Restatement and amendment deadlines - Kravitz, Inc.

1 Qualified plans must operate in accordance with their plandocuments. Ongoing legal andregulatory changes in retirementplan rules frequently require plan sponsors to amend andrestate their plans to keep theirdocuments in compliance. Preapproved plans ( , master and prototype documents and volume submitter plans) must berewritten, reviewed and approvedby the IRS, and readopted byemployers once every six years. We are currently in the midst of thefirst six-year Restatement cycle, and the EGTRRA document has beenapproved by the IRS. Employers usingpreapproved defined contribution plan documents must restate (readopt)them by April 30, 2010. Cumulative list conceptIn order to know what qualificationrequirements should be included whena plan is being rewritten, the IRS devisedthe cumulative list concept. Each year,an updated list is issued containingqualification requirements for plansthat must be rewritten the followingyear.

2 The cumulative list simplifies theamendment and review process byestablishing cutoff dates: Generally, anylaws and/or guidance issued after onecumulative list is published will auto-matically be included on the next listfor the next Restatement cycle. Here s an example: The EGTRRA preapproved document was writtenbased on the cumulative list issued atthe end of 2004 (IRS Notice 2004-84),and the submission deadline for IRSreview and approval was January 31, laws and regulatory changes thatoccurred after the 2004 Cumulative Listare not incorporated into the EGTRRA document Restatement . Thus, eventhough many PPA provisions becameeffective before the plans were approvedin early 2008 and might already havebeen in operation, virtually no PPA language is incorporated into theapproved , the Treasury Departmentand the IRS both have the power to,and often do, require interim documentamendments to incorporate changesafter a cumulative list has been plans must make theseso-called snap-on amendments toincorporate the changes by the prescribeddeadline.

3 Required changes since thelast Restatement cycle will be writteninto the next document. PPA amendment deadlineThe Pension Protection Act of 2006(PPA), which was enacted after the 2004 Cumulative List was published, requiresthat plans operate under PPA provisionsas each becomes effective but does notrequire that plans be amended until theend of the first plan year beginning onor after January 1, , required amendments likethose for PPA changes could be madeup until a plan s due date for filing itstax return for the 2009 plan year. How-ever, the IRS has indicated that therenovember/december 2009amendment deadlinesRestatement and(Continued on page 2)Los Angeles Atlanta Las Vegas Denver Washington DC Salt Lake City Ann Arbor Minneapolis Charlestontel fax Plan Newsmay be anti-cutback issues (which, if not correctly handled, would reduce a benefitalready earned by the participant) if the PPAamendment is not completed before the endof the plan year.

4 (The IRS plans to publish alist of anti-cutback issues.) This amendmentdeadline applies to both interim and discre-tionary amendments made pursuant to statutory PPA provisions and any PPA-relatedregulations. Thus, the EGTRRA restatementdeadline of April 30, 2010, is not applicableto the PPA amendment , and plans may needto be amended for PPA before they arerestated for EGTRRA. In this case, the PPAamendment should then be brought over tothe EGTRRA designed plans and PPA Individually designed plans that are off-calendar-year Cycle D plans have an oppor-tunity to meet the deadline for adopting PPAlanguage by the last day of their 2009 planyear. To accomplish this, they may elect to be Cycle E plans, which would change thesubmission period to between February 1, 2010,and January 31, 2011. These plans will beCycle D plans for the followingrestatementcycle, which has a submission period of February 1, 2014, through January 31, this case, employers would not have a fullfive years between , EESA, and WRERA amendmentsThe amendment for the Heroes EarningsAssistance and Relief Tax Act of 2008 (HEART)is not due until the 2010 plan year, althoughsome plans are incorporating HEART and PPAprovisions at the same time.

5 The EmergencyEconomic Stabilization Act of 2008 (EESA) amendment is also not due until the 2010plan year, but some plans are incorporatingEESA and PPA provisions at the same amendment for the provision suspendingrequired minimum distributions, part of theWorker, Retiree, and Employer Recovery Actof 2008 (WRERA), is not due until the 2011plan year. The IRS has promisedguidance onthe scope and timing of the amendment . Restatement and amendment deadlines (Continued from page 1)New nonspousebeneficiary rollover rulesThe Worker, Retiree, and Employer Recovery Act of 2008 (WRERA),enacted December 23, 2008, contains provisions pertaining todistributions made to nonspouse beneficiaries. The requirementsare effective for plan years beginning after December 31, 2009,and affect the distribution options and mandatory tax withholdingrules of distributions for nonspouse beneficiaries.

6 The provision allowing a nonspouse beneficiary the option ofrolling over a deceased participant s plan balance to an inheritedIRA was introduced by the Pension Protection Act of have been subsequent changes, but WRERA clears up theconfusion and provides new plan sponsors have already updated their plans to allowthis type of transaction. Sponsors who already offer this option as well as sponsors who don t may not be aware of thechanges that WRERA requires starting in 2010. NNoo lloonnggeerr WRERA, the nonspouse beneficiaryrollover distribution is a requiredplan provision. Thus, allqualified plans must allow for nonspouse beneficiary distributionsby direct wwiitthhhhoollddiinngg An equally important change isthat nonspouse beneficiary distributions will be considered eligible rollover distributions, thus making them subject tomandatory 20% tax withholding and notice requirements.

7 Changingthis type of death benefit to an eligible rollover distribution willnow result in a 20% mandatory tax withholding on any amountsnot directly rolled over to an inherited IRA. NNoottiiccee they have not already been doing so, plansponsors must begin providing nonspouse beneficiaries with the402(f) notice, also known as the Special Tax Notice or Rollover Notice, when a distribution is requested. The normal30- to 180-day time frame for this notice applies. TTaakkee plan sponsors should ensure that these requirementsare met and that distributions to nonspouse beneficiaries havefederal income tax withheld appropriately. Special explanations mayhave to be provided to nonspouse beneficiaries so that they fullyunderstand the tax impact of their decisions beginning next IRA conversions are a hottopic.

8 Effective January 1, 2010, a provision in the Tax Increase Prevention and ReconciliationAct of 2006 (TIPRA) eliminatesthe $100,000 limit on adjustedgross income (AGI) that previouslyprevented higher income tax-payers from converting a traditionalindividual retirement account (IRA)to a Roth IRA. This change opensup a number of retirement andtax planning opportunities for bothemployees and plan sponsors. BackgroundContributions made into a Roth IRAhave already been taxed; thereforewhen a traditional IRA is convertedinto a Roth IRA, the individual isrequired to pay taxes on the conversionamount by including it as gross incomefor the year the conversion occurs. Onereason Roth IRA conversions areattractive is that earnings may ultimatelybe withdrawn tax free (as long as allrequirements are met).To be eligible for tax-free treatment, theRoth IRA must have been in existencefor five years and the IRA owner mustbe age 59 or older, disabled, ordeceased.

9 Another benefit is that RothIRAs are not subject to the requiredminimum distribution (RMD) rules. (Notethat an individual currently receivingRMDs from a traditional IRA cannotconvert the current year s RMD amountto a Roth IRA.)2010 conversion rulesTaxpayers who convert a traditionalIRA into a Roth IRA in 2010 have aspecial opportunity for paying theincome tax due on the conversionamount. Ordinarily, the taxpayer wouldinclude the total amount as income for the 2010 tax year. Under the newlaw, instead of paying income tax on a 2010 Roth conversion in the sameyear, taxpayers can opt to defer theirtax burden by a year and then spread itover two years, paying equal amountsin 2011 and 2012. This relief appliesonly to Roth conversions in 2010. EExxaammppllee::Jane decides to convert$200,000 from her traditional IRA intoa Roth IRA in 2010.

10 The next decisionshe must make is whether to: Include the full $200,000 in grossincome in 2010, or Include $100,000 in gross income in2011 and another $100,000 in individuals who convert to aRoth IRA in 2010 may prefer to pay the taxes in 2010, especially if they arewary of possible tax rate 2010, those who convert to a RothIRA will have to pay related incometaxes in the year the conversion is completed. However, there s one waytaxpayers can moderate the tax burdenof a Roth conversion: Instead of con-verting the entire value of a traditionalIRA to a Roth IRA in a single tax year,they can convert smaller amounts overthe course of several years. Not so fastVolatility in the investment markets cansometimes throw a wrench into theworks. Fortunately, it s possible to undo a Roth IRA conversion through a processcalled recharacterization, a popularoption when the value of an individual saccount drops soon after converting toa Roth IRA.