ROTH IRA Conversion

The Pension Protection Act of 2006 (PPA) expanded the retirement plan distribution rules to permit the rollover (conversion) of non-Roth funds held in 401(k), 403(b), or eligible 457 plans to a Roth IRA, if the participant satisfies certain eligibility rules.  Unlike the rollover to a Traditional IRA, the conversion of non-Roth funds to a Roth IRA does not postpone taxation of the distribution.  This provision is effective for plan distributions made after January 1, 2008.

For 2008 and 2009, taxpayers with modified adjusted gross income over $100,000 and married taxpayers who file a separate tax return are not eligible to convert non-Roth money to a Roth IRA.  However, these eligibility rules are removed for 2010 and beyond.  Additionally, the IRS is providing tax incentives for conversions occurring in 2010, allowing the income tax payments to be spread out over two years.

It is important to note that plan participants must be eligible to take a distribution from the plan in order to take advantage of this new rollover (conversion) opportunity.  Please note that participants must still have a distributable event in order to take advantage of the new provisions.

If you have any questions regarding the Roth IRA conversions, please contact your Investment Professional and consider consulting a tax advisor.

RMDs suspended for 2009

In order to conserve their resources after the sharp stock market downturn, participants age 70½ or older will not have to take a required minimum distribution (RMD) from their tax-deferred retirement accounts in 2009, thanks to a new federal law.

The 2009 RMD suspension applies to 401(k)s, 403(b)s, IRAs and other defined contribution plans.

2008 RMDs - please note that the new law does not suspend RMDs for 2008. Also, if you deffered your first RMD to April 2009 it must be withdrawn by that time.

The EGTRRA Restatement, the required plan rewrite for the purpose of incorporating retirement plan law changes into the new IRS approved document, is under way here at TSC.  You can find more details on the EGTRRA Restatement by visiting our website www.tsc401k.com.

The EGTRRA Restatement affects all profit sharing/401(k) and similar Defined Contribution plans.  The deadline to complete the restatement of each plan is April 30, 2010.

Our goal is to make the restatement process easy for you to complete.  As a reminder, if you are contemplating any design or operational changes in your plan, a good time to implement the change is with your EGTRRA Restatement.  While your TSC Retirement Plan Consultant regularly consults on ways to improve your plan, there may be other changes you are considering that have not been discussed with TSC.  Please be aware that IRS rules dictate when plan documents must be amended to reflect changes for a plan year.

The deadline has passed to make changes to your plan that are to be effective in 2008 or that have to be adopted by the end of 2008 for implementation on January 1, 2009.

A note about 403(b) Plans and Defined Benefit Plans

All 403(b) Plans must be amended for EGTRRA and Final 403(b) regulations effective January 1, 2009.  These amendments must be signed by December 31, 2009, under a recently issued extension from the IRS.  We have begun working on our clients’ 403(b) plans and we will complete these amendments (as newly restated documents) in the next few months. This will include the final regulations provisions as well as the language required under the Pension Protection Act (PPA).  Defined Benefit plans are on a different 6-year cycle than Defined Contribution plans, and the restatement of those plans is scheduled to begin in 2010, after the defined contribution plans are all done.

A full two page article appeared in the December 14th issue of the Wall Street Journal entitled “How to Fix 401(k)s”. The very first sentence in the article was; “Has the 401(k) Failed?”  Editorials which are severely critical of the impact of market decline and its effect upon retirees are appearing in major publications across the country.  Academics and journalists are commentating on how the 401(k) system is broken and needs to be fixed.

Their recommended solution is that 401(k) plans need guarantees that only the federal government can provide.  It is proposed that 401(k)s be managed similarly to the Social Security system and that they be credited a guaranteed level of interest.

That is just plain “Hogwash”; the 401(k) system is not broken.  It is the collapse of the capital markets around the world failing as a direct result of inadequate oversight by the governmentally established regulatory bodies and the congressional committees charged with overseeing Fannie Mae and Freddie Mac that has jeopardized financial security for retirees. The 401(k) system has been the most effective individual savings program ever devised and the 401(k) system has, to a degree, softened the blow of current financial market declines.

Let’s consider a governmentally guaranteed approach to a blend of stocks and bonds:

As you can clearly see, even after an extreme 40% reduction the stock market still out-performed the guarantee. Historically the resumption of economic growth has further benefited those invested in the market.

It should be noted that a number of 401(k) product providers do currently offer a guaranteed investment specifically designed for qualified plans.  These investments do come with certain limitations but, clearly, can be beneficial to some plan participants.

A recent editorial written by Nevin Adams of “Plan Sponsor Magazine” says this: “The 401k plan hasn’t done anything other than perform as advertised.  In fact, it has provided millions of Americans with a wonderful opportunity and incentive to provide for their own financial future….It’s a venue where millions of Americans who save nowhere else and who would save nowhere else, choose to do so and they do so because it is a system that encourages and nurtures that behavior.

We would all be better served if the academics and journalists would direct their efforts toward having the policymakers pay more attention to ensuring that a similar market collapse does not happen again.

The answer to this question depends upon how your plan was designed. The following scenarios assume employees have met basic eligibility requirements to enter the plan.

A plan may have “last day language”; meaning that an eligible participant must be employed on the last day of the Plan year.

A plan may also have a minimum hour requirement that an eligible participant must work to receive a profit sharing contribution at year end.

Any plan can have one, both or none of the above requirements.

Your plan document states the required age and/or years of service required for an employee to meet the eligibility requirements to enter the plan.  Once an employee has met these requirements, they are eligible to enter the plan on the plan’s next entry date, which is also defined in your plan document.

Once an employee has met the plan’s eligibility requirements, they are considered a Plan Participant on the next entry date.  Their participation status is not contingent upon whether or not the employee elects to contribute 401(k) deferrals to the plan.  It is also not contingent on the employee’s completed hours of service in subsequent years.  In other words, once the employee is eligible for the plan, they will remain a Plan Participant for all future years.

Taking this one step further, if a plan participant terminates employment and is subsequently re-employed, they are immediately considered eligible to contribute 401(k) deferrals.  Their eligibility to share in employer contributions may be suspended pursuant to the terms of the Plan Document, but they are immediately considered a Plan Participant upon their date of rehire.