Fox & Fox Archives 2005

Effective January 1, 2006, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $170,000 to $175,000. For participants who separated from service before January 1, 2006, the limitation for defined benefit plans under section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2004, by 1.0273.

The limitation for defined contribution plans under section 415(c)(1)(A) is increased from $42,000 to $44,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of section 415(b)(1)(A). These dollar amounts and the adjusted amounts are as follows:

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $210,000 to $220,000.

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $135,000 to $140,000.

The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $95,000 to $100,000.

The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $450.

In recent articles published by both the Associated Press and USA Today, the topic of pension funding rules has arisen as a major hurdle to the financial security of many workers. With the growing concerns regarding the struggling airline industry, lawmakers in the Senate, House of Representatives, and the White House are all striving to revise pension funding rules that, Senator Charles Grassley, R-Iowa and chairman of the Senate Finance Committee, has dubbed far too lenient.

Senator Grassley pointed to the case of United Airlines' use of "smoothing" techniques to hide problems in its pension plans. In this case, United Airlines was able to use paper investment gains from the 1990's to hide current deficits in its pension plans, despite the fact that the gains are no longer existent. By so doing, United was able to avoid making additional contributions and was able to deceive Pension Benefit Guaranty Corporation officials as well as United employees into believing that the plan was financially sound. Yet the most surprising part of this story is that under the current PBGC rules (established by the Employee Retirement Income Security Act of 1974), these practices are completely legal. The disparities in United's pension plans finally came to light last month when, in order to allow the company to attempt to come out of bankruptcy, a federal judge allowed United to default on its pension obligations; thus, effectively transferring the $9 billion burden to the PBGC. However, under PBGC rules, retirees may receive less than they had planned. The ceiling on benefits for 2005 is $45,613.68 for individuals who retire at age 65. This figure is adjusted annually and may decrease for individuals who begin to collect benefits prior to age 65. Likewise, the ceiling may be higher for individuals who retire after age 65.

In testimony before the Committee on Finance yesterday, Bradley Belt, Executive Director of the PBGC, stated that not only are the current funding rules flawed but, "they have failed to ensure that companies make good on the commitments they make to their workers and retirees. Indeed, the funding rules even allow companies to make new benefit promises when their plans do not have enough assets to meet existing obligations." Mr. Belt further stated that of the 350 active bankruptcy cases before the PBGC, six have underfunded claims greater than $500 million and 37 have underfunding claims of $100 million or greater.

Because, the PBGC is funded from gains on investments as well as insurance premiums collected from pension plan sponsors, the burden of these claims will ultimately fall on healthy companies by requiring them to pay higher premiums. Already, CEOs of various airlines have stated that should this occur, they may find it necessary to terminate their own pension plans; as relieving United Airlines of its $9 billion obligation would give them an unfair advantage.

In recent news from he U.S. Department of the Treasury, more information has been released regarding proposed regulations that would, under the EGTRRA act of 2001, allow for Roth contributions to 401(k) plans.

Under the proposed regulations, the participant must elect to make the contribution as a pretax salary deferral. The annual limitation on deferrals for 2006 will be $15,000 and the Roth contributions are aggregated with the ordinary, pretax deferrals for limitation purposes. The aggregate total will then be subject to the overall limit of either 100% of compensation or $42,000, whichever is lesser. In addition, contrary to the traditional Roth IRA, contributions to 401(k) plans will not be subject to income limitations.

Rollovers from Roth 401(k) plans can be made to a Roth IRA, Roth 403(b), or into another Roth 401(k). However, any rollovers from non-Roth 401(k) or traditional IRA accounts can not be converted to Roth accounts.

Because contributions to a Roth account are post-tax, distributions from these accounts are subject to specific limitations that are more complex then those of a regular 401(k) plan. Ordinarily, if the requirements for a qualified distribution are met, both the principal contributions as well as all Roth earnings are untaxed. For a qualified distribution, one of the following events must occur:

However, if the distribution is not a qualified distribution, the earning will be subject to income taxes while the principal amount would not. In addition, distributions cannot be made within five years of the date of the first Roth contribution made to the account (if the account is a rollover) or the date of the first designated Roth contribution.

Upon attainment of age 70.5, the participant will be required to begin to receive minimum distributions unless the participant rolls the contributions over to a Roth IRA. Should the participant choose to rollover to a Roth IRA, the minimum distribution requirements will not apply.

Despite the recent bill that had been introduced by Congressman Cardin of Maryland including a provision to repeal the Roth 401(k), recent developments indicate that such action will not take place. Representatives from the American Society of Pension Professionals & Actuaries recently met with Congressman Cardin and have reported that the Congressman does not intend to pursue the previously introduced provision. In fact, Congressman Portman of Ohio has since introduced a companion bill that does not include the provision repealing the Roth 401 (k).

At a recent press conference held at the National Press Club in Washington, DC, the Pension Education and Research Foundation of the American Society of Pension Professionals & Actuaries released the results of a report commissioned to study the affects of tax code changes by the Presidents Advisory Panel on Federal Tax Reform. The report was composed by two former congressional staffers from the Joint Committee on Taxation and found that certain options to reform the tax code which would change the income tax to a consumption tax would lead to the demise of employer-sponsored retirement plans. Following the press conference, copy of this report was submitted to the Advisory Panel.

Earlier this week, the IRS and the Treasury Department issued Notice 2005-42 modifying flexible spending arrangements which allow employees to set aside pre-tax funds to pay for uncovered medical expenses. With this, the deadline for reimbursements of health and dependant care expenses will be extended for up to 2-1/2 months following the end of the year. Prior to this update, any monies that were not used by the end of the year were simply forfeited.

Under a recent ruling by the U.S. Supreme Court, it seems that individual retirement accounts can now be granted certain protection in the case of bankruptcy. Section 522 (d) (10) (E) of the Bankruptcy Code allows that because IRA's are retirement assets, they will be protected from creditors if the following three tests are satisfied:

Although the third test was not studied, the court found that the first test is satisfied because IRAs do meet the definition of "similar plans or contracts within the meaning of Section 522 (d) (10) (E)." In addition, because the penalty imposed for distributions prior to age 59-1/2 is a "substantial barrier" preventing early withdrawals; the second test is also met.

In essence, IRAs are only protected to the extent that they are considered "reasonably necessary" for the support of the debtor and/or his or her dependants. If only half of the IRA funds are determined to be necessary for support, than the remaining half remains available to the claims of creditors.

The Treasury recently issued proposed regulations that, under IRC Section 402A, would allow employees under certain plans to make designated contributions as Roth contributions. Designated Roth contributions are defined as elective contributions that satisfy the following requirements.

Contrary to the rules for Roth IRAs, plan participants are not restricted by income limits. In addition, if at the time of distribution the funds are qualified distributions of designated Roth contributions, they are not counted as income. However, due to the separate account requirement, Roth account transactions such as contributions and withdrawals, as well as investment losses, gains, and charges, must all be debited and credited to the Roth account. These accounts must be maintained separately until the entire account is distributed.

The above exceptions withstanding, Roth accounts are subject to the same requirements of the existing pre-tax 401(k) deferral contributions. The plan documents are required to designate to what extent Roth contributions are permitted and for IRC Section 401 (a) (31), the documents must also state that Roth contributions can be rolled over to a Roth IRA or another account that allows for Roth contributions. In addition, updated Summary Plan Descriptions or Summary of Material Modifications detailing the new contribution type must be provided to plan participants.

As usage of the Voluntary Fiduciary Correction Program of the Department of Labor's Employee Benefit Security Administration has increased, the EBSA has recently published proposed revisions to streamline the program.

The revised program is designed to prevent deficiencies in submissions by providing a model application in Appendix E. Also, much of the documentation that had previously been required for specific filing such as information regarding plan's fidelity bonds is no longer necessary. Detailed information such as payroll data that had once been required for corrections to delinquent deposits of participant contributions and loan payments greater than $50,000 can now be submitted as summary data. In addition, an online calculator as well as a list of factors from IRS Revenue Procedure 95-17 that is used to calculate lost earnings and restoration of profits under the simplified method is available on the EBSA's Web site at www.dol.gov/ebsa/calculator/main.html.

Three new transactions have also been added to the list of transactions eligible for correction on the program. Two allow corrections of loans that violate either the amount or duration limits of Code Section 72(p) while the third makes it possible to sell an illiquid asset that is determined to no longer be in the best interest of the plan participants. When selling the illiquid asset reasonable efforts must be made to first sell to a non-party-in-interest, however, if this is not possible, it can then be sold to a party-in-interest.

Only plans/applicants that are not "under investigation" are eligible to use the program. With this revised program, "under investigation" now includes any federal agency such as the IRS or SEC.

Fresno, CA – The locally-owned employee benefits and consulting company Fox & Fox has just announced a relocation and the release of its redesigned Web site at www.foxnfox.com. Specializing in the employee benefit needs of the small- to medium-sized company, Fox & Fox has expanded and moved its offices to 7082 N. Maple.

To enhance its client services, Fox & Fox restructured its Web site to offer more detailed, up-to-date company information along with news related to employee benefits.

The new site, like the company, is straightforward and innovative. With a new look and less text, it enables clients to get the information they need quickly. The site contains a full presentation of Fox & Fox, including services and benefits, contact information, and news.

The Fox & Fox website has a customer service number on each page so the company can be contacted easily. E-mail feedback links also appear on each page, as the company welcomes customer interaction to further improve the site and the company's services.

IRS News Release • IR 2004-127 • October 20, 2004

The Internal Revenue Service today announced cost of living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2005.

Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. It also requires that the Commissioner annually adjust these limits for cost of living increases.

Many of the pension plan limitations will change for 2005. For most of the limitations, the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. Furthermore, several limitations, set by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), are scheduled to increase at the beginning of 2005.

For example, under EGTRRA, the limitation under section 402(g)(1) on the exclusion for elective deferrals described in section 402(g)(3) is increased from $13,000 to $14,000. This limitation affects elective deferrals to section 401(k) plans and to the Federal Government’s Thrift Savings Plan, among other plans.

Effective January 1, 2005, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $165,000 to $170,000. For participants who separated from service before January 1, 2005, the limitation for defined benefit plans under section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2004, by 1.0273.

The limitation for defined contribution plans under section 415(c)(1)(A) is increased from $41,000 to $42,000.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $205,000 to $210,000.

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $130,000 to $135,000.

The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period is increased from $830,000 to $850,000, while the dollar amount used to determine the lengthening of the 5 year distribution period is increased from $165,000 to $170,000.

The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $90,000 to $95,000.

The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $305,000 to $315,000.

The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $450.

The compensation amounts under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes increased from $80,000 to $85,000. The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $165,000 to $170,000.

The Code, as amended by the Economic Growth and Tax Relief Act of 2001 (EGTRRA), specifies the applicable dollar amount for a particular year for certain limitations. These applicable dollar amounts are as follows: