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ROLLOVER
CENTER |
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| STIFEL |
Retirement |
| NICOLAUS |
Plans Quarterly |
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Third Quarter 2007
BANKRUPTCY PROTECTION AND IRAs
In 2005, President Bush signed the Bankruptcy Abuse Prevention and
Consumer Protection Act into law. Its enactment makes it more
difficult for consumers to discharge certain debt obligations by
filing for bankruptcy. While some provisions of the Act restrict
debtor options in bankruptcy, the legislation provides 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. In
addition, assets rolled from employer-sponsored retirement plans into
IRAs or IRA-based plans are given total protection from inclusion in a
bankruptcy estate. Coverdell Education Savings Accounts (ESAs) and IRC
Sec. 529 plans are also given protection, with special limitations
based on the timing of the contributions.
IRA protection
Under the Act, Rollover, Simplified Employee Pension (SEP), and
Savings Incentive Match Plan for Employees (SIMPLE) IRAs are totally
protected. The following are highlights of the various protections:
� Traditional and Roth IRA assets may be exempted from a debtor�s
bankruptcy estate up to a limit of $1 million (under new 11 U.S.C.
Sec. 522(n)).
� The $1 million amount may be increased, based on a review of the
Consumer Price Index (CPI) every three years (by changes to 11 U.S.C.
Sec. 104(b)(1) and (b)(2)).
� 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.
Simplification of the law
Prior to the enactment, under federal law, most of a debtor�s
property was included in the bankruptcy estate with the exception of
the individual�s assets held in retirement plans that qualified under
bankruptcy code Sec. 522(d)(10)(E). The federal exemption did not
include IRAs or IRA-based plans. However, many states provided
specific exemptions for IRAs without meeting the qualifications under
the federal bankruptcy code, thus resulting in inconsistencies between
state and federal bankruptcy laws.
The Act provides uniform protection of IRAs and IRA-based
retirement plans without regard to whether the debtor elected state or
federal exemptions. The Act clarifies that retirement accounts that
are tax exempt under the Internal Revenue Code are exempt from the
debtor�s estate.
This information is not intended to give tax or legal advice and is
for educational purposes only. It is recommended that individuals seek
the aid of a competent tax advisor or tax attorney to assist with tax
advice and bankruptcy guidance. |
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3rd Quarter 2007 |
ROTH IRA DISTRIBUTIONS - TAXABLE or
TAX-FREE?
In order for a distribution from a Roth IRA to be a tax-free
"qualified distribution," certain requirements must be met. A
"qualified distribution" is one that is taken after five years in the
plan and
has a qualifying event, such as attainment of age 59 �,
first time home buyer, death, or disability. However, when one of
these conditions is not met, the tax filer must apply certain "distribution
ordering rules" in order to determine the tax
consequences of that particular distribution.
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Roth IRA Distributions |
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Nonqualified Distributions |
| Distribution Order |
Qualified
Distributions |
Penalty Exception |
No Penalty Exception |
| Annual Contribution |
No
tax No penalty |
No
tax No penalty |
No
tax No penalty |
| Taxable Conversions |
No
tax* No penalty |
No
tax* No penalty |
No
Tax* Penalty if taken within five
years of conversion |
| Non-Taxable
Conversions |
No
tax No penalty |
No
tax No penalty |
No
tax No penalty |
| Earnings |
No
tax No penalty |
Tax No penalty |
Tax Penalty |
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*Taxes were paid when converted
The above chart summarizes the tax
implications of a Roth IRA distribution, considering the source of
assets, the time when taken (i.e., within the applicable five-year
period or after), and whether taken following a qualifying event.
The first column represents the "order" of contribution
distributed, and the second, third, and fourth columns reflect any
tax or penalties associated with the type of distribution taken
and whether the distribution was with or without a penalty
exception.
Penalty
Exceptions
IRA rules
are designed to discourage early distributions, and a 10% penalty
is imposed on distributions taken prior to the IRA holder reaching
age 59 1/2. However, the law provides several exceptions to the
penalty, which include:
� Death
�
Disability
�
Substantially equal periodic payments (Rule 72(t))
�
Purchase of first-time home
� Higher
education expenses
� Medical
expenses
� Health
insurance
� Certain
distributions taken during declared "Presidential Disaster Area"
relief periods
Note that
IRA holders under age 59 1/2 who apply one of the penalty
exceptions toward a distribution from their IRA should be
confident that they meet the definition and requirements. It is
always recommended that they seek the aid of a competent tax
advisor or tax attorney to assist with tax advice and guidance.
CAN MINORS HAVE IRAs?
Under
federal tax laws, there are no minimum age restrictions for minors
wishing to establish and fund Traditional or Roth IRAs. If a minor
has earned income, he or she may establish and contribute the
lesser of 100% of their earned income or $4,000 into an IRA for
2007 ($5,000 for 2008).
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Earned income
The definition for "earned income" is
earnings from personal services rendered. This is generally the
income that appears on IRS Form W-2. However, a Form W-2 is not a
requirement for contracted self-employed individuals. They
generally receive IRS Form 1099-MISC that reports amounts received
for services in their trade or business. In addition, other
income, such as non- reported tips or household employee income
(if less than $1,500 paid in 2007), is not reportable by the
employer on Form W-2. No matter the source of the income, it is
important to keep records of exactly when and how it was earned in
case the IRS ever questions the income.
State law concerns
An IRA is a contract between a
financial organization and an individual, and appropriate state
laws pertaining to minors signing contracts should be reviewed. In
many states, minors are restricted from entering into valid
contracts, and in other states, a contract requires a co-signature
of a parent or legal guardian.
SIMPLE IRAs - OCTOBER 1 DEADLINE
The SIMPLE IRA is an
employer-sponsored plan that allows for pre-tax salary deferrals
for employees and a mandatory employer contribution. SIMPLE IRA
plans must be maintained on a calendar year basis (IRC Sec.
408(p)(6)(C)), and employee elective deferrals are based on
compensation earned by the employee during the plan year. October
1 is an important date for all new SIMPLE plans. There is a
requirement that within a 60-day period preceding the plan year,
the employer must allow eligible employees to make deferral
elections (IRC Sec. 408(p)(5)(C)). For the plan year 2007, the
60-day election period must begin by October 1 for new plans to
include 2007 deferrals. For existing plans, employers should
furnish the 60-day election notice by November 1 each year. This
notice allows newly eligible employees to make elections, or
existing employees to modify elections for the next year.
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. |
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October 1
is quickly approaching, and
employers wishing to establish a SIMPLE plan for 2007 should do so
immediately.
Automatic Enrollment Safe Harbor
With pensions no longer being the
mainstay of retirement plans, most employees are left to fund
their own retirement through the use of a 401K plan.
Unfortunately, studies have shown that about 30% of those eligible
to participate in a 401K plan do not contribute, and those who do
participate don�t contribute enough to secure a comfortable
retirement.
Automatic enrollment has been gaining
popularity over the last few years and has been shown to
substantially increase participation and contribution rates. Under
the automatic enrollment feature, new employees are automatically
enrolled and assigned a default contribution rate, at which point
the employee can opt out of the plan or elect a different
contribution rate.
Automatic enrollment is usually
thought of to help lower-paid employees save for retirement, but
it can also benefit higher-paid employees too. Non-discrimination
tests that apply to 401K plans limit the maximum rate at which
Highly Compensated Employees can contribute based on the rate at
which lower-paid employees contribute. Thus, increasing
participation and contribution rates of lower-paid employees leads
to a reduction in non-discrimination failures that limit the
contribution levels of higher-paid employees.
In an effort to encourage plan
sponsors to utilize automatic enrollment, the Pension Protection
Act of 2006 introduced a "safe harbor." Plans that meet the
optional safe harbor requirements will be exempt from the ADP and
ACP discrimination tests and the top-heavy rules.
The requirements to satisfy the
automatic enrollment safe harbor are as follows:
� Minimum automatic deferrals �
The arrangement must provide that the contribution rate for
automatic enrollees is at least 3% during the first year of
participation, 4% during the second year, 5% for the third year,
and 6% thereafter. The plan may specify a higher percentage, up to
a maximum of 10%.
� Mandatory employer contribution
� The employer must make either a matching contribution of
100% of the first 1% deferred and 50% of the next 5% deferred or a
3% non-elective contribu- tion to all eligible non-highly
compensated employees.
The traditional safe harbor provision
continues to be available for all 401K plans, including those with
automatic enrollment. However, the government has sought to
encourage automatic enrollment by making the employer contribution
for the automatic enrollment safe harbor less expensive than the
traditional safe harbor provision.
A Look at the Proposed Default
Investment Rules
As part of the automatic enrollment
provision outlined in the Pension Protection Act of 2006, Section
404(c) of ERISA was amended to provide relief to fiduciaries that
invest participant assets in approved default investments in the
absence of participant investment direction.
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The amendment eases fiduciary and plan sponsor concerns about
their potential liability if they add the automatic enrollment
feature and place the participants� money in the plan�s default
investment option.
The proposed rule, which should soon
be finalized, will relieve plan fiduciaries from liability if the
"qualified default investment alternative" (QDIA) chosen by the
plan sponsor suffers losses. The proposed rule clearly states that
the fiduciary retains liability for the selection and monitoring
of the QDIA and cautions that a plan fiduciary must carefully
consider investment fees and expenses when selecting a QDIA. The
proposed rule also states that the plan fiduciary must act as a
prudent expert in identifying and selecting a QDIA; however, a
plan sponsor may delegate the task of choosing the default
investment vehicle to an investment manager, who then assumes
fiduciary responsibility.
To be a QDIA, the proposed rule would
require that an investment:
� Not hold or permit the acquisition
of employer securities, unless they are held in a pooled
investment vehicle independent of the plan sponsor and subject to
periodic examination by a State or Federal agency, or are acquired
as a matching contribution from the employer or at the direction
of the participant or beneficiary;
� Not impose financial penalties or
otherwise restrict the ability of a participant or beneficiary to
transfer, in whole or in part, his or her investment from the QDIA
to any other investment available under the plan;
� Be managed by an investment manager,
as defined in Section 3(38) of the Act, or an investment company
registered under the Investment Company Act of 1940;
� Be diversified so as to minimize the
risk of large losses; and
� Be one of three types of investment
products, portfolios, or services, as follows:
(1) An investment fund product or
model portfolio that pro- vides varying degrees of long-term
appreciation and capital preservation through a mix of equity and
fixed income exposures based on the participant�s age, target
retirement date, or life expectancy.
(2) An investment fund product or
model portfolio that is designed to provide long-term appreciation
and capital preservation through a mix of equity and fixed income
exposures consistent with a target level of risk appropriate for
participants of the plan as a whole.
(3) An investment management service
in which an investment manager allocates the assets of the
participant�s individual account to achieve varying degrees of
long-term appreciation and capital preservation through a mix of
equity and fixed income exposures, offered through investment
alternatives available under the plan, based on the participant�s
age, target retirement date, or life expectancy.
Based on the proposed rules,
stand-alone capital preservation investment vehicles, such as
money market funds and stable value products, may not be used as
the QDIA, as they are not diversified and do not offer long-term
appreciation. Plan sponsors that are
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currently using risk-free investment products as default
investments may want to begin exploring products that would meet
the requirements of a QDIA under the DOL�s proposed rules.
403(b) Regulations Finalized
The IRS issued new 403(b) regulations
on July 26, 2007. These regulations represent the first
comprehensive guidance issued since the original 403(b)
regulations were adopted in 1964. The key provisions of the
regulations include the requirement of a written plan document,
restrictions on asset transfers between 403(b) accounts, and the
allowance of a plan termination.
Written Plan Document
Prior to the new regulations, only
403(b) plans subject to ERISA were required to have a written plan
document. Since many 403(b) plans were not subject to ERISA,
because they did not offer employer contributions, they were not
required to maintain a plan document. The new regulations will
require all 403(b) plans to operate according to a written plan
document. The plan document must contain all the terms and
conditions for eligibility, benefits, contributions limits,
available investment contracts and accounts, loans, hardship
withdrawals, distributions, fund transfers, and rollovers. To help
reduce expenses for non-ERISA plans, the IRS will be issuing a
model document for 403(b) plans.
Transfer Restrictions
The new regulations repeal Revenue
Ruling 90-24 as of September 24, 2007. Revenue Ruling 90-24
allowed 403(b) participants to transfer their 403(b) account to
another 403(b) provider without the employer�s approval. The final
regulations provide that transfers may continue if the plan
permits the transfer and if the following conditions are met: (i)
the participant�s accumulated benefit after the transfer is at
least as great as such benefit before the transfer, (ii) the new
product imposes distribution restrictions that are at least as
stringent as those applicable under the old product, and (iii) the
employer and new provider enter into an arrangement to provide
each other certain information related to the plan�s compliance
requirements.
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Plan Termination
The new regulations allow 403(b) plans
to be terminated provided the employer will not make 403(b)
contributions to a successor plan for 12 months. In order for a
403(b) to be considered terminated, all accumulated benefits under
the plan must be distributed to all participants and beneficiaries
as soon as administratively feasible. Prior to the regulations, if
an employer decided to no longer offer a 403(b) plan, the
participants were not able to rollover the assets to an IRA or
another employer-sponsored retirement plan, as there was not a
triggering event since the plan could not be terminated.
The regulations are generally
effective for taxable years beginning after December 31, 2008.
With respect to plans maintained pursuant to collective bargaining
agreements in effect on July 26, 2007, the regulations are
effective on the last date of the collective bargaining agreement
or, if earlier, July 26, 2010. With respect to plans maintained by
churches and church-related organizations, the regulations apply
the first plan year beginning after December 31, 2009.
Qualified Plans Adoption Deadline
Approaching
Year-end is approaching, and so is the
deadline to establish new plans for 2007. According to Revenue
Ruling 76-28, a qualified plan must be adopted by the employer by
the end of the tax year for which the tax deduction is being
taken. An employer operating a plan on a calendar year basis must
complete the plan Adoption Agreement no later than December 31.
Although the plan must be adopted by
the end of the tax year, employers can make qualified plan
contributions for a tax year until its tax filing deadline (March
15 for corporations and April 15 for sole proprietors and
partnerships) including extensions.
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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.
S TIFEL,
NICOLAUS &
COMPANY,
INCORPORATED
Member SIPC and New York
Stock Exchange, Inc.
National Headquarters: One
Financial Plaza � 501 North Broadway � St. Louis, Missouri 63102
(800)434-401K �
www.stifel.com
Investment Services Since 1890 |
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