Return to www.Rollover.net Home                                                         Fourth Quarter 2011

IRS ANNOUNCES COST-OF-LIVING ADJUSTMENTS FOR 2012

On October 20, the Internal Revenue Service announced cost-of-living adjustments applicable to dollar

limitations for plans and other items for tax year 2012. In general, many of the pension plan limitations

will change because the cost-of-living index met the statutory thresholds that trigger their adjustment.

However, other limitations will remain unchanged.

Annual Limit

2012

2011

Social Security Wage Base

$110,100

$106,800

Annual Compensation Limit

$250,000

$245,000

Key Employee Compensation Limit

$165,000

$160,000

HCE Compensation

$115,000

$110,000

Elective Deferral Limit (401(k), 403(b), 457)

$17,000

$16,500

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

$5,500

$5,500

SEP Minimum Compensation

$550

$550

SIMPLE IRA Deferral Limit

$11,500

$11,500

Catch-Up Contributions (SIMPLE IRA)

$2,500

$2,500

IRA Contribution Limit

$5,000

$5,000

IRA Catch-Up Contributions

$1,000

$1,000

Annual DB Benefit Limit

$200,000

$195,000

Annual DC Contribution Limit

$50,000

$49,000

IRA deductibility and Roth IRA eligibility are as follows:

Traditional IRA Deductibility: Income limits if covered by an employer-sponsored plan

Single Filer's AGI Married Filing Jointly AGI

Full Contribution <$58,000 <$92,000

Partial Contribution $58,000 - $68,000 $92,000 - $112,000

Not Eligible >$68,000 >$112,000

Maximum Joint Compensation for deductible contribution by non-covered spouse: $173,000 - $183,000

Single Filer's AGI Married Filing Jointly AGI

Full Contribution <$110,000 <$173,000

Partial Contribution $110,000 - $125,000 $173,000 - $183,000

Not Eligible >$125,000 >$183,000

Retirement

Plans Quarterly

4th Quarter 2011

THE REQUIRED MINIMUM DISTRIBUTION

ALTERNATIVE

As the end of the calendar year approaches, there are many items

that individuals must address before saying good-bye to 2011,

such as required minimum distributions (RMDs). However,

depending on an individual’s age, they may have an additional

option for RMDs. Traditional IRA holders are required to begin

taking distributions from their IRA in the year in which they

reach age 70 ½ (Prop. Treas. Reg. 1.401(a)(9)-1, B-1). However,

an IRA holder may choose to delay the first RMD until April 1

of the year following the year they turn age 70 ½ (Prop. Treas.

Reg. 1.401(a)(9)-1, B-1). If the first distribution is delayed, a

second payment for the second (current) year’s RMD must be

made by December 31 in the same year.

To determine the RMDs, the prior year-end balance of each IRA

is divided by an individual’s Uniform Life Expectancy (ULE)

factor. The ULE factor is derived from the individual’s age at the

end of the year (i.e., ULE factor for age 73 is 24.7, according to

IRS Publication 590).

Custodians of IRAs usually inform of pending RMD amounts

and provide calculations for their clients. Recently transferred

IRAs may be tricky to calculate, as a client will have to provide

the prior year-end balance from their previous custodian (usually

with their monthly statement). Rarely will the amount transferred

in be equal to the prior year-end balance.

The same rule of mandatory distributions applies to Qualified

Retirement Plans (QRPs). However, the required beginning date

for QRPs is April 1 of the calendar year following the later of

the year in which the participant turns age 70 ½ or the calendar

year in which the participant retires (Treas. Reg. 1-.401(a)(9)-2,

A-2(a)). This is an optional provision which requires the plan

sponsor to amend the document if they wish for it to be included.

Those who own five percent or more of the business do NOT

have this option and are subject to RMDs from the plan upon

reaching age 70 ½ (Sec 1.401(a)(9)(C)).

Remember the Alternative Method

When IRA holders begin taking RMDs from their IRA, an alter-

native method may be used. Under Prop. Treas. Reg. 1.408-8, an

IRA holder must satisfy the RMDs separately from each IRA.

However, an exception to this rule allows an IRA holder to deter-

mine the RMDs for each IRA separately and then remove all or a

portion of the RMDs from any one or more of the IRAs.

Note that this alternative method only applies to two types of

retirement plans, IRAs and 403(b) tax-sheltered annuities. How-

ever, distributions from 403(b) plans may not be used to satisfy

IRA RMDs and vice versa. In addition, the alternative method

may not be used to satisfy RMDs from qualified plans, such

as 401(k) plans. Each QRP must satisfy the RMD requirement

independently.

Summary

If an IRA holder has more than one IRA, the alternative method

does not alter the amount that an individual must remove each

year, but gives an individual the flexibility to select the IRAs

from which RMDs are taken.

DECEMBER 31 DEADLINE FOR TAX-FREE

CHARITABLE DISTRIBUTIONS

The Pension Protection Act of 2006 provides IRA holders who

have reached 70 ½ years of age the opportunity to donate assets

in their IRA to qualified charitable organizations. If done cor-

rectly, the distributions are tax-free. However, the benefit is only

available for distributions from Traditional or Roth IRAs (not

SEP or SIMPLE IRAs). Those who intend to take advantage

of this option must act quickly, as the extension is due to expire

December 31, 2011.

Future extensions

At the current time, it is unclear whether or not qualified chari-

table distributions will be extended for future years. Stay tuned.

NEW SIMPLE IRA PLAN CONTRIBUTIONS

SIMPLE IRAs must be maintained on a calendar year basis

only. However, when an employer establishes a new SIMPLE

IRA plan, an effective date other than January 1 may be chosen,

thus creating a short plan year. When an employer makes a two

percent non-elective contribution to the plan for that short year,

an employer may prorate the compensation, including the annual

compensation cap ($245,000 for 2011). As a result, participants

in the SIMPLE IRA plan may receive a substantially smaller em-

ployer contribution for the first year of the plan, other than they

would during all subsequent full plan years.

Limiting compensation is optional

Under Notice 97-6, D-6, the IRS stated that an employer “may

make non-elective contributions equal to two percent of employ-

ees’ compensation for the entire calendar year." The IRS clarified

that employers may, but are not required to, prorate the compen-

sation when a two percent non-elective contribution is made to a

SIMPLE IRA during a short plan year.

Note that if an employer chooses the matching formula, the em-

ployer’s contribution will still be based on the lesser of a dollar-

for-dollar match or 3% of the employee’s annual compensation.

TAX CREDIT FOR RETIREMENT PLAN STARTUP COSTS

Many small businesses face a unique set of circumstances.

Besides competing with other companies in selling products or

services, small businesses strive to provide employee benefits

comparable with larger companies in order to retain quality

employees. A retirement plan is usually considered as part of

the benefits package, but one of the main reasons cited by small

business owners for not offering retirement plans is the high costs

associated with their establishment and administration. However,

small businesses that adopt a new defined contribution, defined

benefit, SIMPLE, or SEP plan are allowed a tax credit of 50%

of the expenses paid or incurred for administration or retirement

education. The credit applies to the first $1,000 of these qualify-

ing expenses in each of its first three plan years, with a maxi-

mum credit of $500 for each year.

Eligibility

To be eligible, an employer must have had no more than 100

employees, with compensation in excess of $5,000 each, in the

preceding tax year. In addition, the plan must cover at least one

Non-Highly Compensated Employee (HCE).

A plan is considered “new" if the employer sponsored no quali-

fied retirement plan during the three-year period immediately

before the first year the credit is available. An employer claiming

the credit is not allowed a business expense deduction for the 50%

of the expenses for which the credit is claimed.

Note that many new plans will be established by December 31,

2011, for plan year 2011. Employers will surely want to take

advantage of this savings.

For more information, review IRS Form 8881, Credit for Small

Employer Pension Startup Costs.

THERE IS STILL TIME FOR THE INDIVIDUAL 401(K)

FOR 2011

Many sole proprietors are looking to maximize their contribu-

tions for retirement while also obtaining a tax deduction for their

business. For these business owners, there is still time to open

an Individual 401(k) plan for 2011. If the business owner has

contributed to a traditional or SEP IRA in the past, they may not

be aware of other options still available to them

As we approach the end of the year, many business owners now

have an idea of the amount that may be available to contribute to

a retirement plan. Depending on their income level, an Individ-

ual 401(k) plan may be a great fit and allow for a larger contri-

bution (and tax deduction) than a traditional or SEP IRA. The

contribution limit for SEP IRAs is the lesser of 25% of compen-

sation or $49,000 for 2011. A sole proprietor earning more than

$196,000 easily reaches $49,000 using a SEP IRA only. But, a

sole proprietor earning less than $196,000 will NOT be able to

contribute $49,000 without the help of an Individual 401(k).

Higher contributions for Individual 401(k)s at

certain incomes

The Individual 401(k) accepts two types of contributions: sal-

ary deferrals and employer profit sharing contributions. The

employer contribution is a profit sharing contribution that uses

the same formula as a SEP IRA contribution. But, the salary

deferral component of the Individual 401(k) allows contributions

over and above the SEP IRA. In addition to the 25% employer

contribution, the sole proprietor is able to contribute up to

$16,500 in pre-tax salary deferrals (plus an additional $5,500 if

the individual is age 50 or older). The total of the salary defer-

rals and employer contribution is still subject to the $49,000

annual maximum ($54,500 if the individual is age 50 or older).

For example, a sole proprietor with income of $100,000 will be

able to contribute $25,000 to his SEP, but the Individual 401(k)

would allow him to contribute $41,500 ($25,000 + $16,500).

The salary deferral contributions just lowered the business’ tax-

able income by an additional $16,500 and increased the business

owner’s retirement account for the future.

Owner-only businesses, which include partnerships and LLCs

with no employees, are eligible for the Individual 401(k). The

plan sponsor may be able to avoid filing the IRS Form 5500 for

the plan if certain conditions are met and the plan assets are less

than $250,000.

Various mutual fund and insurance companies offer Individual

401(k) plan packages or a self-directed brokerage account may

be used. Business owners that want flexibility with contributions

to their retirement plan will appreciate the Individual 401(k)

plan. In addition to the higher level of contributions, an Individ-

ual 401(k) plan can allow for loans, whereas SEP IRAs do not.

Individual 401(k) plans will vary on cost, but these costs should

be covered easily with the tax savings of deferring up to $54,500

of income.

Still have questions. Here are some answers to the most fre-

quently asked questions:

What types of businesses are candidates for an Individual

401(k).

Individual 401(k)s are designed for businesses that have no

employees other than owners and their spouses. The Individual

401(k) is not designed for businesses with employees due to the

additional testing and administrative requirements.

How is an Individual 401(k) different from other 401(k) plans.

The primary difference is in the administrative and compliance

requirements of the plan. A 401(k) plan sponsored by a business

employing owners and their spouses only (no employees) is not

subject to 401(k) testing and has fewer administrative require-

ments.

What happens if the business establishes an Individual 401(k)

and then hires employees.

If the business hires employees, the plan will be subject to

401(k) discrimination testing and Form 5500 filing. Also the

employer must make the same percentage profit sharing con-

tributions for eligible employees as they do for themselves.

Because of the increased administrative duties involved with

adding employees to a plan, the vendor may charge additional

administrative fees or the employer may be forced to transfer

their plan to a vendor who can accommodate the administrative

responsibilities.

What is the deadline to establish and fund an Individual

401(k).

The plan Adoption Agreement must be signed by the employer's

tax year-end, usually December 31. Contributions must be made

by the employer’s tax filing deadline plus extensions.

Can the business owner’s spouse participate in the plan.

The business owner’s spouse may participate in the plan if he/she

is employed by and receives earned income from the business.

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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Are loans available from the Individual 401(k) plan.

Yes. Generally, plan participants may borrow up to one-half of

their vested account balance, but no more than $50,000. The

terms of the loan are subject to IRS regulations.

Can the business owner convert their existing retirement plan

to an Individual 401(k).

It depends on the type of plan. If the business has a profit shar-

ing plan, they will probably be able to amend the plan into an

Individual 401(k). SEP IRAs can be rolled into the Individual

401(k). However, if the business owner has contributed to a

SIMPLE IRA plan in 2011, they may have to wait until 2012 to

open an Individual 401(k). Also, existing SIMPLE IRA ac-

counts can only be rolled into another plan after they have been

established for two years.

The year-end deadline is fast approaching, but there is still time

for an Individual 401(k) plan for 2011. Or if you have contrib-

uted to a SIMPLE IRA plan, now would be a good time to set up

the plan for 2012.

DEPARTMENT OF LABOR TO RE-PROPOSE

DEFINITION OF FIDUCIARY

The U.S. Department of Labor’s Employee Benefits Security

Administration (EBSA) will re-propose its rule on the definition

of a fiduciary. The decision to re-propose is due in part to

requests from the public, including from members of Congress,

that the agency allow an opportunity for more input on the rule,

EBSA said in a news release dated September 19.

Specifically, the agency anticipates revising provisions of the

rule, including, but not restricted to:

• Clarifying that fiduciary advice is limited to individual-

ized advice directed to specific parties

• Responding to concerns about the application of the

regulation to routine appraisals

• Clarifying the limits of the rule’s application to arm’s

length commercial transactions, such as swap transac-

tions.

Also anticipated are exemptions addressing concerns about

the impact of the new regulation on the current fee practices of

brokers and advisers and clarifying the continued applicability of

exemptions that have long been in existence that allow brokers

to receive commissions in connection with mutual funds, stocks,

and insurance products.

The agency said it will carefully craft new or amended exemp-

tions that can best preserve beneficial fee practices, while at the

same time protecting plan participants and individual retirement

account owners from abusive practices and conflicted advice.

EBSA said it will continue to coordinate closely with the Securi-

ties and Exchange Commission and the Commodities Futures

Trading Commission to ensure that this effort is harmonized

with other ongoing rulemakings.

The new proposed rule is expected to be issued in early 2012.