Return to www.Rollover.net Home                                                         Second Quarter 2011

SEPS CAN STILL BE ESTABLISHED FOR 2010

An employer must establish a Qualified Retirement Plan (QRP) by the end of the tax year for

which a tax deduction is taken (Rev. Rul. 76-28). If an employer’s tax year is based upon the

calendar year, December 31, 2010 was the last day a QRP could be established for 2010. How-

ever, employers have until the due date of their federal income tax return, including extensions,

for the business to establish a Simplified Employee Pension (SEP) Plan and make SEP contribu-

tions (Prop. Treas. Reg. 1.408-7(b): IRC Sec. 404(h)) for 2010.

For sole proprietors, April 18 (emancipation day extension) was the normal filing date for the

2010 tax return. However, if an extension was filed, a sole proprietor can establish and fund a

SEP until October 18, 2011.

Eligible Employers

Most types of employers are eligible to establish SEP IRAs, including sole proprietors, partnerships,

S or C corporations, and certain other non-profit and tax-exempt entities. The SEP may be an

attractive alternative to the Profit Sharing Plan for small business owners.

Benefits

1. There are several distinct benefits associated with SEPs, such as:

2. They may be established and funded until the business owner’s tax filing deadline (plus

extensions)

3. Contributions flow directly into eligible participants’ SEP IRA accounts

4. No IRS Form 5500 reports required

5. Little administration, resulting in low fees

Contributions

The maximum amount that can be contributed for 2010 on behalf of SEP participants is the

lesser of:

• 25 percent of compensation (IRC Sec. 402(h) limit) up to the compensation cap of

$245,000 (same for 2011) or

• $49,000 (same for 2011) (IRC Sec. 415(c) dollar limitation)

Closing Comment

A SEP plan is a very attractive plan for small business owners considering the benefits offered,

ease of establishment, and little or no fiduciary responsibilities. In addition, it’s a great plan for

those business owners who filed for an extension, as they can still open and contribute to a SEP

and take advantage of receiving a tax deduction for the 2010 tax year.

IRAs AND IRS FORM 8606

The IRS Form 8606 has multiple uses with IRAs and is an extra, yet necessary, step while

managing one’s IRA. Most commonly, an individual will use it to track non-deductible amounts

contributed to their traditional IRA and for Roth IRA conversions. However, the Form goes

beyond the contributions; it also plays a part in the distribution of assets from both the traditional

and Roth IRAs.

Non-Deductible Contributions

If an individual has any non-deductible contributions, they must file an 8606 to identify the

value as such. These non-deductible contributions might include traditional IRA contributions,

Roth conversion amounts, or a rollover of non-deductible amounts from a Qualified Plan to a

traditional IRA. This form will help keep track of the after-tax basis (established value of non-

deductible amounts) in the traditional IRA, which is critical information when it comes time to

take a distribution.

Retirement

Plans Quarterly

2nd Quarter 2011

IRA Distributions

Distributions from any IRA that contains after-tax amounts

require the IRA holder to file an 8606. This will inform

the IRS that the holder’s after-tax basis has been reduced.

For either a distribution or a conversion, the 8606 helps

to determine the pro rata formula (ratio of deductible to

nondeductible amounts held inside all IRAs) required for

each distribution by defining the after-tax amount for the

ratio of overall IRA holdings. When taking distributions

from any traditional IRA while holding multiple IRAs,

the amounts within all IRAs must be aggregated, and the

ratio of total pre-tax vs. after-tax of all accounts must be

considered.

Roth Conversions

There is also a section of the 8606 that must be completed

when converting to a Roth IRA. The Form identifies any

conversion amounts compared to contribution amounts

inside a Roth IRA. This is important, as a Roth IRA has

distribution ordering rules, where contributions must be

withdrawn before any conversions are withdrawn. And,

Roth IRA holders will have to complete the 8606 to

determine whether any portion of their withdrawal from

a Roth IRA is taxable and/or subject to the 10% early

distribution penalty.

Failure

Failure to file Form 8606 can result in extra money going

to Uncle Sam. If one simply does not file the Form, for

whatever reason, it will trigger a $50 penalty. Overstating

an after-tax amount on the 8606 will yield a $100 penalty.

Closing

When considering why the individual must bear the burden

of managing their pre-tax vs. after-tax money, remember

what an IRA stands for: Individual Retirement Arrangement.

Qualified Plan administrators are required to keep track

of after-tax amounts for participants. However, custodians

of IRAs are not required to, and most likely will not, keep

track of an IRA holder’s after-tax basis. That is the indi-

vidual’s or his or her CPA’s responsibility.

THE ROTH 401(K) VERSUS THE ROTH IRA

The Roth IRA has been popular for more than a decade,

but its retirement plan counterpart, the Roth 401(k), has

been slower to take off. The Roth 401(k) market received

a big boost with passage last fall of the Small Business

Jobs Act, which removed restrictions on converting 401(k)

savings to Roth 401(k) accounts. Previously, rollovers

were limited to Roth IRAs, and many people generally

could do it only when leaving a job. Now the regula-

tions allow eligible participants the ability to convert their

contributed pre-tax money (deferrals, profit sharing, match,

etc.) into an in-plan Roth 401(k) option. All limits on

income for Roth conversions were removed under separate

legislation. Following is a comparison of the Roth 401(k)

versus the Roth IRA:

Advantages

Higher contribution limits: Like a 401(k), retirement plan

participants can contribute up to $16,500 (for 2011) to a

Roth 401(k) ($22,000 for participants age 50 and older),

which is much higher than the annual combined contribution

limit on a Roth and/or traditional IRA. For those accounts,

contributions are limited to the lesser of $5,000 or the

amount of taxable compensation (or $6,000 for clients over

age 50 and older).

No income limit: For 2011, Roth IRAs can be used only

by investors with modified adjusted gross income (AGI)

below $177,000 for a joint return, or $120,000 for a single

filer. But there’s no income eligibility rule for Roth 401(k)

contributions.

Enhanced savings power: Roth 401(k)s offer an especially

attractive option to participants in high tax brackets. Unlike

a tax-deferred account, a Roth 401(k) allows participants to

max out their contributions and pay taxes with additional

dollars.

Matching contributions: Roth 401(k) deferrals can be used

to generate any employer matching contributions that

might be available. Although, any matching contributions

must go into a tax-deferred account.

Good for younger workers: Roth 401(k)s and Roth IRAs

are favorable for young workers with lower incomes and

tax brackets, since taxes are paid upfront. A Hewitt survey

found the highest rate of workplace Roth adoption (16%)

among workers age 20-29.

Disadvantages

RMDs: One of the Roth IRA’s most important benefits is

that no required minimum distributions (RMDs) need be

taken after age 70½. Roth 401(k)s have the same RMD

rules that govern 401(k) accounts. Participants may be able

to avoid the Roth 401(k) RMD by converting Roth 401(k)

assets to a Roth IRA before age 70½.

Investment choices and cost: Investment choices may be

better in a Roth IRA than for a Roth 401(k), although the

IRA’s costs might be higher. This will depend largely on

the size of the employer; retirement plans at larger companies

usually feature lower costs and a variety of investment

choices. Average 401(k) total plan costs can range as low

as 0.20 percent of assets for the largest plans and as high as

5 percent for small employer plans, according to

Brightscope.com.

Less flexible withdrawals: When people need money in

an emergency, the money in Roth IRAs can be used, since

contributions can be withdrawn tax free by savers over age

59½, so long as the funds have been in the account for

five years. However, a Roth 401(k) is subject to the less

flexible retirement plan rules, and a 10% penalty is levied

on withdrawals made before age 59½, along with income

tax liability.

There are many advantages to adding a Roth 401(k) option

to a retirement plan. Pointing out these advantages to

employees can increase participation and contributions to

the retirement plan. Increasing participation and contributions

will have a favorable affect on everything from passing

discrimination tests to reductions in investment costs.

FOCUSING ON RETIREMENT PLAN FIDUCIARIES

It goes without saying that employees view a company

retirement plan as one of the key benefits that an employer

can provide to them. For the employer sponsoring a plan,

administering it requires certain actions and required

responsibilities. Specifically, the Employee Retirement

Income Security Act (ERISA) sets standards of conduct for

those who manage employee benefit plans and their assets.

Those individuals involved in this capacity can be deemed

“plan fiduciaries," involving certain responsibilities under

ERISA.

Who, specifically, is a plan fiduciary.

Many actions involved in running a retirement plan can

make a person, or entity, performing them a fiduciary.

Having discretion on managing a plan or controlling the

plan’s assets makes that person a fiduciary, within the

extent of that discretion. Therefore, fiduciary status results

from the function(s) performed for the plan, as opposed to

just a person’s, or service’s specific title. Within the written

retirement plan document, at least one fiduciary must be

named as having control over the plan’s operations. For

larger organizations, that fiduciary may end up being an

administrative committee.

What are the requirements of plan fiduciaries.

Fiduciaries have important responsibilities that, as mentioned

above, are subject to standards of conduct under ERISA.

Those responsibilities include:

• Operating the plan according to its plan document

• Paying only reasonable expenses

• Acting in a prudent manner

• Acting solely in the best interests of plan participants

Acting in a prudent manner is a core fiduciary responsibility

under ERISA, and it requires expertise in a variety of

areas, such as investments, or the hiring of experts in areas

where the fiduciary is lacking. Acting in a prudent manner

requires the same care, skill, and due diligence, under the

circumstances, that a prudent man acting in a like capacity

and having familiarity with such matters would undertake.

The ERISA standards of prudence ultimately focus in on

the process for making fiduciary decisions. Therefore, it

makes sense to document the basis for the decisions being

made. For example, by hiring a 401(k) plan recordkeeper,

a fiduciary would want to survey a number of recordkeeping

vendors, with the same information requested, and those

vendors having the same requirements to be evaluated by.

Following the requirements of the plan document is also

a very important fiduciary responsibility. The document

provides key guidance to the operation of the plan. Fidu-

ciaries must be quite familiar with the provisions of the

document in order to fulfill their duties under the plan.

Is there liability involved with being a plan fiduciary.

Can this liability be reduced.

Plan fiduciaries that don’t adhere to the ERISA standards

of conduct may be personally liable to restore any losses

that the plan incurs as a result. Documenting the fiduciary

decision-making process can be a great aid in limiting

fiduciary liability by clearly outlining how plan respon-

sibilities have been conducted, and that they have been

properly carried out.

Another way of limiting fiduciary liability is by giving

participants some control over the investment allocation of

their plan balances, while complying with ERISA Section

404(c). Under 404(c), the plan must provide at least three

different investment options with different risk/reward

characteristics to allow for a diversity of investments.

Also, participants must be given sufficient information to

make informed decisions about those investment options,

as well as have the ability to move money amongst those

investments at least once a quarter.

Plans that automatically enroll employees into the plan

can be set up to limit fiduciary liability through the use of

“qualified default investment alternatives (QDIA)." With

this approach, the fiduciary must place automatically

enrolled employee plan contributions into some type of

investment, given the absence of a participant election.

Under Department of Labor (DOL) guidelines, there are

four types of default investment alternatives (one example

is target date funds) that limit a fiduciary’s liability for any

losses incurred by a participant for having been defaulted

into that default investment.

While a fiduciary may get liability relief under ERISA

404(c), or through the use of QDIA under automati-

cally enrollment plans, the fiduciary is still responsible

for selecting and monitoring the investments being made

available within the plan. This illustrates that, while there

can be ways to reduce fiduciary liability, there is no way

to completely alleviate the responsibility. Therefore, to

have a more comprehensive approach to limiting fiduciary

liability, that fiduciary (or the employer, on behalf of the

fiduciary) can purchase fiduciary liability insurance to

cover the overall liability of the fiduciary. This insurance

is usually available as a rider to the employer’s property

and casualty or errors and omissions policy.

Dealing with co-fiduciaries

Fiduciaries for a retirement plan can either be appointed

(i.e., named in the plan document), or become fiduciaries

through the nature of the services they provide to a retirement

plan. Appointed fiduciaries many times make the decision

to delegate certain responsibilities to third parties, and

those third parties could be acting in a fiduciary capacity.

If so, then a co-fiduciary relationship has been established,

where all plan fiduciaries have potential liability for the

actions of their co-fiduciaries. This is an important point,

since some service providers may identify themselves as a

fiduciary, where their credentials or service standards may

or may not live up to a fiduciary standard. Fiduciaries

need to determine whether to take on a co-fiduciary, and

the resulting liability that this brings. In other words, the

quality, value, cost, and credentials backing the service(s)

to be provided should be carefully evaluated before entering

into the relationship. Then, it may or may not be justified

to add the service within a fiduciary framework.

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

Conclusion

There are many details associated with running a company

retirement plan. Many, but not all aspects involve a fiduciary

role, where a prudent standard of conduct defined under

ERISA then applies. Even if fiduciaries hire third-party

providers to manage certain fiduciary duties of a plan, the

hiring fiduciary still is responsible for justifying that hire and

must continue to monitor that third party. That third party

should be terminated and/or replaced when the evaluation

of the services provided prove unsatisfactory. Being named

a plan fiduciary can possibly result in personal liability

to that party, since being a plan fiduciary is a legal duty

under ERISA. There are ways to limit this liability, either

through complying with aspects of ERISA that allow for

this, or by purchasing fiduciary liability insurance. This

being said, while plan sponsors may be able to limit their

liability, it is impossible to completely eliminate it. How-

ever, following an approach of documenting the fiduciary

decision-making process can go a long way in avoiding

problems, since the ERISA standards of conduct very

much focus on the process that leads to fiduciary decisions.

LEGISLATIVE UPDATES

DOL extends deadline for ERISA Section 408(b)(2)

compliance

The Labor Department’s Employee Benefits Security

Administration (EBSA) announced February 11 that it

will extend the applicability date for disclosure rules under

Section 408(b)(2) of the Employee Retirement Income

Security Act to January 1, 2012.

The department published an interim-final regulation on

July 16, 2010, which generally requires companies that

provide services to employee pension benefit plans to

disclose the direct and indirect fees charged for their services

so that plan fiduciaries can assess the reasonableness of

service provider contracts or arrangements. The new

requirements had previously been scheduled to apply to

plan contracts or arrangements for services in existence on

or after July 16, 2011.

Fiduciary definition change moving slowly

The Department of Labor previously announced a 15 day

extension to submit public comments to the proposed rule

redefining the term “fiduciary" under the Employee Retire-

ment Income Security Act (ERISA). This put the deadline

at April 12, 2011.

The proposed rule seeks to expand what qualifies as

“fiduciary advice" to reflect changes in retirement plans

over the past 30+ years, including investment products,

services, and the shift from defined benefit plans to defined

contribution plans. It would affect sponsors, fiduciaries,

participants, and beneficiaries of retirement plans as well

as providers of investments and investment-related advice

services. Now that the comment period is over, the DoL

will make their final changes and present the new regu-

lation. This new regulation is estimated to be effective

beginning in 2012.

Not everyone is in agreement about the proposed definition.

Most of the criticism centers on the idea that the expanded

regulation will increase cost and limit investment options

for investors. The Department of Labor (DoL) released

transcripts of the early March Hearings regarding their

proposal for the definition of fiduciary. They can be found

on the DoL web site.