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MANAGEMENT
MOXIE Nimble News
401(k), 403(b) and Retirement Plans- A "Heads-Up" for 2011
Exciting News: What a Benefit!
Phil Sweeney recently joined our growing firm, expanding the scope of services we offer significantly. Phil’s practice covers all the design, implementation, operational and legal compliance (ERISA and tax) aspects of both tax-qualified and non-qualified retirement and deferred compensation plans, including: Defined benefit, profit sharing, 401(k), 403(b) and 457 plans. This Moxie by Phil gives an overview of developments in his practice area:
Rules, rules, rules and more rules. By the time we learn them, they change what we thought we knew or
give us even more rules to remember!
With Congress considering "tax simplification" and the DOL and IRS proposing new regulations, 2011
is shaping up to be an interesting year for 401(k), 403(b), 457(b) for retirement plan sponsors and plan
participants. Some things we know for certain and some things we will discover as the year develops.
A few things are not changing:
- Most "defined contribution" plan contribution dollar limits in
2011 will be the same as the 2010 limits - The 401(k), 403(b) and 457(b) deferral limit stays at $16,500 ($22,000 for those 50 and over).
The maximum total employer and employee contribution will still be $49,000 per participant. The
maximum amount of an employee’s pay that can be taken into account under a plan remains at $245,000.
- The definition of "Highly Compensated Employee" for 401(k), 403(b)
and tax - qualified retirement
plan nondiscrimination testing is unchanged for 2011- Once again the HCE pay
amount will be $110,000 for 2011. This means that an employee who earns more
than $110,000 in 2010 will be considered an HCE in 2011, along with any employee
who is a "5% owner" in 2010 or 2011. Remember,
this HCE definition applies for retirement plan testing. There are other definitions
for HCE that apply for other types of benefits testing, such as health plan
nondiscrimination testing.
- The Saver’s Tax Credit is still with us - The Saver’s Tax
Credit provides lower income plan participants a tax credit of up to $1000
for the first $2000 contributed to an IRA or to a 401(k), 403(b) or 457(b)
plan. The credit applies to more participants in 2011since the adjusted gross
income limits to qualify for the credit have been increased to $28,250 for
a single tax payer and $56,500 for a couple filing a joint return.
But, a few things are changing:
- To Roth or not to Roth, that is the question - Beginning
in 2010 it became possible for everyone to "convert" existing pre-tax 401(k),
403(b) and 457 plan money into after-tax Roth money. Before last year only
those with adjusted gross income under $100,000 were able to do that.
Now, any participant with pre-tax plan money can make an "in-plan" conversion of all or a portion of
that money to after-tax Roth money, provided of course, the plan’s provisions allow it. More and more
plans are adding a Roth contribution option and the in-plan conversion feature. There can be significant
advantages to a Roth conversion, including escaping all future income taxes on earnings and avoiding the
age 70.5 mandatory distribution requirements.
The Roth option is very attractive to both younger participants with many years ahead to accumulate
income tax free earnings on their contributions and participants who are relatively well off and like the
idea of passing along income tax free money to their heirs.
- The Department of Labor is getting serious about fiduciary
responsibility and participant disclosure - 401(k) and 403(b) plans
have largely replaced traditional defined benefit pension plans as a retiree’s
source of retirement income apart from Social Security. Gone are the days
that an employee could count on the employer to provide an "automatic" pension.
For the most part it’s up to the employee
to decide what to contribute, how to invest the money in his or her account and
then how to convert what’s there at retirement into a lifetime income.
Employers that offer 401(k) and 403(b) plans are not off the hook though. Plan sponsors have to be
careful when they select the menu of plan investment options. They have a fiduciary duty to select
options that can stand up to scrutiny if the market turns sour. The DOL has issued a set of broad new rules
that cover everything from what participants need to be told about mutual fund fees and administrative
costs to expanding the definition of plan fiduciary to nearly anyone with influence over how a plan’s
investment option menu is chosen.
- And the IRS is getting serious about 403(b) plan compliance - For
years most tax-exempt employers that offered 403(b) arrangements to their employees
were able to do so without much worry about compliance audits since, in many
cases, there wasn’t much to audit. That’s changed.
403(b) arrangements must satisfy plan documentation requirements and new 5500 filing requirements.
In addition, the IRS has begun an effort to make sure tax-exempt employers that sponsor 403(b)s are
satisfying all of the applicable "tax-qualification" requirements, including the limits on deferrals and tax-
free participant loans, the restriction on pre-age 59.5 withdrawals and the requirement that distributions
begin at 70.5.
Another rule the IRS intends to enforce is the "universal eligibility" rule. Employers often exclude "per
diem" and temporary or part-time employees from eligibility to contribute to the 403(b) program. In many
cases, that exclusion violates the universal eligibility rule.
The IRS has even published a "403(b) checklist" for employers to use in order to self-identify potential
problem areas.
Recent proposals signal more changes:
Every year congress proposes and the president floats changes to the tax rules that apply to 401(k),
403(b), 457(b) and other "tax-favored" retirement savings vehicles. Last year the bipartisan National
Commission on Fiscal Responsibility also proposed changes to the way the tax code encourages and
rewards retirement savings. In addition, the IRS and DOL are constantly issuing proposed regulations.
The legislative proposals include simplifying the tax code by consolidating 401(k), 403(b), 457(b) and
IRA rules under a single set of rules that are uniform and apply to all employers and tax payers. Some
proposals would eliminate the deductibility of contributions in favor of tax-free payouts at retirement or
other events such as first-time home purchases (similar to the way Roth contributions and distributions
are treated under current law).
While it is impossible to predict what proposals might actually be adopted and
what regulations will be issued or made final, it is certain that some change
will occur.We will keep you posted on important developments in this area and
alert you to changes that can affect your plan and your plan’s
participants. In the meantime, if you have a question on any of these items or
retirement savings and retirement plans, give us a call.
Questions? We can help. 508-548-4888 or info@foleylawpractice.com
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