Robert C. Reeves is a Registered Representative of and offers securities through Royal Alliance Associates, Inc., Member FINRA/SIPC.
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Lafayette, CA 94549
Raymond, Reeves & Stout, LLP is not a subsidiary or an affiliate of Royal Alliance Associates, Inc.
Retirement articles of interest
Maximum Dollar Limits | The Pension Protection Act of 2006 | In-Plan Roth Conversions
Maximum Dollar Limits
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The Pension Protection Act of 2006
This is a general overview of the landmark pension Bill that was signed into law on August 17, 2006. This general overview is provided as information only and is not intended as, nor can it be relied on as legal or tax advice.
The major provisions of the Pension Protection Act of 2006 are as follows:
- EGTRRA increases made permanent. The very valuable increased deferral limits and the maximum
contribution amounts implemented under the Economic Growth and Tax Relief and Reconciliation Act (EGTRRA) are made permanent,
effective immediately. (See our Maximum Dollar Limits chart for current limits). The Roth 401(k) and 403(b) provisions were
also made permanent, giving employees the flexibility to choose between paying their taxes now or in the future.
Defined Benefit funding rules.
Beginning with 2008 plan years, the IRS will prescribe a single
funding method, interest rate and mortality table to be used for
funding Defined Benefit Plans adding new complexity to an
already complex system. A generous new maximum deduction limit
is effective for 2006 and 2007 plan years, that may help some
plans maximize their contributions.
Cash Balance Plans.
The act provides immediate and prospective relief from age
discrimination claims for cash balance or other hybrid plans
that comply with new benchmarks (that are identical to how we
currently administer our cash balance plans). A new three year
cliff vesting must be used by new plans and beginning with the
2008 plan year for plans in existence on June 29, 2005.
The Flat-rate premium has increased from $19 to $30 per
participant for 2006 plan years. The Variable-rate premium will
be calculated under new rules beginning with 2008 plan years,
which is expected to increase greatly the premium for plans that
A prohibited transaction exemption effective January 1, 2007 was
enacted for investment advice given to participants in
self-directed plans. There are certain notice requirements and
advisor qualifications that must be met. The Plan Fiduciary is
still liable for the prudent selection and monitoring of
State law is now preempted by Federal law to allow �automatic
contribution arrangements.� Certain notice requirements and
default investment options must be provided. Beginning with
2008 plan years, a new �Qualified Automatic Contribution
Arrangement� Safe Harbor Plan is available. These new plans
will not be subject to ADP/ACP testing or Top Heavy rules.
Certain notice, minimum automatic deferral levels, employer
contributions and two year cliff vesting are required similar to
current Safe Harbor plans.
Combined Plans (DB/DC Combinations) Deduction Limit.
Previous law limited the deduction for combined plans if the
same employees participate in both plans to the greater of: 1)
the amount needed to fund the DB plan, or 2) 25% of
Compensation. The new law effective for 2006 states that only
contributions to the DC plan in excess of 6% of Compensation
will count towards this long-standing combined limit. Further
beginning in 2008, if the single employer DB plan is insured by
the PBGC, then that plan is not taken into account in applying
the combined plan deduction limit.
Faster Vesting for Non Top-Heavy Defined Contribution Plans.
The 7 year graded and 5 year cliff vesting are no longer
available for defined contribution plans, beginning with 2007
plan years. All such plans must use either the 6 year graded or
the 3 year cliff schedules.
Default Investment Arrangement now protected by 404(c).
a participant fails to make investment choices, the fiduciary
will receive 404(c) protection if the funds are placed in
qualified �default investment arrangements� and proper notice is
given. It is no longer advisable to use Money Market funds for
such purposes, since default investments must include a mix of
asset classes consistent with Capital preservation and/or
appreciation. Also beginning in 2008, there will be 404(c)
protection for fiduciaries during properly noticed blackout
periods and any resulting mapping of investments.
Non-Spouse Beneficiary Rollovers.
Beginning January 1, 2007, non-spouse beneficiaries of a
decedent�s balance in a qualified plan may roll over inherited
amounts, by means of a trustee to trustee transfer, into an
�inherited IRA� structured for that purpose. This will greatly
enhance the beneficiaries ability to stretch out the payments
and taxation of pension death benefits.
Periodic Pension Benefit Statement. Effective for plan
years beginning on or after January 1, 2007, all Defined
Contribution Plans will be required to issue a new Pension
Benefit Statement, that is more like a comprehensive new
notice. This new required statement represents the most
dramatic change to the disclosure requirements of ERISA since it
was enacted way back in 1974. The new Pension Benefit Statement
is required each calendar quarter for plans that allow any
participant directed investments and each calendar year for
plans that are pooled without participant direction. The
Benefit Statement must include:
Failure to timely issue these benefit statements will incur a stiff penalty of $110 per day per failure!
Based on the latest available information, the total accrued
benefits, the value of each investment, and the impact of
vesting on the value of the accounts.
An explanation of any permitted disparity or any
floor-offset arrangement that may apply to the plan.
Limitations or restrictions on the right to direct
An explanation of the merits of asset diversification, with
a reference to the DOL web site as a source for additional
information concerning diversification.
- New Combined Defined Benefit and 401(k) Plan.
Beginning in 2010, a new plan type will be available for Employers with 500 or fewer participants. If the plan meets
certain benefit, contribution, vesting and nondiscrimination requirements, these plans will be exempt from the ADP/ACP
testing and the Top Heavy rules.
"In-Plan" Roth Conversions
On September 27, 2010, President Obama signed into law the Small Business Jobs and Credit Act of 2010 ("Small Business Jobs Act"). One provision of this new law, "In-Plan" Roth Conversions, will have an impact on 401(k) plans.
"In-Plan" Roth Conversions
This provision of the new law allows participants in 401(k) plans to convert non-Roth plan amounts that are distributable as an eligible rollover distribution to Roth amounts within the plan. Amounts become distributable as an eligible rollover distribution following the occurrence of one of several statutorily defined events, including the termination, disability, or death of the participant and the participant's attainment of age 59½. Certain distributions, including hardship distributions and required minimum distributions, are not eligible rollover distributions, and are thus not eligible for conversion under the new law. 401(k) plan sponsors will be able to adopt the conversion option in 2010. As with any new law, there are a number of unanswered questions concerning the implementation of these provisions. However, here is what we do know about the in-plan conversion feature:
Impact on Plan Sponsors
- The conversion provision is optional; there is no requirement for plan sponsors to add it to their Roth plans.
- Plan sponsors must offer a Roth feature as part of the plan (for ongoing Roth contributions) in order to permit Roth conversions within the plan.
- The conversion election is only available to participants who have a distributable event that would allow them to withdraw the conversion amounts from the plan.
- The conversion election can only apply to amounts that are treated as eligible rollover distributions. This means that distributions such as hardship withdrawals, required minimum distribution payments, corrective distributions and other such payments would not qualify for the in-plan Roth conversion.
- It appears that all vested amounts available to the participant as an eligible rollover distribution can be converted to Roth amounts within the plan (e.g., pre-tax deferral, after-tax employee contribution and certain vested employer contribution amounts).
- Any taxable amounts that are converted to Roth amounts as part of the in-plan conversion will be taxable to the participant in the tax year in which the conversion takes place. However, there is a special rule for 2010 conversions: if the in-plan conversion is completed by December 31, 2010, the participant will be able to defer the taxes due for 2010 ratably over two years __ in 2011 and 2012. According to IRS guidance, once a conversion election is made for 2010, it may not be revoked after the due date, including extensions, for filing the 2010 federal tax return.
- The conversion election is available for participants and spousal beneficiaries.
- The IRS has not issued guidance regarding plan amendment requirements to implement in-plan Roth conversions, but we anticipate that the IRS will provide sufficient time for plan sponsors to timely adopt the provision.
The new law enables 401(k) plan sponsors to allow Roth conversions within the plan without forcing the participants to distribute the funds from the employer's retirement plan.