Month: May 2006

Automatic Enrollment Making a Difference in Employees’ Savings Habits

From a recent study by Hewitt, described in this press release here: Employer efforts to automate, simplify and better communicate the 401(k) plan are making positive differences in improving certain employee investment behaviors and raising participation rates among hard-to-reach demographics,"…

From a recent study by Hewitt, described in this press release here:

Employer efforts to automate, simplify and better communicate the 401(k) plan are making positive differences in improving certain employee investment behaviors and raising participation rates among hard-to-reach demographics,” said Lori Lucas, director of retirement research at Hewitt Associates. . .

Not surprisingly, Hewitt’s study found that companies that automatically enrolled employees saw higher participation rates for younger, lower-tenured and lower-salaried workers than those that didn’t. Participation rates among employees with less than one year tenure were 30 percentage points higher than those across the entire Hewitt Universe, 21 percentage points higher for employees making under $20,000 in salary, and 22 percentage points higher for employees age 20-29.

And regarding participants’ tendency to over-invest in company stock:

While the use of lifestyle and lifecycle funds increased, Hewitt’s study showed employees have decreased their investments in company stock. Although it continued to remain the single largest holding for employees in 401(k) plans that offer it, the average investment in company stock decreased from 26.5 percent in 2004 to 21.9 percent in 2005. In addition, the number of employees holding half or more of their 401(k) balances in company stock decreased from 27 percent in 2004 to 20 percent.

To a large extent, this reflects the fact that employers are proactively reducing the role of company stock in the 401(k) plan,” added Lucas. “For example, very few employers now restrict diversification out of company stock. This, coupled with the growing availability of third-party investment advice and guidance, and diversification tools such as lifestyle and lifecycle funds, is helping employees make better investment choices in their 401(k) plans.”

The annual study examined the saving and investing habits of more than 2.6 million employees eligible for 401(k) plans.

The U.S. Supreme Court unanimously affirmed the Fourth Circuit in Sereboff v. Mid-Atlantic Medical, allowing the administrator for a health plan to obtain reimbursement under a subrogation clause from a participant who had recovered from a third party in a…

The U.S. Supreme Court unanimously affirmed the Fourth Circuit in Sereboff v. Mid-Atlantic Medical, allowing the administrator for a health plan to obtain reimbursement under a subrogation clause from a participant who had recovered from a third party in a tort action. The opinion, written by Chief Justice Roberts, resolves a split in the Courts of Appeal. Excerpt from the opinion distinguishing the result reached in this case from the result reached in the Great-West case:

[The] impediment to characterizing the relief in Knudson as equitable is not present here. As the Fourth Circuit explained below, in this case Mid-Atlantic sought “specifically identifiable” funds that were “within the possession and control of the Sereboffs”—that portion of the tort settlement due Mid-Atlantic under the terms of the ERISA plan, set aside and “preserved [in the Sereboffs’] investment accounts.” 407 F. 3d, at 218. Unlike Great-West, Mid-Atlantic did not simply seek “to impose personal liability . . . for a contractual obligation to pay money.” Knudson, 534 U. S., at 210. It alleged breach of contract and sought money, to be sure, but it sought its recovery through a constructive trust or equitable lien on a specifically identified fund, not from the Sereboffs’ assets generally, as would be the case with a contract action at law. ERISA provides for equitable remedies to enforce plan terms, so the fact that the action involves a breach of contract can hardly be enough to prove relief is not equitable; that would make §502(a)(3)(B)(ii) an empty promise. This Court in Knudson did not reject Great-West’s suit out of hand because it alleged a breach of contract and sought money, but because Great-West did not seek to recover a particular fund from the defendant. Mid-Atlantic does.

See a previous post on the Sereboff case here.

The U.S. Supreme Court unanimously affirmed the Fourth Circuit in Sereboff v. Mid-Atlantic Medical, allowing the administrator for a health plan to obtain reimbursement under a subrogation clause from a participant who had recovered from a third party in a…

The U.S. Supreme Court unanimously affirmed the Fourth Circuit in Sereboff v. Mid-Atlantic Medical, allowing the administrator for a health plan to obtain reimbursement under a subrogation clause from a participant who had recovered from a third party in a tort action. The opinion, written by Chief Justice Roberts, resolves a split in the Courts of Appeal. Excerpt from the opinion distinguishing the result reached in this case from the result reached in the Great-West case:

[The] impediment to characterizing the relief in Knudson as equitable is not present here. As the Fourth Circuit explained below, in this case Mid-Atlantic sought “specifically identifiable” funds that were “within the possession and control of the Sereboffs”—that portion of the tort settlement due Mid-Atlantic under the terms of the ERISA plan, set aside and “preserved [in the Sereboffs’] investment accounts.” 407 F. 3d, at 218. Unlike Great-West, Mid-Atlantic did not simply seek “to impose personal liability . . . for a contractual obligation to pay money.” Knudson, 534 U. S., at 210. It alleged breach of contract and sought money, to be sure, but it sought its recovery through a constructive trust or equitable lien on a specifically identified fund, not from the Sereboffs’ assets generally, as would be the case with a contract action at law. ERISA provides for equitable remedies to enforce plan terms, so the fact that the action involves a breach of contract can hardly be enough to prove relief is not equitable; that would make §502(a)(3)(B)(ii) an empty promise. This Court in Knudson did not reject Great-West’s suit out of hand because it alleged a breach of contract and sought money, but because Great-West did not seek to recover a particular fund from the defendant. Mid-Atlantic does.

See a previous post on the Sereboff case here.

WSJ Commentary: Make My (Mother’s) Day . .

A commentary from the Wall Street Journal discusses some of the challenges women face in the workplace regarding benefits: "Make My (Mother's) Day . . ."…

A commentary from the Wall Street Journal discusses some of the challenges women face in the workplace regarding benefits: “Make My (Mother’s) Day . . .“

Info Regarding H.R. 4297 – Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”)

From RIA (subscription only): After months of intense negotiations, House and Senate conferees have finally reached an agreement on H.R. 4297, the “Tax Increase Prevention and Reconciliation Act of 2005” (TIPRA) (the legislation keeps its 2005 date because it was…

From RIA (subscription only):

After months of intense negotiations, House and Senate conferees have finally reached an agreement on H.R. 4297, the “Tax Increase Prevention and Reconciliation Act of 2005” (TIPRA) (the legislation keeps its 2005 date because it was originated in Congress in 2005). The legislation, which includes a revenue offset that eliminates the income limitations on Roth IRA conversions, and an excise tax on entity managers, passed the House by a vote of 244-185 on May 10, 2006, and passed the Senate by a vote of 54-44 on May 11. ( TIPRA Conference Report; Cong Record H2465, 5/10/2006; Cong Record S4460, 5/11/2006 )

Links for obtaining information on H.R. 4297 are here, here and here.

Continue reading for the text of Section 512 pertaining to the conversion of traditional IRAs to Roth IRAs as well as the text of the Conference Agreement on the provision. . .

“Tax SEC. 512. CONVERSIONS TO ROTH IRAS.

(a) Repeal of Income Limitations.–

(1) IN GENERAL.–Paragraph (3) of section 408A(c) (relating to limits based on modified adjusted gross income) is amended by striking subparagraph (B) and redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C), respectively.

(2) CONFORMING AMENDMENT.–Clause (i) of section 408A(c)(3)(B) (as redesignated by paragraph (1)) is amended by striking “except that–” and all that follows and inserting “except that any amount included in gross income under subsection (d)(3) shall not be taken into account, and”.

(b) Rollovers to a Roth IRA From an IRA Other Than a Roth IRA.–

(1) IN GENERAL.–Clause (iii) of section 408A(d)(3)(A) (relating to rollovers from an IRA other than a Roth IRA) is amended to read as follows:

“(iii) unless the taxpayer elects not to have this clause apply, any amount required to be included in gross income for any taxable year beginning in 2010 by reason of this paragraph shall be so included ratably over the 2-taxable-year period beginning with the first taxable year beginning in 2011.”.

(2) CONFORMING AMENDMENTS.–

(A) Clause (i) of section 408A(d)(3)(E) is amended to read as follows:

“(i) ACCELERATION OF INCLUSION.–

“(I) IN GENERAL.–The amount otherwise required to be included in gross income for any taxable year beginning in 2010 or the first taxable year in the 2-year period under subparagraph (A)(iii) shall be increased by the aggregate distributions from Roth IRAs for such taxable year which are allocable under paragraph (4) to the portion of such qualified rollover contribution required to be included in gross income under subparagraph (A)(i).

“(II) LIMITATION ON AGGREGATE AMOUNT INCLUDED.–The amount required to be included

[Page: H2215] GPO’s PDFin gross income for any taxable year under subparagraph (A)(iii) shall not exceed the aggregate amount required to be included in gross income under subparagraph (A)(iii) for all taxable years in the 2-year period (without regard to subclause (I)) reduced by amounts included for all preceding taxable years.”.
(B) The heading for section 408A(d)(3)(E) is amended by striking “4-YEAR” and inserting “2-YEAR”.

(c) Effective Date.–The amendments made by this section shall apply to taxable years beginning after December 31, 2009.”

Conference Agreement Text:

“B. ELIMINATE INCOME LIMITATIONS ON ROTH IRA CONVERSIONS
(Sec. 408A of the Code)

PRESENT LAW
There are two general types of individual retirement arrangements (`IRAs’): traditional IRAs and Roth IRAs. The total amount that an individual may contribute to one or more IRAs for a year is generally limited to the lesser of: (1) a dollar amount ($4,000 for 2006); and (2) the amount of the individual’s compensation that is includible in gross income for the year. In the case of an individual who has attained age 50 before the end of the year, the dollar amount is increased by an additional amount ($1,000 for 2006). In the case of a married couple, contributions can be made up to the dollar limit for each spouse if the combined compensation of the spouses that is includible in gross income is at least equal to the contributed amount. IRA contributions in excess of the applicable limit are generally subject to an excise tax of six percent per year until withdrawn.

Contributions to a traditional IRA may or may not be deductible. The extent to which contributions to a traditional IRA are deductible depends on whether or not the individual (or the individual’s spouse) is an active participant in an employer-sponsored retirement plan and the taxpayer’s AGI. An individual may deduct his or her contributions to a traditional IRA if neither the individual nor the individual’s spouse is an active participant in an employer-sponsored retirement plan. If an individual or the individual’s spouse is an active participant in an employer-sponsored retirement plan, the deduction is phased out for taxpayers with AGI over certain levels. To the extent an individual does not or cannot make deductible contributions, the individual may make nondeductible contributions to a traditional IRA, subject to the maximum contribution limit. Distributions from a traditional IRA are includible in gross income to the extent not attributable to a return of nondeductible contributions.

Individuals with adjusted gross income (`AGI’) below certain levels may make contributions to a Roth IRA (up to the maximum IRA contribution limit). The maximum Roth IRA contribution is phased out between $150,000 to $160,000 of AGI in the case of married taxpayers filing a joint return and between $95,000 to $105,000 in the case of all other returns (except a separate return of a married individual). 541

[Footnote] Contributions to a Roth IRA are not deductible. Qualified distributions from a Roth IRA are excludable from gross income. Distributions from a Roth IRA that are not qualified distributions are includible in gross income to the extent attributable to earnings. In general, a qualified distribution is a distribution that is made on or after the individual attains age 59 1/2 , death, or disability or which is a qualified special purpose distribution. A distribution is not a qualified distribution if it is made within the five-taxable year period beginning with the taxable year for which an individual first made a contribution to a Roth IRA.

[Footnote 541: In the case of a married taxpayer filing a separate return, the phaseout range is $0 to $10,000 of AGI.]

A taxpayer with AGI of $100,000 or less may convert all or a portion of a traditional IRA to a Roth IRA. 542

[Footnote] The amount converted is treated as a distribution from the traditional IRA for income tax purposes, except that the 10-percent additional tax on early withdrawals does not apply.

[Footnote 542: Married taxpayers filing a separate return may not convert amounts in a traditional IRA into a Roth IRA.]

In the case of a distribution from a Roth IRA that is not a qualified distribution, certain ordering rules apply in determining the amount of the distribution that is includible in income. For this purpose, a distribution that is not a qualified distribution is treated as made in the following order: (1) regular Roth IRA contributions; (2) conversion contributions (on a first in, first out basis); and (3) earnings. To the extent a distribution is treated as made from a conversion contribution, it is treated as made first from the portion, if any, of the conversion contribution that was required to be included in income as a result of the conversion.

Includible amounts withdrawn from a traditional IRA or a Roth IRA before attainment of age 59 1/2 , death, or disability are subject to an additional 10-percent early withdrawal tax, unless an exception applies.

HOUSE BILL
No provision.

SENATE AMENDMENT
No provision.

CONFERENCE AGREEMENT
The conference agreement eliminates the income limits on conversions of traditional IRAs to Roth IRAs. 543

[Footnote] Thus, taxpayers may make such conversions without regard to their AGI.

[Footnote 543: Under the conference agreement, married taxpayers filing a separate return may convert amounts in a traditional IRA into a Roth IRA.]

For conversions occurring in 2010, unless a taxpayer elects otherwise, the amount includible in gross income as a result of the conversion is included ratably in 2011 and 2012. That is, unless a taxpayer elects otherwise, none of the amount includible in gross income as a result of a conversion occurring in 2010 is included in income in 2010, and half of the income resulting from the conversion is includible in gross income in 2011 and half in 2012. However, income inclusion is accelerated if converted amounts are distributed before 2012. 544

[Footnote] In that case, the amount included in income in the year of the distribution is increased by the amount distributed, and the amount included in income in 2012 (or 2011 and 2012 in the case of a distribution in 2010) is the lesser of: (1) half of the amount includible in income as a result of the conversion; and (2) the remaining portion of such amount not already included in income. The following example illustrates the application of the accelerated inclusion rule.

[Footnote 544: Whether a distribution consists of converted amounts is determined under the present-law ordering rules.]

Example.–Taxpayer A has a traditional IRA with a value of $100, consisting of deductible contributions and earnings. A does not have a Roth IRA. A converts the traditional IRA to a Roth IRA in 2010, and, as a result of the conversion, $100 is includible in gross income. Unless A elects otherwise, $50 of the income resulting from the conversion is included in income in 2011 and $50 in 2012. Later in 2010, A takes a $20 distribution, which is not a qualified distribution and all of which, under the ordering rules, is attributable to amounts includible in gross income as a result of the conversion. Under the accelerated inclusion rule, $20 is included in income in 2010. The amount included in income in 2011 is the lesser of (1) $50 (half of the income resulting from the conversion) or (2) $70 (the remaining income from the conversion), or $50. The amount included in income in 2012 is the lesser of (1) $50 (half of the income resulting from the conversion) or (2) $30 (the remaining income from the conversion, i.e., $100–$70 ($20 included in income in 2010 and $50 included in income in 2011)), or $30.

Effective date.–The provision is effective for taxable years beginning after December 31, 2009.

Resource Regarding Lifecycle Funds

Mercer has a helpful article on lifecycle funds which you can access here. The article-"Asset allocation issues in lifecycle fund selection and design"-provides information useful to plan sponsors that want to offer these types of programs and compares "the five…

Mercer has a helpful article on lifecycle funds which you can access here. The article–“Asset allocation issues in lifecycle fund selection and design“–provides information useful to plan sponsors that want to offer these types of programs and compares “the five most popular lifecycle programs as of the end of 2005: American Century, BGI, Fidelity, T. Rowe Price and Vanguard.”

Republicans Announce Agreement on Tax Cuts

From the Wall Street Journal, "Republicans Announce Agreement On $70B Tax Relief Bill." Also, from Bloomberg, "Congressional Republicans Set Votes on Tax Cuts." And, finally, from MarketWatch, "Congressional Republicans agree to extend tax cuts." Excerpt: In order to keep the…

From the Wall Street Journal, “Republicans Announce Agreement On $70B Tax Relief Bill.”

Also, from Bloomberg, “Congressional Republicans Set Votes on Tax Cuts.”

And, finally, from MarketWatch, “Congressional Republicans agree to extend tax cuts.” Excerpt:

In order to keep the net size of the package to less than $70 billion, negotiators included a number of revenue-raising measures. These include a provision that allows wealthier people to convert retirement savings into Roth IRAs.

That’s expected to provide a short-term revenue boost because money moved out of traditional IRAs into Roth IRAs is taxed immediately. Critics say the measure will put a hole in the budget over the longer term when retirees withdraw Roth IRA funds that have grown tax-free.

(Hat Tip: TaxProf Blog)

‘These are a few of my favorite’ . . . IRS Plan Compliance Resources

Practitioners can find a lot of good information these days on the IRS's website when it comes to retirement plan compliance. However, sometimes it is a bit difficult to find what you are looking for. In fact, most times I…

Practitioners can find a lot of good information these days on the IRS’s website when it comes to retirement plan compliance. However, sometimes it is a bit difficult to find what you are looking for. In fact, most times I find it easier to “google” what I am looking for, rather than to dig around on the IRS’s website. Because of that, I am adding a section over in the side-bar entitled “IRS Plan Compliance Resources” where I am listing retirement plan compliance resources which are available on the IRS’s website and which I often find useful (i.e. I just don’t want to have to hunt around for them anymore. Hope you find them useful too.)

The following resources are listed:

Long-Awaited Rev. Proc. 2006-27

For months, practitioners have been anticipating that the IRS was going to issue a new Rev. Proc. governing EPCRS. It has finally arrived. See Rev. Proc 2006-27 [pdf]. It is interesting to note that the Table of Fees For Nonamenders*…

For months, practitioners have been anticipating that the IRS was going to issue a new Rev. Proc. governing EPCRS. It has finally arrived. See Rev. Proc 2006-27 [pdf].

It is interesting to note that the Table of Fees For Nonamenders* that was published here previously at Benefitsblog in October of 2003, as shared by IRS officials at a local meeting, has finally been made official in this new Rev. Proc. (See Section 14.04 of the Rev. Proc. at pgs. 54-55.) The table has to do with the compliance fees imposed by IRS on plan sponsors where a plan is submitted for a determination letter, and the IRS identifies-during the determination letter application process–that the plan was not properly amended for certain changes in the law. The table is as follows:

IRS Nonamender Fee Schedule
Number of Employees EGTRRA GUST UCA/OBRA TRA’86 T/D/R ERISA
20 or less $2,500 $3,000 $3,500 $4,000 $4,500 $5,000
21-50 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000
51-100 $7,500 $9,000 $10,500 $12,000 $13,500 $15,000
101-500 $12,500 $15,000 $17,500 $20,000 $22,500 $25,000
501-1,000 $17,500 $21,000 $24,500 $28,000 $31,500 $35,000
1,001-5,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000
5,001-10,000 $32,500 $39,000 $45,500 $52,000 $58,500 $65,000
Greater than 10,000 $40,000 48,000 $56,000 $64,000 $72,000 $80,000

It is my understanding that the scenario could run something like this. Plan X comes in for a favorable determination letter during its scheduled time under Rev. Proc. 2005-66. Somehow during the IRS’s review of Plan X, it is discovered that the plan sponsor failed to adopt one of the required EGTRRA amendments on a timely basis. The plan sponsor has 1,023 employees. According to the table, the plan sponsor would now owe $25,000 in fees for the nonamender failure. (If instead the plan sponsor only had 15 employees, the compliance fee would only be $2,500.)

According to Section 14.02 of the Rev. Proc., the fees will be even higher if the nonamender failure is discovered in an IRS audit, rather than during the determination letter application process.

*The term “nonamender failure” is defined in Section 4.06 of the Rev. Proc. as a “failure to amend the plan to reflect a change in a qualification requirement within the plan’s applicable remedial amendment period, as set forth in Rev. Proc. 2005-66.”