News|New U.S. Retirement Laws

New U.S. Retirement Laws

• New Rules for Depositing Participant Contributions
  
• Worker, Retiree, and Employer Recovery Act of 2008 (the Recovery Act)
  

   

  On December 23, 2008, the President signed into law the Worker, Retiree, and Employer Recovery Act of 2008 (the Recovery Act). Among other new laws, the Recovery Act waives required minimum distributions (RMDs) for 2009.

   

  Generally, RMDs must begin to be made from qualified plans by April 1 of the calendar year following the later of the calendar year in which participants reach age 70-1/2 or retires (if they are not more-than-5% owners). Participants who fail to take RMDs must pay a 50% excise tax on any shortfall between the RMD and the amount that actually was distributed for the year. Under the Recovery Act, no RMD is required for 2009 from 401(k) (and certain other individual account) plans. But the waiver does not lift RMD requirements for 2008 or for calendar years after 2009. For example, participants whose required beginning date is April 1, 2009 (because they reached age 70-1/2 in 2008) must take their 2008 RMDs by April 1, 2009, but they would not need to take a 2009 RMD (which they would have otherwise been required to take by December 31, 2009); participants whose required beginning date is April 1, 2010 (because they reached age 70-1/2 in 2009) have no RMD for 2009, and thus no RMD must be distributed by April 1, 2010, but they must take their 2010 RMDs by December 31, 2010.

   

  Note that recent Treasury correspondence indicates that the IRS and Treasury do not plan to undertake any changes to RMD requirements for 2008.

   

• The Pension Protection Act of 2006
  
• Qualified Default Investment Alternative (QDIA)
  

  DOL Issues Final Regulations on Qualified Default Investment Alternatives

  November 21, 2007
  
  The Department of Labor has issued final regulations on Qualified Default Investment Alternatives ("QDIAs") under participant-directed individual account plans (such as 401(k) plans). As you may recall, the Pension Protection Act of 2006 made a number of changes to the laws governing pension and 401(k) plans. One of those changes was to encourage 401(k) plan sponsors to use automatic enrollment arrangements by providing plan fiduciaries with a safe harbor from liability if certain default investments are required under the plan. By using the safe harbor, plan fiduciaries will reduce their exposure to liability if a participant's account is invested in a default investment option and that investment option incurs losses (or does not earn as much as other investment options).
  
  Here are some of the highlights of the final regulations on QDIAs:

  • Scope of Fiduciary Relief. Relief is available to the plan fiduciary of an individual account plan if loss or breach results from an investment in a QDIA. However, the fiduciary remains obligated to select and monitor prudent investment option(s) that will be deemed to be the default investment option under the plan (although the final regulations make clear that the fiduciary is not obligated to select the "most prudent" investment option). Also, the fiduciary safe harbor does not extend to transactions prohibited under ERISA Section 406 (such as those involving self-dealing), conflicts of interest, and other improper influences.
  • Safe Harbor Requirements. For the safe harbor to apply, the following six requirements must be met:

  1.       Assets must be invested in the QDIA because the participant failed to direct the investment of his or her assets despite having had the opportunity to do so.
  
  2.       The plan must provide adequate notice to the participant of the QDIA arrangement (see below for a brief discussion of the notice requirements).
  
  3.       The plan fiduciary must provide the participant with specific information relating to the QDIA, including the prospectus, proxy materials, and information about the QDIA's annual operating expenses.
  
  4.       The defaulting participant must be permitted to transfer out of the QDIA with the same frequency afforded other participants, but at least once every three months.
  
  5.       The participant must not be subject to fees or expenses imposed by the QDIA for 90 days from the date of the participant's first contribution, though ongoing fees and expenses related to the operation of the QDIA are permitted. After 90 days, fees and expenses may be imposed for any transfers or withdrawals from the QDIA to the same extent that fees and expenses would otherwise be charged to participants who elect to invest in the QDIA.
  
  6.       The plan must offer a broad range of investment alternatives. The alternatives must: (a) be diversified; (b) be distinct with respect to risk and return; and (c) enable the participant to achieve a portfolio with risk and return within the range appropriate for a like participant.

  • Investment Option That Qualify as QDIAs. For an investment option to qualify as a QDIA, the following four requirements must be met:

  1.       The QDIA may not hold or acquire employer securities unless the employer securities are: (i) held or acquired by a regulated financial institution; or (ii) acquired as a matching contribution from the plan sponsor or at the direction of the participant.
  
  2.       The QDIA may not impose any restrictions, fees, or expenses in violation of the regulations (see safe harbor requirements above).
  
  3.       The QDIA must be managed by an investment manager, a plan trustee, a plan sponsor who is a named fiduciary, or a registered investment company.
  
  4.       The QDIA must use specific types of investment fund products, including either:
  
  a.       A life-cycle or targeted-retirement-date fund, which consists of a mix of equity and fixed income exposures based on the participant's age, target retirement date, or life expectancy.
  b.       A managed account, where an investment management service allocates a participant's assets among equity and fixed income exposures based on the participant's age and target retirement date.
  c.        A balanced fund, which consists of a mix of equity and fixed income exposures consistent with the target risk appropriate for the plan participants in the aggregate. Any of these three types of funds may be offered through variable annuity contracts, trust funds, or other pooled investment funds.

  • Capital Preservation Investments. While capital preservation funds, such as stable value and money market funds, are generally excluded from the definition of a QDIA, an individual account pension plan may initially default undirected account assets into a capital preservation investment for up to 120 days after the participant's first elective contribution. After 120 days, the plan must then default into one of the investment options noted above. In addition, investments in stable value funds made before December 24, 2007, the effective date of the regulations, are "grandfathered" under the regulations.
  • How QDIAs Apply to Situations Beyond Automatic Enrollment. Under the final regulations, fiduciary relief applies whenever a participant has had the opportunity to direct the investment of assets in her account but fails to do so. This means that, for example, should a participant fail to provide investment direction following the elimination of an investment alternative, the plan fiduciary may avail itself of the relief provided by the regulations and invest the participant's account in a QDIA until the participant provides a different direction.
  • Notice Requirements and Transition. To qualify for the safe harbor, an initial notice must be provided to the participant either: (a) at least 30 days before her or she becomes eligible to participate in the individual account plan; (b) at least 30 days before his or her assets are invested in the QDIA; or (c) before or at the time of plan eligibility if the plan provides participants with a 90-day window to withdraw automatic contributions without penalty. An annual notice must also be provided at least 30 days before each subsequent plan year.
    
    Each notice must include the following information: (a) the circumstances giving rise to the investment of a participant's assets in a QDIA; (b) a description of the QDIA; (c) a description of the participant's right to direct the investment in his or her plan account and to divest his or her QDIA holdings and invest the proceeds in any of the plan's other investment alternatives; and (d) directions on how to obtain information on the other investment alternatives.
    
    The IRS recently published a sample notice that plan sponsors can use as a starting point for preparing the applicable notice. The notice may not be provided by including it in the plan's summary plan description.

   
• Qualified Automatic Contribution Arrangement (QACA)
  

  11/14/2007

   

  The IRS has released proposed final regulations for a new safe harbor design to automatically pass annual discrimination testing OR to consider the new safe harbor design even if a Plan currently utilizes a safe harbor design. 
  
  This new design-based safe harbor applies only to a qualified automatic contribution arrangement (QACAs) that is available for 401(k) plans beginning in 2008 BUT would have to be promulgated to Employees no later than December 1st. In addition, as explained below, there are a number or required administrative procedures necessary to properly comply with the new design format. 

  
  Plans meeting this safe harbor will be deemed to satisfy the annual 401k discrimination test (the ADP test) and, if additional requirements are met, the annual 401k matching discrimination test (the ACP test) and generally will also be exempt from the annual top-heavy discrimination test.  
  
  The new safe harbor design requires plans to uniformly apply certain automatic deferral percentages to all newly eligible employees as of January 1, 2008, who do not make an affirmative election when initially becoming eligible to participate in the Plan. During the initial period, the automatic deferral percentage must be at least 3% of compensation. The initial period begins on the first day an employee participates in the qualified automatic contribution arrangements (QACA) and ends on the last day of the following plan year (potentially as long as two years). After the initial period, the minimum required percentage increases 1% per year until it reaches 6%. This QACA arrangement can provide for a higher percentage than is required, but the percentage cannot exceed 10% of compensation.

  
  The regulations allow current employees who were eligible for the plan prior to the January 1, 2008, and who had a current election--even if it was a 0% election--to be excluded from the automatic deferral percentage requirements. However, employees eligible to participate prior to January 1, 2008, MUST have a deferral election waiver on file to be excluded from the QACA. (Those currently in the 6-month suspension period due to a hardship withdrawal are also not bound by the QACA). 
  
  Employers implementing the QACA must also make a minimum non-elective or basic matching contribution for all participating non-highly compensated employees. Unlike the current safe harbor designs, however, employers implementing a QACA are permitted to impose a two-year vesting schedule and a lower basic matching contribution (100% of deferrals up to 1% of compensation and 50% of deferrals from 1% to 6% of compensation). As such, Employers with a current safe harbor design might want to consider this new safe harbor design option. 
  
  The regulations require that an annual safe harbor notice be provided in future years to all eligible employees at least 30 days (and no more than 90 days) prior to the beginning of the plan year. This aspect of the regulation will, naturally, be monitored and provided by our Firm for our Clients 

• Sarbanes-Oxley Act of 2002 (Re: Blackout Periods)
  

  
  President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "SOA"), which was enacted in response to the outcry over Enron and other corporate accounting scandals. The SOA includes several new rules that apply to a blackout period under an individual account plan (e.g., a 401(k) plan), including advance notice to participants and a ban on insider trading. These new blackout rules will became effective January 26, 2003. The SOA also generally prohibits a public accounting firm from providing audit services "contemporaneously" with non-audit services.
  

  Here are some details on the new blackout period rules:

  • PLAN ADMINISTRATOR MUST GIVE 30-DAY ADVANCE NOTICE OF ERISA BLACKOUT PERIOD TO PARTICIPANTS AND BENEFICIARIES. At least 30 days before the beginning of an ERISA blackout period (described below), the plan administrator must notify the affected participants and beneficiaries. The notice must include: (1) the reasons for the blackout period; (2) identification of the investments and other rights that are affected; (3) the expected beginning date and length of the blackout period; and (4) a statement that individuals should evaluate the appropriateness of their current investment decisions in light of their inability to direct or diversify assets credited to their accounts. The notice must be in writing; this requirement may be satisfied by electronic means so long as the notice is "reasonably accessible" to the recipient. The plan administrator who fails to provide a required blackout notice may be fined up to $100 per day per affected participant or beneficiary. If the blackout period involves employer securities, the plan administrator is required to also provide notice to the issuer of the employer securities.

  
  RPG Comment: These new administrative requirements will be enforced by large penalties that may be imposed upon plan administrators that don't comply (see also the increased criminal penalties described below). The DOL must issue initial guidance and a model notice no later than January 1, 2003. Interim final rules are to be promulgated by October 13, 2002. 
  
   

  • WHAT IS AN ERISA BLACKOUT PERIOD? For purposes of the notice requirements, a "blackout period" is defined as a period of more than three consecutive business days during which the participants or beneficiaries in an individual account plan are limited or restricted from their normal right to direct or diversify assets in their accounts or obtain plan loans or distributions. A regularly scheduled limitation or restriction is not a blackout period if it is previously disclosed to participants and beneficiaries through a summary of material modifications or in other materials describing specific investment alternatives under the plan. Exceptions also apply for limitations or restrictions that arise from a qualified domestic relations order, under a one-person retirement plan, or by application of securities laws.

  
  RPG Comment: Unlike the definition of "blackout period" that applies to the prohibition on insider trading (described below), this definition of blackout period includes restrictions on plan distributions and loans, and it does not provide an exception for mergers and acquisitions. However, a special rule relaxes the 30-day requirement if the blackout period occurs solely in connection with a person becoming or ceasing to become a participant or beneficiary because of a merger or acquisition. In that case, the notice requirement will be met if it is provided to affected participants and beneficiaries as soon as reasonably practicable. Some other limited exceptions apply when a fiduciary determines in writing that the required circumstances exist. 
  
   

  • INCREASED CRIMINAL PENALTIES UNDER ERISA. The SOA increases the criminal penalties under ERISA Section 501 for willful violation of ERISA's reporting and disclosure requirements (including the new blackout notice requirement). Under the old law, an individual faced a fine of up to $5,000 and/or up to one year in prison. The SOA increased the penalties to a fine of up to $100,000 and/or up to 10 years in prison. For entities that are not individuals, the old penalty amount of up to $100,000 is increased to up to $500,000.

  
  RPG Comment: Apparently, the criminal penalties were increased as a reaction to perceived questionable accounting practices. Yet these increased penalties apply not only to the new blackout period requirements but also to existing summary plan description, annual report and other disclosure requirements. 

• Economic Growth and Tax Relief Reconciliation Act of 2001 (H.R. 1836) -How this affects Cafeteria Plans
  

  Expansion Of Adoption Credit And Adoption Assistance Programs

  The tax credit for qualified adoption expenses is expanded from a maximum of $5,000 to a maximum of $10,000. In the case of the adoption of a child with special needs, the tax credit is $10,000 regardless of the amount of the qualified adoption expenses. Similarly, the amount excluded from income for employer-provided adoption assistance programs is increased to a maximum of $10,000 per eligible child, and in the case of a special needs child $10,000 may be excluded, regardless of the amount of qualified adoption expenses. The income level at which adoption tax credits begin to be phased out has been raised from $75,000 to $150,000. These changes apply to tax years beginning after December 31, 2001. However, the provisions that change the tax credit and exclusion for special needs adoptions are effective for tax years beginning after December 31, 2002.
  
  Dependant Care Credit Increase

  The dependent care tax credit under Code Section 21 provides a tax credit for up to 30 percent of qualifying employment-related dependent care expenses. Effective for tax years beginning after December 31, 2002, a taxpayer may take into account $3,000 (increased by the Act from $2,400) of employment-related dependent care expenses for one qualifying individual, and $6,000 (formerly $4,800) for two qualifying individuals. The Act also increases the percentage for determining the credit to 35 percent. The tax credit begins to phase out at an adjusted gross income of $15,000.

  RPG Comments: Another alternative for providing dependent care benefits is a dependent care assistance program (DCAP) under Code Section 129. Note that the Act did not increase the current $5,000 limit for DCAPs.

  
  Extension of Exclusion for Employer-Provided Educational Assistance

  Employer-provided educational expenses (up to $5,250) are excludable from income if provided under an educational assistance plan. Currently, the exclusion only applies to undergraduate expenses, and it expires with respect to courses beginning after December 31,2001. The Act does two things: it extends the Code Section 127 exclusion (so it will not expire this year); and it provides that graduate education expenses may also qualify for the exclusion.

  RPG Comments: Educational assistance benefits cannot be funded via a cafeteria plan. They are not qualified benefits for purposes of Code Section 125.

  
  Modification of Top-Heavy Rules

  The Act changes the definition of "key employee" for purposes of the top-heavy rules for years beginning after December 31, 2001, to mean (1) an officer with compensation in excess of $130,000, adjusted for inflation in increments of $5,000, (2) a five-percent owner, or (3) a one-percent owner with compensation in excess of $150,000. (Prior to its amendment, the definition included officers earning over one-half of the defined benefit dollar limitation of Code Section 415 ($70,000 for 2001), as well as the top ten employee-owners earning more than the defined contribution plan dollar limit ($35,000 for 2001).) Under the Act, an employee is "key" only if he or she had that status during the preceding plan year (repealing the four-year lookback rule).

  RPG Comments: The above changes make it less likely that a qualified retirement plan will be top-heavy. Note also that the changes indirectly affect nondiscrimination testing for cafeteria plans because the key employee concentration test directly incorporates the Code Section 416 definition changed by the Act.

   

• Economic Growth and Tax Relief Reconciliation Act of 2001 (H.R. 1836) -How this affects Qualified Retirement Plans
  

  Increase in Benefit and Contribution Limits - The Code imposes various dollar limits on contributions to 401(k) plans.

  •  The dollar limit on "annual additions" under Code Section 415 has been increased for years beginning after December 31, 2001 from $35,000 (the 2001 limit) to $40,000.
    
  • The compensation limit under Code Section 401(a)(17) has been increased for years beginning after December 31, 2001 from $170,000 (the 2001 limit) to $200,000.
    
  • The $10,500 limit on elective deferrals under Code Section 402(g) has been increased for years beginning after December 31, 2001 to $11,000, and the limit is increased each year by another $1,000 until it reaches $15,000 in 2006.
    
  • The dollar limit on elective deferrals to a SIMPLE 401(k) plan is increased for years beginning after December 31, 2001 to $7,000, and the limit is increased each year by another $1,000 until it reaches $10,000 in 2005.
     

  RPG Comments: All of these limits will continue to be indexed for cost of living, and the Act modifies in some cases the increments by which the limits will be increased. Note that in addition to the change to the Code Section 415 dollar limit discussed above, the Code Section 415 percentage limit for defined contribution plans has also been changed. See Section 632 of the Act, discussed below.
  
  Equitable Treatment for Contributions of Employees to Defined Contribtuion Plans -

  Currently, the amount contributed on behalf of a participant to a defined contribution plan is limited under Code Section 415(c) to the lesser of $35,000 or 25% of compensation. The Act increases the percentage of compensation limit to 100%. The Act also modifies the limits for tax-sheltered annuities under Code Section 403(b) and plans under Code Section 457 (for tax-exempt or governmental employers).
  
  RPG Comments: As discussed above, Section 611 of the Act increases the Code Section 415(c) dollar limit from $35,000 to $40,000. As a result of increasing the percentage limit from 25% to 100%, individuals earning $40,000 or less can have up to 100% of pay allocated to their account from all contribution sources. Individuals earning over $40,000 will be limited to a maximum allocation of $40,000.
  
  Elective Deferrals Not Taken into Account For Purposes Of Deduction Limits -

  The Act provides that a participant's elective deferrals are not subject to the Code Section 404 deduction limit for profit sharing plans (soon to be 25%,as discussed below under Deduction Limits).

  
  RPG Comments: With this amendment, for a typical 401(k) plan, only matching contributions and traditional profit sharing contributions will be subject to the 25% deduction limit. 
  
  Deduction Limits -

  The Act increases the deduction limit for 401(k)/profit sharing plans to 25% of compensation (was 15%). The Act also revises the definition of compensation to track the Code Section 415(c)(3)(D)definition (the limitation for defined contribution plans), so that a participant's elective deferrals are "added back". This means that the 25%deduction limit is based on gross pay (in general, this is the amount reported in Box 5 of the W-2).

  
  RPG Comments: This amendment, coupled with the amendment discussed immediately above that provides that participants' elective deferrals do not count against the deduction limit, raises significantly the amount that can be contributed by participants (elective deferrals) and employers (matching contributions and traditional profit sharing contributions). Under current law an employer that wishes to maximize deductible contributions needs both a profit sharing plan and a money purchase plan (yielding a combined 25%limit on employer contributions). Once these amendments become effective with an employer's 2002 taxable year, a 401(k)/profit sharing plan alone can provide the same result (a 25%limit on employer contributions).

  
  Plan Loans for Subchapter S Owners, Partners, and Sole Proprietors -

  Under current law, plan loans can be made to participants, subject to certain conditions. However, a plan loan made to a participant who is a more-than-5% subchapter S shareholder, or a partner or sole proprietor (owner-employee) is a prohibited transaction. The Act amends the Code and ERISA, bringing parity to the plan loan provisions. Effective for years beginning after December 31,2001, plan loans can be made to all participants, including owner-employees.

  
  Modification of Top-Heavy Rules -

  The Act changes the definition of "key employee" for purposes of the top-heavy rules for years beginning after December 31, 2001, to mean (1) an officer with compensation in excess of $130,000,adjusted for inflation in increments of $5,000, (2)a five-percent owner, or (3) a one-percent owner with compensation in excess of $150,000. (Prior to its amendment, the definition included officers earning over one-half of the defined benefit dollar limitation of Code Section 415 ($70,000 for 2001), as well as the top ten employee-owners earning more than the defined contribution plan dollar limit ($35,000 for 2001).) Under the Act, an employee is "key" only if he or she had that status during the preceding plan year (repealing the four-year lookback rule). Also under the Act, matching contributions can be used to satisfy the top-heavy minimum contribution requirement. Further, a plan that avoids ADP and ACP testing under the design-based safe harbors of Code Sections 401(k)(12) and 401(m)(11) will not be top-heavy.

  
  RPG Comments: The above changes make it less likely that a qualified retirement plan will be top-heavy. Note also that the changes indirectly
  affect nondiscrimination testing for cafeteria plans because the key employee concentration test directly incorporates the Code Section 416
  definition changed by the Act.

  
  Option to Treat Elective Deferrals as After-Tax Roth Contributions -

  Currently, individuals with adjusted gross income below a certain level may make nondeductible contributions to a Roth IRA or convert a regular IRA into a Roth IRA. A distribution that is a qualified distribution from a Roth IRA is not taxable and is not subject to the 10% early distribution penalty that might otherwise apply. A qualified distribution is one made after five years and made after attainment of age 59-1/2, death, or disability, or is a qualified special purpose distribution (such as up to $10,000 for a first-time home purchase). The Tax bill adds a new twist. For tax years beginning after December 31, 2005, a 401(k) plan or a 403(b) plan may be amended to permit participants to designate a portion of their elective deferrals as "Roth contributions." The combined elective deferrals and Roth contributions will be subject to the 402(g) limits (which are increased; see Section 611 of the Act discussed above), and the Roth contributions are treated as elective deferrals for other purposes as well (such as for purposes of nondiscrimination tests, vesting rules, and distribution restrictions). Distributions of Roth contributions (including earnings) will not be taxable, so long as they are made after five years and after the attainment of age 59-1/2, death, or disability.

  
  RPG Comments: Two important differences between a Roth IRA and Roth contributions jump out at us. First, a Roth IRA is available only to individuals below a certain level of adjusted gross income, but Roth contributions are available to participants regardless of their income. Second, qualified special purpose distributions (such as for a first-time homebuyer) are not available for Roth contributions.

  
  Nonrefundable Credit TO Certain Individuals For Elective Deferrals and IRA Contributions -

  The Act adds a new tax credit for tax years beginning after December 31, 2001, for certain low-income individuals who contribute to a qualified retirement plan or to an IRA. The tax credit applies only to individuals with adjusted gross income not exceeding $25,000 (single), $37,500 (head of household), or $50,000 (married filing jointly). The amount of the tax credit is based on the amount of the individual's contribution, up to $2,000, and it varies from 10% to 50% of the amount of the contribution, depending on the taxpayer's income level. The contribution amount upon which the credit is based is reduced by any distributions taken from any plan in the prior two years, the tax year of the contribution, or the period after the tax year ends but prior to the individual's tax filing deadline for that year.

  
  Credit for Pension Plan Start-Up Costs of Small Employers -

  The Act adds a new business tax credit for small employers (those with 100 or fewer employees making at least $5,000 in compensation). The credit is available for "qualified startup costs" in the first three years of establishing and administering a new qualified retirement plan (including a 401(k) plan) and is equal to 50%of those costs up to a limit of $500 for each year. Eligible plans must cover at least one non-highly compensated employee. Expenses for which the credit is taken are not deductible. The credit is effective for costs paid or incurred in years beginning after December 31, 2001 for plans established after that date. The credit is not available where the employer (or any member of its controlled group) provided plan coverage to substantially the same employees in the prior three years.

  
  Elimination of User Fee for Requests to IRS Regarding Pension Plans-

  Under certain conditions, small employers (100 or fewer employees) will no longer be required to pay a user fee for a determination letter on the qualification status of their retirement plans. To avoid the user fee, the determination letter request must be made by the latter of (1) the fifth year of the plan or (2) the end of any remedial amendment period with respect to a plan that begins within the first five plan years. Additionally, at least one non-highly compensated employee must participate in the plan. User fees will still apply to sponsors of prototype plans, although a small employer that adopts a prototype plan will not be required to pay a fee. This change applies to determination letter requests made after December 31, 2001.

  
  Catch-Up Contributions for Individuals Age 50 or Over -

  This amendment allows participants in 401(k) plans who have reached age 50 by the end of a plan year to make additional "catch-up" elective deferrals over and above what would be permitted under the Code Section 402(g) limit (currently indexed at $10,500). (The amendment also permits similar catch-up contributions for participants who participate in Code Section 403(b) annuities, SEPs, SIMPLE plans, and Code Section 457 plans.) The new rule does not apply to after-tax employee contributions. The permitted amount of a 401(k) catch-up contribution will be the lesser of (1) a table of specified dollar amounts ($1,000 for 2002, $2,000 for 2003, $3,000 for 2004, $4,000 for 2005, and $5,000 for 2006, adjusted for inflation in $500 increments in 2007 and thereafter); or (2) the participant's compensation for the year reduced by other elective deferrals for the year. (The permitted amounts for SIMPLE plans are one-half of the 401(k) amounts.) These catch-up contributions are not subject to other contribution limits and are not counted in applying such other limits (including ADP and ACP testing). They are also not subject to applicable nondiscrimination rules--however, plans must allow all eligible participants to make the same catch-up contribution elections or be deemed to violate the general nondiscrimination rule of Code Section 401(a)(4) as to benefits, rights and features (all plans of related employers are treated as one plan for this purpose). Employers may make matching contributions as to catch-up contributions, but these matching contributions are subject to normally applicable rules and limits. The amendment is effective for taxable years beginning after December 31, 2001.

  
  RPG Comments: Employers should take care before implementing a match on catch-up contributions, as the match feature will be subject to the nondiscrimination rules of Code Section 401(a)(4).

  
  Faster Vesting of Certain Employer Matching Contributions -

  Currently, employer contributions to a qualified plan must vest no less favorably than either (1) 100% vesting after five years of service (cliff vesting), or (2) 20% vesting after three years of service and an additional 20% vesting for each additional year of service, with full vesting after seven years (graduated vesting). The Act requires a faster vesting schedule for employer matching contributions made for plan years beginning after December 31, 2001. For a plan with cliff vesting, employer matching contributions must be 100% vested after three years of service. For a plan with graduated vesting, employer matching contributions must be 20% vested after two years with another 20% vesting every year thereafter ending with 100% vested after six years of service.

  
  RPG Comments: Note that this change in vesting requirements does not apply to other types of employer contributions, such as profit sharing contributions.

  
  Modification to Minimum Distribution Rules -

  The Act directs the IRS to modify the life expectancy tables under the minimum required distribution regulations to reflect current life expectancy.

  
  RPG Comments: Other changes to the minimum required distribution rules had been proposed, but this directive is the only thing that survived.

  
  Provisions Relating to Hardship Distributions-

  A 401(k) plan is permitted to distribute elective deferrals when a participant experiences a financial hardship. Such distribution must satisfy two tests: the participant must have an immediate and heavy financial need, and the distribution must be necessary to meet the hardship. A distribution is deemed to address an "immediate and heavy financial need" if certain safe harbor standards are met. One such requirement prohibits a participant who receives a hardship distribution from making elective contributions to the plan and all other plans maintained by the employer for at least 12 months after receipt of the distribution. The Act reduces the prohibited contributions period to six months and directs the IRS to revise the regulations accordingly, to be effective for plan years beginning after December 31, 2001. The Act also provides that all assets distributed as a hardship distribution, including assets attributable to employer matching or non-elective contributions as well as those arising from employee elective deferrals, are ineligible for rollover. (Prior to amendment, the portions of a distribution attributable to employer matching or non-elective contributions were not excluded from the definition of eligible rollover distribution.). A hardship distribution that is ineligible for rollover may not be rolled over to an IRA; also, the distribution will avoid the mandatory 20% withholding requirement (though it will remain subject to general pension plan withholding rules). This change is effective for distributions made after December 31, 2001.

  
  Rollovers Allowed Among Various Types of Plans -

  A rollover is a transfer of a distribution from one retirement plan, arrangement, or IRA to another plan, arrangement, or IRA, and if a rollover is done properly, the transfer is tax-free to the participant. Currently, a distribution from a 401(a) plan or a 403(b) tax-sheltered annuity may only be rolled over on a tax-free basis to the same kind of plan or arrangement, or to an IRA, and a distribution from a governmental 457 plan may not be rolled over at all. The new law provides that tax-free rollovers may be made from a 401(a) plan, a 403(b) annuity, a governmental 457 plan, or an IRA to any of those three types of plans or to an IRA. Under current law, a surviving spouse may roll over a distribution only to an IRA, but the new law permits a surviving spouse to make a rollover to a qualified plan, a 403(b) arrangement, or a governmental 457 plan in which the surviving spouse is a participant. Current law requires plans to provide an explanatory notice to participants who receive distributions that are eligible to be rolled over. The new law adds a requirement that the notice include a description of how the restrictions on, and tax consequences of, distributions from the plan receiving a rollover differ from those that apply to the distributing plan. It is expected that the Secretary of the Treasury will revise the safe harbor rollover notice to satisfy this requirement. There will be no penalty for a plan's failure to satisfy the new requirement until 90 days after the new safe harbor notice is issued, so long as the plan makes a reasonable attempt to comply with the requirement in the meantime. According to the Conference agreement, it would be sufficient to provide a statement that distributions from the plan to which the rollover is made might be subject to different restrictions and tax consequences than would apply to distributions from the plan from which the rollover is made.

  
  Rollovers of IRAs Into Workplace Retirement Plans -

  Currently, a distribution from an IRA may not be rolled over into a 401(a) plan or a 403(b)tax-sheltered annuity arrangement, except through a "conduit IRA."(A conduit IRA holds only distributions from a 401(a)plan or a 403(b) arrangement, and the distributions from a conduit IRA may be rolled over from the IRA to the same kind of plan or arrangement from which the distributions were originally made.) The new law provides for distributions from an IRA to be rolled over into a qualified plan, a 403(b) arrangement, or a governmental 457 plan.

  
  Rollovers of After-tax Contributions -

  Under certain circumstances, current law permits a participant to contribute after-tax dollars to a defined contribution plan, but current law does not permit the rollover of distributions of after-tax contributions. The new law provides for a rollover of after-tax
  contributions from one plan to another plan, but only if the rollover is made directly between the plans and only if the receiving plan separately accounts for both the after-tax contributions that are rolled over and the earnings on them. The new law also provides for a rollover of after-tax contributions from a plan to an IRA, but not from an IRA to a plan.

  
  Hardship Exception to 60-Day Rule -

  Under current law, unless a rollover is done directly from one plan to another, a participant has 60 days from the date of receiving a distribution to roll it over. If the rollover is not done within the 60-day limit, the distribution is subject to taxation. There are two exceptions under the current law which apply if the participant is on military service in a combat zone or the President has declared a disaster. The new law permits the secretary of the Treasury to waive the 60-day limit if its application "would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement. "The conference agreement on the new law lists examples of situations in which the Secretary could waive the 60-day limit, such as delays caused by financial institution errors or the postal service, death, disability, hospitalization, and incarceration, and a period during which a participant has received a distribution in the form of a check but has not cashed the check.

  
  RPG Comments: It is important to note that this provision merely permits the Secretary of the Treasury to waive the 60-day limit. Until the Treasury Department issues guidance on such waivers, plans and participants should be cautious and adhere to the 60-day limit.

  
  Treatment of Forms of Distribution -

  Code Section 411(d)(6),often referred to as the "anti-cutback rule" prohibits a plan from reducing or eliminating an "accrued benefit, "including an optional form of benefit. The Act provides two exceptions to this rule as it applies to optional forms of benefit: (1) optional forms of distribution do not need to be preserved in some circumstances for accounts transferred from one plan to another plan with the participant's consent, and (2) optional forms of distribution may be eliminated so long as a single sum form is available. This provision of the Act is effective for plan years beginning after December 31, 2001.

  
  RPG Comments: The Act expands upon the relief provided in the Treasury regulations issued in September 2000, which permit the elimination of optional forms of benefits in some, more limited, circumstances. It is also interesting to note that the IRS is directed to issue new regulations to be effective for plan years beginning after December 31, 2003 unless the IRS provides for an earlier effective date.

  
  [Same Desk Rule] Rationalization of Restrictions on Distributions -

  Under current law, if as a result of a business acquisition, an employee "separates from service" with the selling employer but continues working at the same desk or same job for a different employer (the buying employer), a distribution to that employee from a 401(k) plan is not permitted except in limited situations (upon a corporation's disposition of its assets or a subsidiary, if certain conditions are satisfied). The Act modifies the distribution restrictions applicable to section 401(k) plans, section 403(b) annuities, and section 457 plans to provide that a distribution may occur upon "severance from employment" rather than separation from service. Consequently, the same desk rule no longer applies, effective for distributions after December 31, 2001, so a distribution from the seller's plan will be permitted even if the employee who has severed employment with the seller continues working for the buying employer (a different employer).

  
  RPG Comments: This is an optional rule. A plan of the seller can be drafted to follow this new ,more liberal rule or the current, more restrictive same desk rule. There is one exception, as expressed in the conference agreement: if there is a transfer of plan assets and liabilities relating to any portion of an employee's benefit under a plan of the employee's former employer (the selling employer) to a plan being maintained or created by the employee's new employer (the buying employer), other than a rollover or elective transfer, then that employee has not experienced a severance from employment, so no distribution is permitted solely because of the acquisition.

  
  Employers May Disregard Rollovers for Purposes of Cash-out Amounts -

  A qualified retirement plan may make an immediate lump-sum distribution following a participant's separation from service without his or her consent if the present value of the non-forfeitable accrued benefit is $5,000 or less (the "cash-out rule"). The Act modifies the cash-out rule to allow plans to determine the present value of a participant's non-forfeitable accrued benefit without regard to the portion of such benefit that is attributable to rollover contributions and related earnings. (A participant's account balance with the employer from whose service he or she is separating often includes rollover contributions from a prior employer's qualified retirement plan.)

  
  RPG Comments: Being able to ignore rollovers when applying the cash-out exception effectively widens the net of accounts that may be distributed without participants' consent. Consequently, this change enhances an employer's ability to clean out small balances and simplify administration.

  
  Automatic Rollover of Certain Mandatory Distributions -

  401(k) and other qualified plans are permitted--without obtaining the participant's consent--to make an immediate lump-sum distribution following a participant's separation from service if the participant's non-forfeitable account balance is $5,000 or less. (Although the plan even in this circumstance must provide a rollover notice and the opportunity to elect a direct rollover.) This amendment would require that any such cash-outs that exceed $1,000 be rolled over into an IRA designated by the plan unless the participant, after notice from the plan, elects otherwise. The written notice must explain the automatic rollover, the participant's right to direct otherwise and the participant's right to have the distribution transferred to a different IRA. Due to the ERISA fiduciary implications of such direct rollovers, this amendment would also change ERISA Section 404(c) to provide that the participant will be deemed to exercise control over an automatic rollover on the earlier of (1) the transfer of any part of the rollover to another IRA; or (2) one year after the rollover. The amendment also directs the DOL to issue fiduciary safe harbors with respect to the designation of institutions and investment of funds in connection with such automatic rollovers. It also directs the IRS and DOL to consider providing special relief with respect to the use of low-cost individual retirement plans for use in connection with the new rule. Note: this provision does not become effective until the DOL issues implementing regulations.

  
  RPG Comments: This amendment appears to follow on Rev. Rul. 2000-36, 2000-31 I.R.B.140, in which the IRS approved of a plan provision calling for default deposit of mandatory cash-outs in IRAs selected by the plan and in which the IRS noted the DOL's comment that selection of the IRA trustee and investments would be fiduciary acts under ERISA.

  
  Clarification of Treatment of Employer Provided Retirement Advice -

  This provision creates a new tax-favored fringe benefit equal to the costs of qualified retirement planning advice and information if such services are provided by an employer maintaining a qualified plan. The exclusion applies to highly compensated employees only if the services are provided in a nondiscriminatory manner. The exclusion does not apply to ancillary services such as tax preparation, accounting, legal and brokerage services. This change is effective for years beginning after December 31, 2001.

  
  RPG Comments: We expect that the IRS will issue guidance regarding the scope of excludable services and the application of the exclusion to highly compensated employees. Until then, we remain uncertain of the distinction between retirement planning advice and investment advice for this purpose.

  
  Repeal of the Multiple Use Test -

  The cumbersome multiple use test for ADP and ACP testing is repealed, effective for years beginning after December 31, 2001.

  
  RPG Comments: As a result of this amendment, a 401(k) plan can pass ADP and ACP testing even if, for example, the ADP and ACP for HCEs is 6% while the ADP and ACP for non-HCEs is 4%. Under the current law multiple use test, the plan would not pass both tests --a difference of 2% for both ADP and ACP is an impermissible multiple use of the 2% alternative limit.