U.S. SUPREME COURT RULES INHERITED IRAS AREN?T PROTECTED

IN BANKRUPTCY

Because of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Act), it?s become more

difficult for consumers to discharge certain debt obligations by filing for bankruptcy. While some provisions of

the Act restrict the debtor?s options in bankruptcy, the legislation does provide limited protection for assets in

certain savings arrangements, including Traditional and Roth IRAs, Simplified Employee Pension (SEP) plans,

and Savings Incentive Match Plan for Employees (SIMPLE) IRAs.

IRA Protection

Under the Act, Rollover, SEP, and SIMPLE IRAs are totally protected from creditors. The following are various

protections:

?

Traditional and Roth IRA assets may be exempted from a debtor?s bankruptcy estate up to a limit of

$1 million.

?

SEP and SIMPLE IRA plan assets are not subject to the $1 million limitation (unlimited asset protection).

?

Assets rolled into IRAs from employer-sponsored retirement plans, including SEP and SIMPLE IRAs, are

totally exempt from creditors.

Inherited IRAs Not Protected

Unlike the IRAs noted above, an IRA that is inherited by a beneficiary after the death of the owner is not

subject to the same protection. The following is an excerpt from Case No. 13-299, Clark v. Rameker, argued

March 24, 2014 ? decided June 12, 2014.

In October 2010, Ms. Heffron-Clark and her husband, Brandon Clark, filed a Chapter 7 bankruptcy petition.

They identified an inherited IRA, by then worth roughly $300,000, as exempt from the bankruptcy estate.

Heffron-Clark argued that an inherited IRA is still technically a retirement fund because that?s the way it was

originally set up.

The Bankruptcy Court disagreed and concluded that an inherited IRA does not share the same characteristics

as a traditional IRA and disallowed the exemption.

The District Court reversed the decision, explaining that the exemption covers any account in which the funds

were originally accumulated for retirement purposes.

The Supreme Court took up the case, reversed the District Court?s decision, and resolved the split on the issue

among federal appeals courts.

Opinion of the Court

When an individual files for bankruptcy, he or she may exempt particular categories of assets from the

bankruptcy estate. One such category includes certain ?retirement funds." The question presented is

whether funds contained in an inherited individual retirement account (IRA) qualify as ?retirement funds"

within the meaning of this bankruptcy exemption. The Court determined that they do not.

When an individual debtor files a bankruptcy petition, his or her ?legal or equitable interests in property"

become part of the bankruptcy estate. ?To help the debtor obtain a fresh start," however, the Bankruptcy Code

allows debtors to exempt from the estate limited interests in certain kinds of property. The exemption at issue

in this case allows debtors to protect ?retirement funds to the extent those funds are in a fund or account that

is exempt from taxation under Section 401, 403, 408, 408A, 414, 457, OR 501(a) of the Internal Revenue Code."

The enumerated sections of the Internal Revenue Code cover many types of accounts, three of which are

relevant here. The first two are traditional and Roth IRAs in which both types of accounts offer tax advantages

to encourage individuals to save for retirement. Legislation does provide limited protection under federal

bankruptcy laws to these accounts.

The third type of account relevant here is an inherited IRA. An inherited IRA is a traditional or Roth IRA that has

been inherited after its owner?s death. It can also be established by beneficiaries of participants in employer-

                                                                                    Third Quarter 2014

Retirement

Plans Quarterly

3rd Quarter 2014

sponsored plans who have directly rolled the inherited plan assets

into an inherited IRA. If the heir is the owner?s spouse, as is often

the case, the spouse has a choice: He or she may ?roll over" the

IRA funds or retirement plan assets into his or her own IRA, or he

or she may keep the assets in the form of an inherited IRA. When

anyone other than the owner?s spouse inherits, he or she may

not roll over the funds into his or her own IRA; the only option

is to maintain the assets as an inherited IRA and take Required

Minimum Distributions (RMDs) when due. Also, unlike an IRA

owner who is under the age of 59½ and who may be assessed a

10% penalty for taking premature distributions, an inherited IRA

beneficiary may receive additional withdrawals from the IRA at any

time, at any age, without penalty.

Relying on the ?plain language of ?522(b)(3)(C)," the court

concluded that an inherited IRA ?does not contain anyone?s

?retirement funds," because unlike with a traditional IRA, the funds

are not ?segregated to meet the needs of, nor distributed on the

occasion of, any person?s retirement."

Note that this is just a brief summary of a long court battle, and

to review a complete transcript of the case, see

http://www.

supremecourt.gov/opinions/13pdf/13-299_6k4c.pdf.

PENALTY-FREE IRA WITHDRAWALS

If an IRA owner wishes to take a distribution from an IRA before

reaching age 59 ½, a 10% premature withdrawal penalty on the

untaxed portion of that distribution is generally due. However,

several exceptions to the general rule exist, and one such

exception is found under IRC Sec. 72(t)(2)(A)(iv), or ?Rule 72(t)."

This rule allows IRA owners to receive predetermined distributions

based on their life expectancy through a scheduled series of

periodic payments (not less frequently than annually) that continue

unaltered over a specified period of time.

These penalty-free withdrawals are also available to Qualified

Retirement Plan (QRP) participants after they separate from service.

Distribution Methods

There are three basic methods by which payments will be

considered to be substantially equal periodic payments:

1.

The Required Minimum Distribution (RMD) Method ? Using this

method, payments are determined by dividing the individual?s

IRA or QRP balance by his or her single life expectancy factor,

or a joint factor of the individual and the primary beneficiary.

The factor to be used is selected from the single life expectancy

table, the joint life and last survivor table, or the uniform lifetime

table. Once a table is selected, that same table must be used

to determine each subsequent year?s distribution. The account

balance that is used to determine payments must be determined

in a reasonable manner based on the facts and circumstances.

2.

Fixed Amortization Method ? Under this method, the payments

are determined by amortizing the IRA or QRP balance over the

single life expectancy of the individual, the joint life expectancy

of the individual and the designated beneficiary, or the life

expectancy found in the uniform lifetime table. Any interest rate

that is not more than 120% of the federal mid-term applicable

federal rate, determined on the date payments begin, may

be used.

3.

Fixed Annuitization Method ? The final method is to divide the

IRA or QRP balance by an annuity factor. The factor is determined

based on the present value of an annuity of $1 per year beginning

at the individual?s age attained in the first distribution year and

continuing for the life of the individual. This factor is determined

by using an interest rate of not more than 120% of the mid-term

applicable federal rate on the date payments begin.

Payment Period

Once payments begin, they must continue for the later of a period

of at least five years or until the day the IRA holder reaches age

59 ½. Note that no other additional distributions may be taken

from the IRA during this period of time.

Changes to Account Balance

Under all three methods, 72(t) payments are calculated with

respect to the account balance established prior to the first 72(t)

payment. This means that a modification to the 72(t) program will

occur if, after the starting date, there is:

?

Any addition to the current account balance other than gains or

losses;

?

Any nontaxable transfer of a portion of the account balance to

another retirement plan; or

?

A rollover by the taxpayer of a 72(t) payment received resulting

in such amount not being taxable.

Relief For Depreciating Accounts

Under Revenue Ruling 2002-62, if substantially equal periodic

payments can no longer be supported by depreciated account

balances, individuals are offered relief by:

1.

Allowing a one-time switch to change the distribution method to

the RMD method.

2.

Allowing that a complete depletion of the IRA assets will not be

treated as a ?modification" of payments.

IRS Allows a One-Time Change

An individual who began distributions based on the amortization

or annuitization method will be allowed in any subsequent year

to switch to the RMD method for the year of the switch and for

all subsequent years. This is a one-time only switch, and any

subsequent change in method will be considered a modification of

payments (subject to penalty).

Conclusion

There are specific IRS guidelines that govern the ?substantially

equal periodic payment" program, and once the program is

initiated by an individual, it cannot stop (or be modified) until the

conclusion of the required period. It is always recommended that

individuals who are considering this program seek the aid of a

competent tax advisor or attorney before making any decisions.

For detailed information, go to the irs.gov web site and type in

Substantially Equal Periodic Payments in the ?SEARCH" block.

QUALIFIED PLAN DISTRIBUTIONS

PENALTY-FREE

It is well known that at age 59½ an employee may take a

distribution from a retirement plan and not be subject to the 10%

penalty tax. Not so well known are the provisions of the penalty

exception at age 55.

If an ex-employee receives a distribution from a plan after

separation from service and separation occurs during or after the

year the employee attains age 55, the 10% penalty does not apply.

So a 54-year-old taking a distribution is not subject to the penalty if

she separated from service in the calendar year she turned 55. On

the other hand, a 55-year-old taking a distribution cannot escape

the 10% penalty if she separated from service at age 53.

The age 55 exception can be enjoyed by certain 54-year-olds but

not certain 55-year-olds. No wonder it is often misunderstood.

OCTOBER 1 SIMPLE IRA DEADLINE

The SIMPLE IRA is a popular retirement plan for the small business

owner who has 100 or fewer employees who earn at least $5,000

or more per year. In a SIMPLE IRA plan, all eligible employees are

allowed to make pre-tax salary deferrals into an IRA account. In

addition, the employer must either match dollar-for-dollar (not

to exceed 3% of compensation) the deferral of participating

employees, or make a non-elective 2% contribution for each

eligible employee.

New Plans

October 1 is an important date for new SIMPLE plans, as there is a

requirement that all new plans be established by October 1 of the

year for which deferrals will be made. In addition, within a 60-day

period preceding a plan year, the employer must allow eligible

employees to make deferral elections (IRC Sec. 408(p)(5)(C)). The

60-day election period for new plans must begin by October 1 to

include 2014 deferrals.

There is one exception to the October 1 establishment deadline.

Newly established companies may open SIMPLE IRA plans as soon

as administratively feasible to accept contributions immediately.

In conclusion, October 1 is just a few months away, and employers

wishing to establish a SIMPLE IRA plan for 2014 should begin the

process now. Plans established after this date are effective

for 201 5.

QUALIFIED DOMESTIC RELATIONS ORDERS

In general, ERISA and the Internal Revenue Code do not allow a plan

par ticipant to assign or alienate his/her interest in a retirement plan

to another person. These ?anti-assignment and alienation" rules

are meant to assure that benefits will be available to participants in

their retirement years. A limited exception to these rules is provided

through qualified domestic relations orders (QDROs).

Every retirement plan is required to establish written procedures

for determining whether domestic relations orders (DROs) are

qualified and for administering distributions under QDROs. The

plan administrator (generally the employer maintaining the

plan) is required to make the determination within a reasonable

period of time and to promptly notify the participant and each

alternate payee when a determination is made. For a fee, plan

administrators can get assistance from certain retirement plan

recordkeepers in drafting a customized QDRO, determining

whether a DRO is a QDRO, and communicating the order?s status

to all parties and, if qualified, its approval to the alternate payee.

A DRO is a judgment, decree, or order (including the approval of

a property settlement) that is made pursuant to state domestic

relations law (including community property law) and that relates

to the provision of child support, alimony payments, or marital

property rights for the benefit of a spouse, former spouse, child, or

other dependent of a participant.

A QDRO is a DRO which creates or recognizes the existence of

an ?alternate payee?s" (a spouse, former spouse, child, or other

dependent of a participant) right to receive all or a portion of a

participant?s benefits under a retirement plan. If an alternate

payee is a minor or is legally incompetent, the QDRO can require

payment to someone with legal responsibility, such as a guardian.

QDROs must contain the following information:

?

The name and last known mailing address of the participant

and each alternate payee;

? The name of each plan to which the order applies;

?

The dollar amount or percentage (or the method of

determining the amount or percentage) of the benefit to be

paid to the alternate payee, and

?

The number of payments or time period to which the

order applies.

A QDRO may be included as part of a divorce decree or court-

approved property settlement, or issued as a separate order. A

QDRO can pertain to retirement benefits under more than one

plan of the same or different employers as long as each plan and

the assignment of benefit under each plan are clearly specified.

A QDRO cannot provide that benefits will be paid to an alternate

payee before the participant?s ?earliest retirement age" unless the

plan permits payments at an earlier date.

An alternate payee will generally be considered a beneficiary

under the plan for purposes of ERISA, and therefore, upon

written request, be entitled to receive copies of a variety of plan

documents. When benefit payments to the alternate payee

begin, he/she will be treated as a ?beneficiary receiving benefits

under the plan" and automatically receive the summary plan

description, summaries of material plan changes, and the plan?s

summary annual report.

According to the DOL, more than 46 million workers are

currently covered by employer-provided retirement plans. So

understanding QDROs can be important in separation, divorce,

and other domestic relations proceedings.

For more information on QDROs, see the Employee Benefits

Security Administration?s (EBSA) booklet online at

http://www.dol.

gov/ebsa/publications/qdros.html.

PLAN DOCUMENTS TO BE RESTATED BY

APRIL 30, 2016

All defined contribution plans must have their documents restated

no later than April 30, 2016, to incorporate the provisions from

the Pension Protection Act (PPA) of 2006 as well as several other

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.

Stifel, Nicolaus & Company, Incorporated | Member SIPC & NYSE | www.stifel.com

One Financial Plaza | 501 North Broadway | St. Louis, Missouri 63102

Investment Services Since 1890

amendments that took effect between 2007 and 2011. It is an

IRS requirement that each defined contribution plan document

be updated and resubmitted for review and approval. (Defined

benefit plan documents must be updated as well but are on a

different cycle.) Plans that do not have their documents restated

by the deadline can be disqualified and/or face significant

financial penalties.

All qualified retirement plans are required to have a written

document. Documents are either a Pre-Approved Plan document

or an Individually Designed Plan (IDP) document. More than 80%

of all plans use a Pre-Approved plan document. Pre-Approved

plan documents are either considered prototype (PT) or volume

submitter (VS) plans. Both types of pre-approved documents must

be restated by April 30, 2016.

The less common Individually Designed Plan (IDP) is a document

that is drafted by an attorney for a specific employer and tailored

to meet the employer?s specific needs. IDPs are the most flexible

type of plan document and, as such, fall on a different cycle

that must be restated every five years, based on the employer?s

Taxpayer Identification Number.

The restatement for all documents must incorporate any new laws

from Congress as well as any guidance from the IRS through late

2010, including the following:

? The final Section 415 regulations

? The Heroes Earnings Assistance and Relief Act (HEART)

? The Worker, Retiree, and Employer Recovery Act (WRERA)

? The Katrina Emergency Tax Relief Act of 2005 (KETRA)

? The GULF Opportunity Zone Act of 2005 (GOZone)

The restatement will also need to incorporate any changes

made in the document between the last restatement date and

this restatement. Additionally, many plan sponsors find that

restatements are a great time to make plan design changes that

the plan trustees may have been contemplating.

After the plan document has been restated, it should be carefully

reviewed. The actual operation of the plan must match that of the

restated document; otherwise, it could jeopardize the qualified

status of the plan. Also, a new Summary Plan Description (SPD)

might need to be drafted to reflect the document changes in a

language the average participant can understand. If a new SPD is

created, it must to be distributed to all of the participants in the plan.

DOES YOUR PLAN NEED A CORPORATE

TRUSTEE.

Every retirement plan must have its assets held in a trust, and

as such, a trustee (or trustees) must be appointed. Generally,

the duties of the trustee include having exclusive authority and

discretion over the management and control of plan assets unless

the plan document provides otherwise by, for example, delegating

control over investment decisions to an ?investment manager." The

question is should the plan be ?self-trusteed" by a key employee

or group of employees or have a corporate trustee. This decision

should depend on the circumstances and preferences of the

company and its retirement plan.

If your plan has an Individually Designed Plan (IDP) document,

a self-trustee might be the only option. IDP documents allow

for more flexibility in plan design, and many corporate trustees

will only serve for plans that adopt the corporate trustee?s own

prototype document. Similarly, a self-trusteed plan has more

flexibility when choosing investments and investment managers.

With a corporate trustee that is also responsible for investing plan

assets in its own investment platform, it is more difficult to change

trustees when desired.

A bank or trust company will charge a fee for its trustee ser vices,

usually ranging from $500 to $1,000 annually. At times, there is

no direct fee assessed by the corporate trustee, so that it appears

to be a free ser vice but is likely being charged indirectly or bundled

with recordkeeping services. Unless the company decides to

compensate key employees to serve as trustee, which is uncommon,

there would be no explicit expense to self-trustee the plan.

When a plan has 100 or more participants, regulations require that

the plan be audited by an independent firm. Corporate trustees

will provide certified trust statements that are necessary for such

audits, whereas this responsibility would fall on key employees if

the plan is self-trusteed.

Corporate trustees can eliminate potential conflicts of interest

that might exist if the business owner is also the plan?s trustee.

Furthermore, corporate trustees provide an extra layer of protection

between business owners and the plan assets by reducing

potential concerns that the plan assets won?t be used for the

exclusive benefit of plan participants and their beneficiaries.

However, this does not eliminate the fiduciary liability of the

employer, as the employer still has a responsibility and liability to

oversee the trustee.

Many larger employers, and a few smaller ones, prefer to hire

corporate trustees instead of worrying about issues for which they

have little or no expertise. It is also possible that the Third-Party

Administrator (TPA) will perform some of the services required of

trustees and the employer?s responsibilities as a trustee would

lessen. Regardless, if deciding to self-trustee or utilize a corporate

trustee, employers are encouraged to have all documents

pertaining to trustee services and all other plan-related issues

reviewed by legal counsel well versed in retirement plan law.