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ROLLOVER
CENTER |
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| STIFEL |
Retirement |
| NICOLAUS |
Plans Quarterly |
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Fourth Quarter 2006
DIRECT ROLLOVERS FOR NON-SPOUSE
BENEFICIARIES BEGIN IN 2007
Under the provisions of the Pension
Protection Act of 2006 (PPA 2006), non-spouse beneficiaries of
qualified retirement plans (QRPs), including governmental 457(b),
403(a), and 403(b) plans, will be allowed to roll inherited QRP assets
into beneficiary IRAs, effective for distributions after December 31,
2006.
Rollovers not permitted for non-spouse
beneficiaries
Unlike spouse beneficiaries, a non-spouse
beneficiary is not permitted to roll over inherited QRP (or IRA)
assets into their own IRA. Instead, a beneficiary IRA account must be
established and distributions must flow from the deceased
participant�s QRP directly into the beneficiary IRA through a
trustee-to-trustee transfer. Although the transfer is technically
called a "direct rollover," constructive receipt (checks payable to a
beneficiary) must be avoided, as rollovers received from non-spouse
beneficiaries are not permitted. Constructive receipt results in the
loss of the benefit and immediate taxation.
IRA rules must be followed
Once QRP assets are received into an
inherited beneficiary IRA account, all IRA Required Minimum
Distribution (RMD) rules for non-spouse beneficiaries apply.
Generally, if a QRP participant was taking RMDs prior to his or her
death, a beneficiary�s RMDs will commence by December 31 of the year
following the deceased IRA holder�s death, calculated based on the
beneficiary�s single life expectancy, determined by referencing the
IRS Single Life Expectancy Table. If the deceased QRP participant was
not taking RMDs, the five-year RMD option may also be selected. With
this option, the entire balance of the beneficiary IRA must be
distributed before the end of the fifth year following the year of the
QRP owner�s death.
Beneficiary IRA advantages
By allowing direct rollovers, a non-spouse
beneficiary can:
� Possibly defer taxes for a longer period
of time � Some QRPs may require a quicker payout period for non-spouse
beneficiaries and life expectancy RMDs may not be available, thus
resulting in immediate taxation.
� Preserve the Stretch IRA strategy � Once
the assets are in a beneficiary IRA, the beneficiary is allowed to
name his or her own beneficiary(ies), if the IRA custodian permits. If
the beneficiary of the inherited IRA dies before reaching his or her
full life expectancy, the IRA assets can continue to be paid to the
next beneficiary over the remaining distribution period of the
deceased beneficiary.
� Investment Options � A beneficiary
may open a beneficiary IRA at the institution of his or her choice (if
the institution allows) and self-direct the assets within the products
offered by that institution rather than be limited to the QRP�s
investments. |
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4th Quarter 2006 |
Certain trusts treated as beneficiaries
When a trust is named as a QRP primary
beneficiary and the trust is maintained for the benefit of one or more
beneficiaries, the trust will be treated in the same manner under this
provision. Assets can be moved directly into an inherited beneficiary
IRA and RMDs paid from the IRA to the trust.
PPA 2006 offers opportunity
The new regulation offers non-spouse
beneficiaries of QRPs flexibility to control their investments and the
timing of their taxation by directly rolling QRP assets to beneficiary
IRAs.
PPA 2006 MAKES SAVER�S CREDIT PERMANENT
Under the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA), certain individuals became
eligible to receive a federal tax credit for retirement plan
contributions in addition to the tax deduction that may apply to the
contribution. Thanks to PPA 2006, the Saver�s Tax Credit, which was
due to expire after the 2006 tax year, is now permanently available.
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Eligibility
Those who are eligible for this credit
include anyone who is at least 18 years of age (as of the close of
the taxable year), not a dependent of another taxpayer, and not a
full-time student. Eligible individuals are allowed a contribution
tax credit based on a percentage of what they defer into their
employer-sponsored 401K, 403(b), SIMPLE, SAR-SEP, or eligible
governmental 457(b) plan. In addition, a tax credit can be claimed
for contributions to Traditional or Roth IRAs.
Contribution credit
A contribution credit is a
non-refundable income tax credit for individuals with adjusted
gross income (AGI) under $25,000 ($50,000 for married filing a
joint return). Individuals who qualify may receive a tax credit of
up to 50% of what they contribute to a plan, with a maximum credit
of $1,000 a year. For married couples filing a joint return, the
maximum credit is $2,000 per year. The following chart outlines
the maximum AGI allowed and the applicable contribution credit.
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Adjusted Gross Income
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| Married
Filing Jointly |
Head of
Household |
All other
filers |
Credit |
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$0-$30,000 |
$0-$22,500 |
$0-$15,000
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50% of contribution |
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$30,001-$32,500 |
$22,501-$24,375 |
$15,001-$16,250
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20% of contribution |
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$32,501-$50,000 |
$24,376-$37,500 |
$16,251-$25,000 |
10% of contribution |
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Over $50,000 |
Over $37,500
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Over $25,000 |
Credit not available |
NONTAXABLE COMBAT PAY ELIGIBLE
COMPENSATION FOR IRAs
As part of the Heroes Earned
Retirement Opportunities (HERO) Act signed into law in May 2006,
members of the armed forces may now consider nontaxable combat pay
as compensation toward making contributions to Traditional or Roth
IRAs. Before the Act, only taxable income could be considered
compensation for IRA eligibility.
The Act is effective for taxable years
after December 31, 2003, and contributions based on combat pay may
be made retroactive for the 2004 and 2005 tax years.
RECOGNIZING LOSSES ON IRA INVESTMENTS
According to IRS Publication 590,
Individual Retirement Arrangements (IRAs), under certain
conditions individuals may be eligible to recognize the loss on a
Traditional or Roth IRA investment when filing their income tax
return.
Conditions for a tax loss
In order for a tax-filer to claim a
loss in a Traditional IRA, the following conditions must be met:
1. All amounts in all Traditional IRAs
(not Roth IRAs) owned by that individual must be distributed.
2. The total Traditional IRA
distributions must be less than the individual�s unrecovered
basis, if any.
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The same holds true for Roth IRAs;
Traditional IRA assets are not considered when meeting these
requirements, but all Roth accounts for an individual must be
distributed.
Determining basis
"Basis" is defined as the total amount
of non-deductible contributions in the individual�s Traditional
IRAs that were reported on IRS Form 8606 (Nondeductible IRAs and
Coverdell ESAs.)
"Unrecovered basis" is created when
the value of the investments within the IRA(s) is lower than the
distribution of all nondeductible contributions (the basis).
For example, an individual has a
Traditional IRA and previously reported $4,000 as a non-deductible
contributions (the basis). In 2006, the value of the IRA is now
$3,000 and the individual takes a complete distribution. The
individual has a net unrecovered basis of $1,000 ($4,000 - $3,000)
and can claim the loss as a miscellaneous itemized tax deduction.
Note, however, a tax-filer�s miscellaneous expenses must surpass a
2% of AGI minimum. For instance, if an individual has AGI of
$50,000, a miscellaneous tax deduction would be allowed for
amounts exceeding $1,000 (2% of $50,000). For the above example,
if no other miscellaneous itemized expenses are reported, the
amount does not exceed the minimum and therefore a deduction is
not available.
For additional information, reference
IRS Pub. 590 Individual Retirement Arrangements (IRAs).
IRS RELEASES 2007 EMPLOYER-SPONSORED
PLAN LIMITS
On October 18, 2006, the IRS announced
(Release No: IR-2006-162) the retirement plan limits that are
effective on January 1, 2007. Some of these limitations were set
by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA),
which had "sunset" provisions that were scheduled to expire at the
end of 2010. The recent passage of the Pension Protection Act of
2006 repealed the sunset provisions, which now makes permanent the
contribution limit increases enacted under EGTRRA.
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2006 |
2007 |
| 401K
Elective Deferrals |
$15,000 |
$15,500 |
| 401K
Catch-Up Deferral |
$5,000 |
$5,000 |
| Annual
Compensation Limit |
$220,000 |
$225,000 |
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Annual Defined Contribution Limit |
$44,000
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$45,000 |
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Defined Benefit Annual Benefit Limit
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$175,000 |
$180,000 |
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Highly Compensated Employees
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$100,000
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$100,000 |
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403(b)/457 Elective Deferrals
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$15,000
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$15,500 |
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SIMPLE Employee Deferrals
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$10,000
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$10,500 |
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SIMPLE Catch-Up Deferral |
$2,500 |
$2,500 |
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SEP Minimum Compensation
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$450
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$500 |
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Social Security Wage Base
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$94,200
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$97,500 |
DOL PROPOSES DEFAULT INVESTMENT
GUIDANCE FOR 401K AUTOMATIC ENROLLMENT
As part of the automatic enrollment
provision outlined in the Pension Protection Act, 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 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 regulated
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.
(1) An investment fund product or
model portfolio that provides 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 currently using risk-free
investment products as default investments may want to begin
exploring products that would qualify as a QDIA under the DOL�s
proposed rules. |
PENSION PROTECTION ACT: DEADLINE APPROACHING FOR DIVERSIFICATION
REQUIREMENTS
Under the Pension Protection Act of
2006, certain defined contribution plans that offer publicly
traded employer stock as an investment option will have to offer
the right to diversify starting on January 1, 2007. The
divestiture requirement does not apply to Employee Stock Ownership
Plans (ESOPs) that contain no elective deferrals, employee
contributions, and matching contributions, and would not apply to
one-participant plans.
Employee contributions
Elective deferrals and employee
after-tax contributions that are invested in employer stock will
be eligible for immediate divestiture.
Employer contributions
Employer contributions may be divested
once the participant has completed three-years of service.
The diversification requirement would
be phased in over a three-year period with respect to employer
stock acquired prior to 2007. Participants who have at least three
years of service (as defined under the rules for vesting) will be
able to divest 33% of employer contributions in employer stock in
the first plan year, followed by 66% in the second year and 100%
in the third year. Any employer stock acquired after 2006 is
immediately eligible for divestiture if the participant has
satisfied the three-year service requirement.
The transition rule does not apply to
participants who have three years of service and who were age 55
at the beginning of the first plan year after December 31, 2005.
These participants have the immediate right to divest employer
contributions in employer stock.
Divestiture timing
The plan must allow the participant to
divest out of employer stock on at least a quarterly basis.
Generally, participants must be given the opportunity to divest
employer stock on the same frequency as they would have in making
other investment changes.
Notice requirements
Each participant affected by the new
rules must receive a notice of their right to diversify at least
30 days before the first date the participant is eligible to
diversify, or December 1, 2006 for calendar year plans. The notice
must explain the diversification rights, as well as the importance
of diversification. Electronic delivery of such notice is
permitted. The Treasury has been directed to provide a model
notice, although it is not expected to be released until early
2007. The fact that there is not a model notice currently
available does not excuse a plan from providing the notice.
Failure to provide the notice can result in penalties of up to
$100 a day per participant.
VESTING REQUIREMENTS CHANGING DUE TO
PENSION PROTECTION ACT
The Pension Protection Act of 2006 is
requiring plans utilizing the least favorable vesting schedules to
change. Currently,
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non-top heavy plans can employ either a 5-year cliff or a 7-year
graded vesting schedule on nonelective employer contributions.
Beginning January 1, 2007, plans must be at least as favorable as
a 3-year cliff or a 6-year graded vesting schedule on nonelective
employer contributions.
The new law brings profit sharing
vesting schedules in line with those for matching contributions
and plans that have been deemed top heavy.
If a plan has a less favorable vesting
schedule, the Act requires the new vesting schedule to cover
participants who accrue at least one hour of service after the
requirement becomes effective. This rule allows an employer to
exclude former employees from the more favorable vesting schedule.
However, for administrative simplicity, it is anticipated that
many employers will elect to apply the new schedule for present
and former employees.
Plan sponsors are encouraged to
consult their plan administrator to ensure that their plan becomes
operationally compliant with the new vesting requirements.
PSCA RELEASES RESULTS OF ANNUAL SURVEY
The Profit Sharing/401K Council of
America recently released the results of their 49th Annual Survey
of Profit Sharing and 401K Plans. The survey reports the plan
year experience of 1,106 profit sharing and 401K plans, covering
6 million participants and $500 billion in plan assets. Of the
1,106 respondent plans, 51 are profit sharing plans, 530 are
401K plans, and 525 are combination profit sharing/401K plans.
Participation rate
77.7% of eligible employees have
balances in their employers� 401K.
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Automatic enrollment
16.9% of respondents have automatic
enrollment. Automatic enrollment is most common in plans with
5,000 or more participants (34.4%) and is least common in plans
with fewer than 50 participants (3.5%).
Investment options
The average number of fund options is
19.
The funds most commonly offered for
participant contribution are: actively managed domestic equity
funds (80.0%), actively managed international funds (74.8%),
indexed domestic equity funds (71.3%), and balanced stock/bond
funds (67.5%).
Employee contribution levels
Pre-tax deferrals average 5.4% for
Non-Highly Compensated Employees and 6.9% for Highly Compensated
Employees.
Employer contribution levels
The average company contribution is
4.7% of payroll. Company contributions are highest in profit
sharing plans (9.4% of payroll) and lowest in 401Ks (2.8% of
payroll).
The most popular company contribution
formula is the fixed matching contribution, present in 31.9% of
plans. The most common type of fixed match is $.50 per $1.00 up to
the first 6% of compensation, present in 33.6% of plans using a
fixed match.
The survey provides a perfect
opportunity to compare your plan against the "average" plan.
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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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