Qualified Retirement Plans

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Qualified Retirement Plans ERISA Welfare Benefit
Plans
Presented by Brad S. Arnold, J.D. Tycor Benefit
Administrators, Inc. [phone] barnold_at_tycorb
enefit.com

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Topics

• Overview of PPA 2006
• Fiduciary Issues
• Disclosure Rules
• Portability
• HSAs
• New Limits
• Roth 401(k)

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EGTRRA Permanence

• In case you had forgotten
• IRA limits - 2,000 to 4,000
• 401(k) limits - 10,500 to 15,000
• Catch-up contributions - 5,000(qp) 1,000(IRA)
• Higher contribution limits - 44,000
• Higher deduction limits 25 profit sharing
• Favorable treatment of salary deferrals
• Higher usable compensation - 220,000
• Roth 401(k)
• Portability rules

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Non Pension EGTRRA Provisions

• Still a 2010 Sunset
• Estate Tax Prospects?

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Automatic Enrollment

• What is it?
• 70 of employees will opt to participate in a
  401(k)
• Only 10 of employees will opt to not participate
  if automatically enrolled
• 20 increase in overall participation through
  design
• Why might it be important to Financial Planners?
• Many participants will not realize they have a
  balance
• Default investments

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Deduction Rules

• Major changes
• Can now have a defined benefit plan AND a 6
  profit sharing and fully deduct both
• 401(k) deferrals can be added on top
• Lets look at one-life cases
• Consultants and solo practitioners
• No need for current income
• Looking for maximum tax deduction
• High Income

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Example

• Age 50
• Income 150,000
• Whats available?
• SEP 25 of pay 37,500
• Solo 401(k) profit sharing of 29,000, plus
  15,000 elective deferral, plus 5,000 catch-up
  49,000
• Why is the profit sharing only 29,000?

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Example cont.

• Defined Benefit 110,000 (actuarially
  determined)
• DB/DC Combo Defined Benefit 110,000, plus
  401(k) of 15,000, plus catch-up of 5,000, plus
  profit sharing of 9,000 139,000!
• Advise clients who operate a business with no
  employees and are looking to maximize tax
  deductions to take advantage of the change in the
  law

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How do you identify these clients?

• Factors to Consider
• Age
• Prior Income
• Desire to save
• Cost to implement
• Complication/aggressiveness
• Time horizon

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Vesting Changes

• Defined contribution plans can no longer use
  5-year cliff vesting or 7-year graded vesting
• Must use top-heavy schedules (or better)
• What is top heavy?
• Effective 1-1-2007

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Defined Benefit Plan Changes

• Major part of PPA
• Funding reform
• Will continue to erode large plan traditional DB
  market
• Cash balance plan alternative will replace

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529 Plan permanence

• Did you know that it wasnt permanent?
• Removed from EGTRRA sunset
• Anti-abuse provision added
• Pennsylvania
• Full steam ahead on 529s!

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IRA Limits now permanent
Calendar Year Limit Catch-up
2006 4,000 1,000
2007 4,000 1,000
2008 5,000 1,000
2009 and beyond 5,000 indexed 1,000 not indexed
500 increments
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Active Participant status

• Who is an Active Participant?
• Phase out ranges
• 10,000 ranges

Calendar Year Joint filer Other filer
2006 75,000 50,000
2007 and beyond 80,000 50,000
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Hardship Rule Expansion

• IRS safe harbor (expanded in Final 401(k)
  Regulations)
• Medical expenses - Purchase of residence
• Post-secondary tuition expenses - Prevent
  eviction/foreclosure
• Burial or funeral expenses - Casualty damage to
  residence
• PPA allows hardships for beneficiaries expenses
• Need more guidance
• Qualified Plans can be a source of money more
  often now

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Fiduciary Issues

• Investment Advice to Qualified Plans
• Prohibited Transaction relief if
• Fees dont vary based on funds chosen, or
• Computer model used
• Default plan investments
• One of three alternatives
• Balanced fund
• Life cycle funds, or
• Individually managed
• Notice required

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Disclosure Rules

• Notices
• Funding, safe harbor, default investments,
  automatic enrollment
• Benefit Statements
• DC plans annual
• If participant directed quarterly
• DB plans at least every three years
• Content vesting, balance, permitted disparity,
  restrictions
• Effective 1-1-2007, DOL will produce model by Aug
  2007

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Portability Non-spouse rollovers

• Prior to PPA, non-spouse beneficiaries could NOT
  rollover
• Now they can - by direct rollover
• Must go into an inherited IRA
• Cannot be re-rolled
• More guidance is needed on 70 ½ rules
• Effective for distributions after 12/31/2006
• May want to wait if a death occurred in 2006

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Portability Rollovers to Charity

• 2006 and 2007 only
• Can rollover directly to a qualified charity with
  no taxation (IRC 170(b)(1)(A) with some
  exceptions)
• Up to 100,000 in each year
• Must be otherwise deductible
• IRA accountholder must be 70½
• Time is of the essence! Only applies to 2006 and
  2007
• If money is in a qualified plan, you may be able
  to roll money out to an IRA and then take
  advantage

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Portability Roth rollovers

• Qualified Plan to Roth IRA rollovers permitted
• Effective for distributions after 12/31/2007
• Pre-tax amounts will be taxed on rollover
• Same tax rules as conversion of traditional IRA
• 100,000 AGI requirement
• When doing advanced planning, dont forget TIPRA.
  In 2010, the AGI restriction will be lifted.
  Clients able to get distribution of qualified
  plan assets can convert them to ROTH using these
  rules.

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Health Savings Accounts

• What is it?
• Health IRA
• Accumulate tax preferred funds over time
• Whats happening in the market?
• Who can contribute to someones HSA?
• Very large accumulations possible over time

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Miscellaneous

• Plan limitations sheet enclosed with outline
• Savers credit extended
• Roth 401(k) usage/Roth recommendations

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• Any Questions?