When converting from a Traditional to a Roth IRA, tax is due on the entire distribution amount in the year of the distribution. However, many individuals are unaware that estimated tax payments may be due on the converted amount prior to the normal tax filing deadline. Tax filers that converted Traditional IRA assets to Roth IRAs may be facing penalties for underpayments of estimated income tax payments, for many did not plan accordingly for a substantial increase in adjusted gross income due to the conversion.

An IRS formula determines whether a tax filer meets the requirements for payment of estimated taxes, either through withholding on taxable income received or by remittance of estimated tax payments sent directly to the IRS by the tax filer.

Numerous tax filers who were assessed underpayment penalties for deficient estimated tax payments for Roth conversion amounts requested relief from the IRS. A Chief Counsel Advice Memorandum (CCA 200105062) indicated that the IRS may not grant relief to tax filers assessed penalties for failing to comply with estimated income tax rules (IRC Sec. 6654).

To determine if you are required to pay estimated taxes, consult your CPA or a competent tax advisor for guidance.

The IRS recently issued final regulations under Section 402A of the Internal Revenue Code that provides guidance on the taxation of Roth 401K and 403(b) distributions.

The regulations provide guidance on determining the 5-tax-year holding period for "qualified distributions." A qualified distribution is one that is made after the employee has held the designated Roth account for at least 5 tax years and is either made after the employee�s attainment of age 59 �, attributable to the employee�s disability, or made after the employee�s death. The 5-year period begins on the first day of the calendar year in which the employee first had Roth contributions made to the plan and ends when five consecutive tax years have been completed. For example, if a participant first makes Roth 401K contributions on June 1, 2007, the participant�s five-year holding period would begin on January 1, 2007, and end on December 31, 2011.

The regulations also provide clarification with regards to rollovers. First, the regulations provide that rollovers of basis in a designated Roth account to a designated Roth account in another plan must be accomplished via a direct rollover.

What is a reasonable rate of interest for participant loans? It depends on whether you ask the Department of Labor (DOL) or the IRS.

The DOL regulations provide that a reasonable rate of interest is one that must be commensurate with the rates charged by commercial lenders for loans made under similar circumstances. This seems to indicate that credit worthiness of the borrower should be considered when setting the interest rate of the loan. In fact, the DOL has indicated that loans charging less interest relative to their risk could be considered imprudent under ERISA, even though the loan is secured by the participant�s vested interest in the plan.

The DOL is also on record as rejecting industry comments that a reference to "prime" or other such industry standard should be deemed reasonable.

In the eyes of the DOL, a reasonable rate of interest would require the plan administrator to survey the interest rates charged by commercial lenders in the area and using the average interest rate from the survey.

It is interesting to note that the DOL does not have a safe harbor for determining a reasonable rate of interest, which could make enforcement difficult.

The IRS has a completely different opinion of what constitutes a reasonable rate of interest. They have traditionally accepted a rate based on a recognized standard, such as the prime rate. The prime rate plus 1% or 2% has been the standard rate accepted by the IRS. In fact, it is documented that during the 1990s IRS examiners were seeking prime plus 2% as the standard.

The IRS has indicated that they would enforce any safe harbor regulation released by the DOL regarding the interest rate for plan loans.

Unfortunately plan sponsors must use their best judgment until such regulations are proposed by the DOL.

ERISA generally requires the administrator of an employer sponsored Qualified Retirement Plan to submit an annual report which contains information on the characteristics and financial operations of the plan. This annual report is completed on Form 5500 and is filed with the Department of Labor�s Employee Benefits Security Administration (EBSA). EBSA provides information from the reports to the IRS and Pension Benefit Guaranty Corporation (PBGC) for use in enforcement.

The Form 5500 is generally due by the last day of the seventh month after the end of the plan year. Thus, the deadline for 2006 calendar year plans is July 31, 2007. One of the most serious offenses that a plan sponsor or plan administrator can commit is failure to file Form 5500. The IRS can impose a penalty of $25 per day up to $15,000, and the Department of Labor and the PBGC can each charge up to $1,100 per day. Also, any incorrect

Section 404(c) of ERISA protects a qualified plan fiduciary against liability for investment losses arising from investment choices and asset allocations. While most plan sponsors comply with 404(c) by allowing the participants to direct the investments of their accounts in a broad range of investment alternatives, many fail to comply with other aspects of 404(c). According to ERISA Attorneys Fred Reish and Bruce Ashton (www.reish.com), the following are some of the 404(c) requirements that plans commonly fail to satisfy:

1. Failure to tell participants that the plan intends to comply with 404(c). If a plan fails to state that it intends to comply with 404(c) and that by complying this will relieve fiduciaries of liability for participant investment decisions, the fiduciaries lose 404(c) protection even if all of the requirements are met. Starting next year, this statement must be in the plan�s Summary Plan Description (SPD).

2. Failure to inform the participants of the fiduciary responsible for ensuring 404(c) compliance and for providing information about the plan, such as a plan document or prospectus. The regulations require that participants be given the name, address, and phone number of this fiduciary. In many cases the fiduciary will be named in the SPD by their position, e.g., Benefits Director, rather than by name.

3. Failure to give participants copies of fund prospectuses and information regarding the exercise of voting, tender, and similar shareholder rights where a plan invests directly in designated mutual funds. Under the regulation, the plan must provide these materials only if they are received from the mutual fund. Federal securities laws require mutual funds to send this information to shareholders, and a qualified plan is a "shareholder."

By complying with 404(c), plan sponsors can transfer the legal responsibility for investment decisions to the participants. It is important to note that 404(c) does not relieve fiduciaries of all liability of plan investments. The fiduciaries remain responsible for selecting and monitoring the plan�s investment options. Plan sponsors should review their 404(c) compliance procedures to ensure they are not committing any breaches.