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Posts Tagged ‘403(b)’

Guidance issued on in-plan Roth rollovers to designated Roth accounts

January 13th, 2014 No comments

The Internal Revenue Service (IRS) has issued Notice 2013-74, providing guidance on the expanded types of amounts eligible for in-plan Roth rollovers within 401(k), 403(b), or 457(b) governmental retirement plans. These amounts, which became eligible for in-plan Roth rollover treatment in 2013 under the 2012 American Taxpayer Relief Act, include sums that are otherwise not distributable to participants under the terms of the plan, such as elective deferrals, matching contributions and nonelective contributions, and annual deferrals made to 457(b) governmental plans.

The IRS’s new guidance also includes deadlines for adopting plan amendments to provide for these in-plan Roth rollovers of such otherwise nondistributable amounts, as well as rules applicable to all in-plan Roth rollovers.

For more perspective on this new guidance, read this Client Action Bulletin.

Will your retirement savings be capped?

May 6th, 2013 No comments

As part of the proposed federal fiscal year 2014 budget, President Obama included a cap on the amount of retirement savings an individual could accumulate in tax-deferred retirement plans. The total accumulation amount for an individual includes all qualified tax-deferred savings plans such as traditional defined benefit (DB), cash balance, money purchase, profit sharing, 401(k), and 403(b) plans, as well as funded governmental 457(b) arrangements and Individual Retirement Accounts (IRAs), both traditional and Roth.

The proposal is most likely a result of the presidential campaign last year, during which it was reported that Governor Mitt Romney had qualified accounts in excess of $100 million. However, the administration’s budget proposal would not tax accumulated accounts in excess of the cap. If the accumulated accounts exceed the cap, the individual would not be allowed to make future deferrals or receive any future employer contributions under any retirement plan.

The proposal would essentially cap tax-advantaged retirement plans to an amount necessary to provide the maximum annuity permitted under a defined benefit plan. The current limit is $205,000 payable annually at age 62. The annual annuity amount would be increased by a cost of living adjustment.

After converting the annuity to a present value using current interest rates, the total accumulation amount is approximately $3.0 million to $3.4 million. Because of the current low interest rate environment, that total accumulation amount is inflated. If interest rates return to a historical level, the maximum accumulated amount could be as low as $2.2 million to $2.4 million for an individual age 62.

No real details are available on how account values would be reported or how the cap would be calculated. There is a concern small business owners could eliminate their retirement plans if they were at the accumulated cap, because they would not receive the benefit of tax-deferred treatment. As a result, retirement savings vehicles for many rank and file employees could be eliminated. As an alternative, consideration could be taken to limit only employee deferrals under the proposal or a portion of employer-provided contributions, allowing small business owners some incentive to keep their retirement plans.

Under the proposal, it is estimated that the accumulation cap would result in approximately $9 billion in additional federal tax revenue over the next 10 years beginning October 1, 2013. On the flip side, it has not been determined how much tax revenue would be lost in future years as a result of smaller account balances for these taxpayers. All distributions from qualified retirement plans (other than Roth accounts) are taxed at distribution.

It will be interesting to see if this proposal will gain traction with lawmakers.

IRS unveils document review procedures for preapproved 403(b) plans

May 2nd, 2013 No comments

The Internal Revenue Service (IRS) issued Revenue Procedure 2013-22, which establishes the procedures the agency will follow when issuing opinion and advisory letters for 403(b) preapproved plans that may be adopted by tax-exempt organizations, public schools, and church-related organizations. Beginning June 28, 2013, sponsors of preapproved 403(b) plans may apply to the IRS for an opinion letter (prototype plans) or an advisory letter (volume submitter, including mass submitter, plans).

The revenue procedure explains:

• The requirements that the preapproved plans must satisfy
• The preapproved plan sponsors’ responsibilities
• The procedures for applying for opinion and advisory letters
• The conditions under which an eligible employer that adopts a preapproved 403(b) plan can rely on the plan documents meeting the tax code and regulatory requirements under section 403(b)

The IRS guidance also includes a remedial amendment provision that allows eligible employers to retroactively correct their plans to satisfy the 403(b) requirements. The new procedures permit the retroactive remedial amendment of 403(b) plans in order to satisfy the written plan requirements and to correct any form defects. This generally would be automatically satisfied if the employer retroactively adopts a 403(b) preapproved plan. Although employers may retroactively amend individually designed plans to correct any defects, the IRS at this time is not offering determination letters for individually designed plans.

Sample language that preapproved 403(b) plan sponsors may use in preparing to submit their plans to the IRS for approval is posted on the agency’s website.

For more information about the IRS’s new procedures for opinion and advisory letters for preapproved 403(b) plans, please contact your Milliman consultant.

American Taxpayer Relief Act of 2012, fiscal cliff legislation, and in-plan Roth conversions

March 4th, 2013 1 comment

Effective January 1, 2013, the recently negotiated and signed American Taxpayer Relief Act of 2012 includes provisions for in-plan Roth conversions. The new provision is akin to the in-plan Roth rollover, with the difference being that the provision is applicable for amounts that are not currently eligible for distribution. The legislation benefits plan sponsors and participants but it also provides a revenue stream for the federal government.

Roth contributions to a qualified 401(k) or 403(b) plan or to a governmental 457(b) plan are made on an after-tax basis. This means participants pay taxes on contributions now, not later. Before the new rules, if a plan permitted an in-plan Roth “rollover,” then a participant could move money from a non-Roth plan account (pretax salary deferrals, employer match, employer nonelective contributions) to the Roth account within the same plan. Participants were only allowed to do this if they had distributable events (i.e., distribution at age 59½, severance from employment) and the amount was eligible for rollover. Under the new law, if a plan permits an in-plan Roth “conversion,” then a participant may move money from a non-Roth plan account to the Roth account within the same plan, without having a distributable event.

If participants decide to take advantage of an in-plan Roth conversion, they will pay income taxes at their current tax rates. The conversion is not subject to mandatory or optional withholding, nor to the early 10% penalty tax, although a recapture rule may apply a 10% penalty if in-plan Roth amounts are distributed within a five-year period. This means the participant needs to think about the following: Is my tax bracket at retirement going to be higher than it is now and do I have the money outside of my plan assets to cover the taxes?

If participants expect to remain in the same tax bracket for the remainder of their working careers, there is no advantage to paying the tax now. However, for participants who believe they will be in higher brackets as they go through their working careers and in retirement, and have other money available to cover the income tax, then conversion of a non-Roth account may be beneficial. The converted amount would be considered tax-free, as are the future earnings on it, if certain requirements are met, including a five-year holding period. If the participant will cross multiple tax brackets, it may be beneficial to spread the Roth conversions over multiple years. This helps the participant accumulate resources to pay the taxes and makes the conversion more affordable.

There are additional questions and considerations the participant needs to address, such as when to retire, whether to work after retirement, how much money will be needed in retirement, whether estate taxes must be paid, and how much Social Security provides. These are not easy questions to answer, but taxes and taxable income may impact the answers. Most participants want to maintain a standard of living in retirement that is not less than what they currently have. Considering after-tax investment vehicles, such as a Roth account, may help participants achieve their financial retirement goals.

Defined contribution plan comparison chart

February 15th, 2012 No comments

We have prepared a comparison of 2012 features and contribution limits for 401(k), 403(b), and 457(b) plans. It is available here.

IRS issues guidance on terminating 403(b) plans

May 31st, 2011 No comments

The IRS has issued a new ruling, providing guidance to eligible tax-exempt organizations, public schools, and churches on terminating and distributing assets from certain 403(b) tax-sheltered annuity plans. The ruling, which was issued in February, provides four examples illustrating how a 403(b) retirement plan funded in different ways may be terminated and explains when the terminating plan’s distributions are taxable to participants. For more on this, read the Client Action Bulletin.

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