and anticipates a withdrawal of assets from the Roth IRA to

pay taxes due, it is highly recommended that the individual seek the aid of a competent tax advisor or tax at-

torney to determine if a conversion is the best course of action.

Retirement

Plans Quarterly

1st Quarter 2010

IRAs FOR 2009 AND 2010

Contributions to traditional and Roth IRAs for the 2009 tax year can

be made until (and including) Thursday, April 15, 2010. Contribu-

tions to traditional or Roth IRAs are limited to the lesser of 100% of

earned income or $5,000 ($6,000 age 50 or older) for 2009 and 2010.

In addition, a spousal contribution may be made to an IRA established

for a spouse with little or no earned income if the married couple

files a joint tax return. For traditional IRAs, the spouse receiving the

contribution must be under the age of 70 ½ for the year in which the

contribution is made (not for Roth IRAs).

Traditional IRA deductibility

The tax deduction for a traditional IRA contribution is based on

whether an individual is an “active participant" in a qualified retire-

ment plan, 403(b), SEP, or SIMPLE IRA. If so, the individual’s tax re-

turn filing status and adjusted gross income (AGI) are considered. If a

single individual is not an active participant, contributions, regardless

of the individual’s income, are fully deductible. For married couples

filing a joint return, if neither spouse is an active participant in a plan,

contributions for each are tax-deductible.

Single filers

If a single individual is an active participant and has AGI of $55,000

($56,000 for 2010) or less, his or her contribution is fully deductible.

A partial deduction is allowed if the AGI is between $55,000 and

$65,000 ($56,000 - $66,000 for 2010).

Married filers treated independently

If one spouse is an active participant and the other is not, both individu-

als’ deductions are subject to different AGI limits. For the spouse who is

an active participant, a fully deductible 2009 contribution is allowed with

joint AGI of $89,000 (no change for 2010) or less. A partial deduction is

available for AGI between $89,000 and $109,000 (no change for 2010).

The spouse who is not an active participant may make a fully deductible

2009 contribution if the couple’s AGI is $166,000 ($167,000 for 2010) or

less. A partial deduction is allowed if their AGI is between $166,000 and

$176,000 ($167,000 - $177,000 for 2010).

Roth contributions

Contributions to Roth IRAs are always non-deductible, and the fol-

lowing income levels apply.

• Single individuals are eligible to make a maximum contribution for

2009 if their AGI does not exceed $105,000 (no change for 2010).

Partial contributions are allowed for AGI between $105,000 and

$120,000 (no change for 2010).

• Married couples filing jointly are eligible to make a maximum con-

tribution for 2009 if their AGI does not exceed $166,000 ($167,000

for 2010). A partial contribution may be made if AGI is between

$166,000 and $176,000 ($167,000 - $177,000 for 2010).

Note that the aggregate total of all contributions to both traditional

and Roth IRAs may not exceed $5,000 per individual or $10,000 per

married couple, plus catch-up contributions, if applicable.

Now is the season to make contributions to IRAs for 2009. Why not

think about making a 2010 contribution at the same time.

PLAN SPONSORS SHOULD PREPARE FOR THE 2009

FORM 5500 SCHEDULE C REPORTING

The Department of Labor recently issued additional guidance on the

expanded requirements for reporting service provider fees and other

compensation information on Schedule C of the Form 5500.

Background

In late 2007, the DOL issued final regulations implementing new

Schedule C reporting requirements for direct and indirect compensa-

tion received by service providers in connection with employee benefit

plans covered by ERISA. The DOL and IRS concurrently adopted re-

visions to the Form 5500 Annual Return/Report, effective for plan years

beginning on or after January 1, 2009. Plan administrators must use the

new Form 5500 and Schedule C for 2009 plan year reporting.

The new Schedule C requirements have generated many questions

from plan administrators and service providers. In response, the DOL

has now provided additional guidance in the form of 40 frequently

asked questions (FAQs). The new FAQs supplement the instructions

to Schedule C and prior FAQs published by the DOL in July 2008.

Issues Covered in the New FAQs

The FAQs address a number of technical issues, including such areas

as how to complete certain fields on Schedule C, reporting gifts and

gratuities, the treatment of different types of investment fees and ex-

penses, the effect of particular structures or characteristics of service

providers on reporting, and health and welfare plan issues.

Schedule C Reporting

Generally, large plans (100 or more participants) must report com-

pensation on Schedule C if the aggregate amount paid to the service

provider directly or indirectly, for the year, is $5,000 or more. The

definition of compensation includes money and anything of value

such as gifts, awards, or trips received by a person in connection with

services rendered to the plan.

The DOL indicates that it will accept a reasonable good faith effort to use

the proper codes on the 2009 Schedule C to classify fees and services,

and confirms that it will not reject the Form solely because it uses a

code different than the service provider. The DOL also clarifies that plan

administrators may use the Employer Identification Number (EIN) of a

service provider’s parent company to identify the service provider as long

as it is used consistently from year to year and on different schedules that

identify the same service provider. Schedule C instructions previously

explained that a service provider’s address can be used as an alternative to

an EIN and the new FAQs do not change this.

The new FAQs state that plan administrators will not be required to

report a service provider who fails to provide information, if the service

provider (a) provides a written statement that it was unable to complete

necessary recordkeeping and information system changes for the 2009

plan year reports despite reasonable, good faith, and timely efforts, and

(b) provides any information that it was able to collect. Regardless, the

DOL expects administrators to discuss with their providers steps being

taken to provide the required information in the future.

Investment Fees

The biggest challenge for the plan sponsor may be to understand

how plan expenses are defined. The 2009 Schedule C defines fees

and compensation as either “direct" or “indirect," which are further

broken down between “monetary" and “non-monetary" fees. Some

fees may be difficult to identify, especially if they are lumped into a

“bundling" arrangement and need to be broken out.

Direct compensation is any payment made directly to a service pro-

vider from the plan or plan sponsor for a service to the plan, such as

recordkeeping, actuarial services, consulting, auditing, or investment

management.

Indirect compensation is any payment received from sources other

than directly from the plan or plan sponsor in connection with ser-

vices rendered to the plan (either monetary or non-monetary). These

include fees and expense reimbursement payments from mutual fund

12b-1 fees and insurance company fees that have not been directly

paid from the plan or plan sponsor. Other examples are finder’s fees

and brokerage commissions.

In order to limit the amount of information reported, the regulations

identify Eligible Indirect Expenses. These are indirect expenses that

meet certain conditions:

1. Indirect compensation that is: (a) fees or expense reimbursement

charged to investment funds and reflected in the return of the plan

or its participants; (b) finders’ fees; (c) float revenue; and/or

(d) brokerage commissions or transaction-based fees for services

that were not paid directly by the plan or plan sponsor. If a fee

falls into this category, the only information required to be dis-

closed is who provided the information.

2. The plan administrator must receive written materials that de-

scribe and disclose: (a) the existence of indirect compensation;

(b) services provided for this compensation; (c) formulas used

to calculate the value of this compensation; (d) who received the

compensation; and (e) who paid the compensation.

In the FAQs, the DOL clarifies that mutual fund redemption fees are

not reportable if they are used to defray the costs associated with the

redemption and are paid directly to the investment fund. Reporting

cannot be avoided by labeling a deferred sales charge or back-end

load a redemption fee.

The FAQs also explain that fees, expenses and charges associated with

the plan’s investments (contingent deferred sales charges, market value

adjustments, surrender/termination charges) would be Schedule C

reportable compensation if received by a service provider.

Fees received by service providers under a bundled service arrange-

ment must be separately reported.

Gifts, Entertainment, and Other Non-Monetary Compensation

The DOL makes several clarifications –

• Simple promotional items (e.g., coffee mugs, calendars, trophies)

are generally presumed to have a value of under $10 for Schedule

C reporting purposes and are NOT counted toward the total value

of gifts from a single source.

• Gifts valued less than $50 and the aggregate value of gifts from a

single source of less than $100 in a calendar year are excludable

from Schedule C non-monetary compensation.

• Business meals and entertainment received by persons who have

business relationships with ERISA plans are not reportable com-

pensation as long as they are not based on the amount of business

with the plans or the recipient’s position.

• Though generally reportable, reimbursements for meals, lodging,

and travel for a plan representative’s attendance at an educational

conference (sponsored by a service provider) will not have to be

reported if there was a fiduciary’s prior written determination that

the plan’s payment of the expenses would be prudent and consistent

with a written plan policy or provision designed to prevent abuse,

the conference was reasonably related to the representative’s duties,

and the expenses were reasonable and unlikely to compromise the

representative’s ability to carry out his or her duties.

What the Plan Sponsor Can Do

There is a lot of information that plan sponsors have to gather, and

they need to make sure they understand everything they receive from

various service providers. Plan sponsors should not underestimate

the potential amount of time they will need to devote to this, and the

potential headaches it will create.

These are three steps plan sponsors should consider to prepare to

meet the reporting requirements:

• Put together a list of service providers from whom they will need

information

• Create a template of a letter to give to each provider that receives

direct compensation asking for compensation information.

• Pull together a team or committee that can understand and inter-

pret the information provided by the various vendors.

Conclusion

The latest guidance from the DOL will be useful in filling out

Schedule C, but plan administrators and service providers will face

many challenges in collecting needed information and complying

with the expanded Form 5500 reporting requirements. Plan sponsors

should seek the help of their plan advisors to review the new require-

ments and in completing the reporting requirements.

To see the entire list of FAQs, please visit the DOL web site at:

http://www.dol.gov/ebsa/faqs/faq_scheduleC.html.

STABLE VALUE OPTIONS IN 401(k) PLANS

Choosing investment options to offer participants in a 401(k) plan

can be a tricky undertaking. Usually the main focus has been around

equity-based investments, considering the many “style boxes" that

stock-based investments can occupy (e.g., large company growth,

small company value, etc.). The next focus has revolved around fixed

income options, though many 401(k) plans have offered limited fixed

income options. The category with generally the least focus has been

cash-based investments. However, as a result of the market melt-

down in 2008 and participants’ eventual “flight to safety," this area is

under more scrutiny.

Usually just one investment option is offered in this category, either a

money market fund, or a stable value option made available through

an insurance company. Often the stable value fund prohibits the of-

fering of a similar or “competing" fund in the plan. The focus of this

article is on understanding the various types of stable value options

available to a 401(k) plan. This option can have a deep impact on the

underlying pricing of the plan and even the ability to move the plan

from one retirement plan vendor to another.

The Different Types of Stable Value Options

When dealing with insurance companies, stable value options will be

housed in one of three contract structures: a general account group

annuity contract, a separate account group annuity contract, or a

global wrap contract. These are quite technical terms, so here is an

explanation of the three:

A General Account Group Annuity Contract – Also known as a

guaranteed interest contract (GIC), this investment guarantees to pays

a specified rate of return during a specified time period and is backed

by the insurer’s general account. Needless to say, if the insurance

company comes under financial pressure, the guarantee could also

come under pressure.

A Separate Account Group Annuity Contract – The goal of this

contract is also to pay a guaranteed rate to any invested principal

and accrued interest, where this guarantee is backed by the general

assets of the insurance company providing the contract. However,

the securities are held in a separate account and owned by the insur-

ance company, and are held solely to deal with claims of any plan(s)

participating in the separate account.

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

A Global Wrap Contract – The stable value option within this

contract is a portfolio that is owned and maintained by the 401(k) plan,

where the book value of the assets held is backed by insurance “wrap-

pers" purchased from a vendor(s) (usually insurance companies) that

provide such insurance. These are also called Synthetic GICs.

Why Be Concerned with a Plan’s Stable Value Option.

Potentially Higher Investment Returns – Compared to a money mar-

ket fund, stable value options are designed to have a longer “duration,"

or exposure to fixed income investments that have a longer time to

maturity (generally, upwards of four years). In an interest rate environ-

ment with a very steep yield curve (which is currently in place), being

invested in longer maturity fixed income instruments can deliver higher

rates of interest, and hence overall higher rates of return.

Better Understanding of Plan Costs – A retirement plan spon-

sor should, as a plan fiduciary, be aware of the costs involved with

administering a retirement plan. However, not many plan sponsors

realize that exact expenses are not available on a guaranteed interest

contract (GIC) that is invested in, and backed solely by an insurance

company’s general account. This is due to the myriad of investments

contained in an insurance company’s general account. Therefore,

it would make sense from a fiduciary standpoint to also consider

a separate account or global wrap stable value option, where the

expenses are clearly broken out.

Potential Participant Liquidity Issues – Assumptions around assets

held in stable value options can many times drive the pricing of a

401(k) plan. Therefore, some insurance company retirement plan

vendors may require that a certain minimum percentage of assets

be held in the stable value option so that they can meet minimum

revenue expectations involving this investment option. Also, for

example, if a plan offers a stable value option and a money market

fund, the stable value option may require that any money being

moved by a plan participant first be moved to an equity option in the

plan (typically for at least 90 days) to prevent the plan participants

from transferring back and forth in an attempt to take advantage of

different interest rate environments (i.e., interest rate arbitrage).

Potential Portability Issues – When an investment option aims to

guarantee principal and accrued interest at a higher rate of return than

a competing option (i.e., a money market fund), there has to be a catch,

right. Well there is. While stable value options are usually designed to

be liquid at the plan participant level, it is not always liquid at the plan

level (e.g., when terminating a relationship and moving from one re-

tirement plan vendor to another). In extreme interest rate environments

(which currently exist), this may involve: a) a “market value adjust-

ment," where money needs to be paid back to the insurance company

to repay them for losses incurred when unwinding the investments, or

b) a “put option" where the assets in the stable value option need to be

held behind for a period of time (usually 1 year) to not incur a market

value adjustment. Just to point out, GICs backed by an insurance

company’s general account tend to involve market value adjustments,

while separate account stable value options usually have the ability to

invoke the put option.

Insurance Wrap Provider Contract Issues – For a stable value op-

tion contained in a global wrap contract, the availability of an insurance

wrap to guarantee asset book value is essential. Unfortunately, the

number of vendors willing to offer this insurance wrapper has recently

dwindled from about 25 down to 12. This is particularly important in

that insurance wrappers can expire and, many times, are not renewed

by the existing vendor. In the past, the multitude of vendors allowed

for the somewhat easy replacement of insurance wrappers. This is not

currently the case. An extreme example of this situation occurred in

2008 within Lehman Brothers’ 401(k) plan, which contained a global

wrap stable value option. With the advent of Lehman’s bankruptcy, the

insurance wrap vendors took advantage of an out clause in their con-

tracts in relation to a bankruptcy by the plan sponsor. With the speed

of Lehman’s bankruptcy, many plan participants began pulling money

out of the stable value option, where there was no time for Lehman

to put in place some replacement insurance wrappers. The result was

that participants lost some of their accrued interest, though they did get

back their investment principal.

Other Considerations – When selecting a stable value option, there

are other things beyond interest rate and contract provisions to con-

sider. For example, since the principal and interest accrued are guar-

anteed, what is the financial strength of the organization providing

that guarantee. Did they take TARP money. Do they have sufficient

surplus capital to cover liabilities. What is the experience and tenure

of the teams managing the fund. What were their long-term invest-

ment returns, with a focus on both up and down cycles. What is the

credit quality distribution and average credit quality of the portfolio.

A detailed analysis and market comparison should be conducted prior

to making the decision to add a stable value fund.

Conclusion

Stable value options can be an important investment option within a

401(k) plan. With financial markets being quite volatile of late, they

can be a source of refuge for plan participants while providing a bet-

ter rate of return than a money market fund, especially with a steep

interest rate yield curve. The stable value market is large, encom-

passing more than $400 billion in assets, almost entirely in retirement

accounts. Since this is the case, 401(k) retirement plan sponsors will

most definitely encounter these investment types at some point. With

their complexity, it is important to get a better understanding as to

what they are all about, since they can have an impact on the costs

of administering the 401(k), the investment returns on participant

accounts, and the ability to move from one retirement plan vendor to

another. Being that the plan sponsor, as fiduciary, has the responsi-

bility to deal with these issues, an education on stable value options

is highly warranted.