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PENSION UPDATE

PENSION UPDATE. NATIONAL PENSION STUDY GROUP SUMMER 2012. ON THE HILL. HOUSE AND SENATE CONFEREES. JUNE 28, 2012 House and Senate conferees have agreed to changes to pension funding stabilization legislation, including most of the provisions previously passed by the Senate.

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PENSION UPDATE

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  1. PENSION UPDATE NATIONAL PENSION STUDY GROUP SUMMER 2012

  2. ON THE HILL

  3. HOUSE AND SENATE CONFEREES • JUNE 28, 2012 • House and Senate conferees have agreed to changes to pension funding stabilization legislation, including most of the provisions previously passed by the Senate. • If passed the segment rate for funding will be increased, lowering the 2012 MRC. • May elect to use for 2012, required to be used for later years.

  4. HOUSE : FSA USE IT OR LOSE IT • 6/7/12: Despite a White House veto threat, the House approved legislation that would amend a 28-year-old rule requiring flexible spending account users to forfeit their unused balances. • The bill also lifts restrictions on using FSAs and health savings accounts for over-the-counter drugs.

  5. HOUSE KILLS FSA USE IT OR LOSE IT • Under the measure, employers can allow employees to withdraw taxable money up to $500 that's sitting in unused FSA balances at the end of the plan year or at the end of a grace period. The law also overturns a health reform provision that prohibits FSA and HSA users from getting reimbursement for OTC drugs without a prescription. Distributions for drugs without a prescription face a 20 percent federal tax.

  6. OVERHAUL OF THE TAX CODE • House Republicans call for overhaul of tax code in 2013 • As part of a year-end budget deal, House Republicans are urging adoption of “fast-track procedures” to force lawmakers to complete a sweeping overhaul of the U.S. tax code in 2013.

  7. OVERHAUL OF THE TAX CODE • House Ways and Means Committee chairman Dave Camp (R-Mich.) said Thursday that he has two goals with respect to the tax code: “One, block massive, job-killing tax increases” at the end of the year, when the George W. Bush-era tax cuts are set to expire. “And two, enact — not just pass — comprehensive tax reform.” • Per Camp: “There is strong support to use the expiration of the [Bush tax cuts] as leverage to force action in 2013 on comprehensive tax reform.”

  8. LETTER SENT TO CONGRESS • The undersigned organizations, which represent thousands of pension plans providing retirement benefits to millions of workers and retirees, urge immediate Congressional action to stabilize funding interest rate rules for private-sector pension plans. Without legislation to adjust for current economic conditions, the current plan funding regime will undermine job retention and growth and limit companies' ability to invest in capital improvements needed to be competitive worldwide and to maintain the economic recovery here at home. Moreover, failure to address on-going funding issues will threaten the long-term retirement security of workers and retirees. • Sent May 15, 2012 urging the provisions in the Highway Bill of pension reform be adopted.

  9. HIGHWAY INVESTMENT, JOB CREATION AND ECONOMIC ACT INTRODUCED 2/7/12 • In order to create revenue to pay for the Bill it changes the interest rates to determine the MRC. • Under the new provision, for purposes of determining the minimum required contribution, segment rates are confined to a 15% corridor around a 10-year average of the rates.  Since this “stabilization” will not apply for purposes of 417(e)(3), we had expressed concern

  10. HIGHWAY INVESTMENT, JOB CREATION AND ECONOMIC ACT INTRODUCED 2/7/12 • Change would require 2012 valuations to be redone as the MRC would go down. • Bill has now been stalled as the prior law, which was to expire, was extended.

  11. SENSE OF THE CONGRESS • In light of the Obama’s 2013 budget plan which calls for a rollback in 401(k) deferrals and DC limits. • More than 100 Representatives of the House signed a letter expressing that they support the current tax incentives in 401(k) plans.

  12. HR 4049 INTRODUCED • Bill would require employers that do not have a QP to provide an Auto IRA plan for employees. • Not a new idea.

  13. HR 3561 INTRODUCED • Small Business Pension Promotion Act of 2011. Introduced 12/5/2011. • Later valuation date for MRD and more time to make the payment (from 70 ½ to 75). • Earnings for self employed will include the IRA or QP deduction. • Repeals the excess tax on over contributions to QP. • Bill has not gotten much attention and will die in the Ways and Means Committee.

  14. PRES. PRESENTS HIS BUDGET • "Under current law, there is already a $250,000 cap on compensation that can be used to calculate contributions to 401(k) plans. The President's proposal effectively doubles down on this limit for 401(k) plans, and takes an axe to the tax incentives that encourage small business owners to offer these types of plans at work." (ASPPA)

  15. PRES. PRESENTS HIS BUDGET • Has an add on which would eliminate the possibility of spreading payments of Inherited IRA over the lifetime of the Beneficiary. • Would require payment of all assets within 5 years. • The additional revenue will help pay for the rest of the bills provisions.

  16. FROM THE COURTS

  17. DEFENSE OF MARRIAGE ACT UNCONSTITUTIONAL • On May 31, 2012, the US Court of Appeals for the First Circuit held in Massachusetts v. United States Department of Health & Human Services that the definition of marriage as being between one man and one woman in the Defense of Marriage Act (DOMA) is unconstitutional on equal protection grounds.

  18. DEFENSE OF MARRIAGE ACT UNCONSTITUTIONAL • Section 3 of DOMA states in part that under federal law, "'marriage' means only a legal union between one man and one woman as husband and wife." Although DOMA does not invalidate same-sex marriages in states where same-sex marriage is legal, it does prevent same-sex married couples from receiving federal benefits that are otherwise available to heterosexual married couples, including Social Security survivor benefits and health insurance benefits for federal employees. • In these consolidated cases, the plaintiffs, seven same-sex couples lawfully married in Massachusetts, sued to enjoin federal agencies and officials from enforcing DOMA to deprive them of federal benefits available to different-sex married couples in Massachusetts. The Commonwealth of Massachusetts brought a companion case, fearing the law would revoke federal funding for programs tied to DOMA's definition of marriage. • The district court found Section 3 of DOMA unconstitutional under the Equal Protection Clause, and in the companion case held Section 3 violated the Spending Clause and the Tenth Amendment of the US Constitution. Although the district court enjoined federal officials and agencies from enforcing Section 3, it stayed injunctive relief pending the defendants' appeals.

  19. NEW JERSEY DOES NOT HAVE TO PAY COLAs • 5/30/2012, The decision Superior Court Judge Douglas Hurd upholds part of the state's new pension law, which denies the adjustments until the retirement systems reach targeted funding levels. • NJ ED Assoc. spokesman said it's unfair to deny retirees the payments they have bargained and planned for, which is a reason why unions like his challenged the law.

  20. NEW JERSEY DOES NOT HAVE TO PAY COLAs • A federal judge in March threw out another lawsuit brought by New Jersey teachers, police officers, firefighters and other public workers challenging a portion of the law requiring them to pay more for pensions and health benefits. U.S. District Court Judge Anne Thompson dismissed the lawsuit on jurisdictional grounds.

  21. SUPREME COURT DECISION OF LAST YEAR CIGNA VS AMARA USED • Federal Appeals Court Rejects Equitable Remedies When SPD Promises More Generous Benefits Than Pension Plan Document. • The Ninth Circuit held that the terms of the more generous SPD were not enforceable under any of the theories advanced by the plaintiffs. • Uses the Supreme court ruling of last year to make this decision.

  22. 10% TAX APPLIES TO IRA WITHDRAWAL FROM ROLLOVER • At age 56, a partner left his law firm and elected to roll his balance in the firm 401(k) over into an IRA. Subsequently, he took a pre-age 59½ distribution from the 401(k) and was assessed with the additional 10% tax. The U.S. Tax Court upheld the additional 10% tax. The U.S. Court of Appeals for the Seventh Circuit upheld the Tax Court. The court held that the taxpayer would not have been subject to the 10% tax if he had taken the distribution directly from the 401(k) plan upon termination because of the exception in section 72(t)(2)(A)(v) of the Internal Revenue Code for post-separation distributions to an employee who has attained age 55, but because he chose to roll over his balance, the exception no longer applied to a distribution from an IRA. Kim v. Comm’r of Internal Revenue, No. 113390 -10 (7th Cir. May 9, 2012).

  23. EXEMPT ORG. NOT LIABLE FOR EXCISE TAX • U.S. Tax Court ruled that a 501(c)(3) ORG was not required to pay a 20% reversion tax even though it had paid a tax on unrelated business income (a position that has been taken by the IRS for many years). • The Org. had filed a Form 5330 and paid the excess tax then sued to recover the reversion tax paid. • However, even though there was an overpayment of an excise tax, the court lacked jurisdiction under Sec.6512(b) to award a refund. • What do we learn from this case?

  24. NEW SUITS OVER DO-IT YOURSELF IRAs (May 2012) • Equity Trust Co. and Entrust Group Inc. accused of touting the security and safety of self-directed IRA. • Equity Trust Co. apparently sent out statements reflecting assets that have become worthless. • In addition several investment advisors have been sued for misuse of investments in self-directed IRAs. • Expect future legislation to strengthen the law to protect assets of Self-directed IRAs.

  25. TUSSEY VS ABB INC. • April 24, 2012 Missouri federal court rules that the fiduciaries were libel for 35M in damages for failure to properly monitor the third-party administrative costs. • Courts ruled the fiduciary failed to monitor recordkeeping costs, failed to negotiate rebates for the plan, selected more expensive share classes, and permitted fees in excess of market rates.

  26. MORGAN KEEGAN PAYS MORE THAN $630,000 • April 2012, Morgan Keegan a full service brokerage firm agrees to pay to 10 ERISA plans. • Courts ruled it violated its fiduciary duty when it recommended certain hedge funds, that then paid revenue-sharing and other fees to the broker.

  27. Company Hit for $35 Million in 401(k) Fee Case • IN THE FIRST CLASS ACTION OVER 401(K) FEES TO BE TRIED AND DECIDED ON ITS MERITS, A MISSOURI FEDERAL DISTRICT COURT RULED ON MARCH 31 THAT MANUFACTURER ABB INC. BREACHED ITS EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) FIDUCIARY DUTIES. THE COURT’S OPINION IS A MUST READ FOR ALL PLAN SPONSORS AND SERVICE PROVIDERS.

  28. Company Hit for $35 Million in 401(k) Fee Case • The company must pay $35.2 million to the plaintiff class for (1) failing to monitor the recordkeeping fees and revenue-sharing payments made to the plan’s trust company, (2) failing to negotiate rebates to offset or reduce the cost of providing administrative services to plan participants, and (3) replacing an actively balanced mutual fund with the trust company’s target date fund that generated more in revenue sharing for the trust company.

  29. KRAFT SETTLES CLAIM • March 2012, Kraft will pay $9.5 M to settle claim that it mismanaged employees’ retirement plan causing accounts to lose more than $80M. • After 5 years of litigation Kraft settled rather to continue to deal with more attorney fees and litigation, while continuing to deny any wrong doing.

  30. FROM THE IRS

  31. ELIMINATION OF LUMP SUM OPTION • Proposed Reg. issued 6/21/2012. • Proposed regulation would provide a limited exception under Section 411(d)(6)(B) to permit a plan sponsor that is a debtor in a bankruptcy proceeding to amend its single-employer defined benefit plan to eliminate a single-sum distribution option (or other optional form of benefit providing for accelerated payments) if certain conditions are satisfied.

  32. ELIMINATION OF LUMP SUM OPTION • Condition: the court overseeing the bankruptcy case has issued an order, after notice to each affected party (within the meaning of section 4001(a)(21) of ERISA) and a hearing,finding that the adoption of the amendment eliminating that optional form of benefit is necessary to avoid a distress termination of the plan pursuant to section 4041(c) of ERISA or an involuntary termination of the plan pursuant to section 4042 of ERISA before the plan sponsor emerges from bankruptcy (or before the bankruptcy case is otherwise completed). • PBGC has issued a determination that the adoption of the amendment eliminating that optional form of benefit is necessary to avoid a distress or involuntary termination of the plan before the plan sponsor emerges from bankruptcy (or before the bankruptcy case is otherwise completed) and that the plan is not sufficient for guaranteed benefits within the meaning of section 4041(d)(2) of ERISA.

  33. NRA GOVERNMENT PLANS • Notice 2012-29 [issued April 18, 2012], the IRS and Treasury have signaled their agreement with many in the governmental plans community that the requirements of the 2007 Final Normal Retirement Age Regulations should not be imposed on governmental retirement plans that do not provide for in-service distributions.... [A] governmental plan that does not 'provide' for in-service distributions before a participant's attainment of age 62 does not need to contain a definition of normal retirement age; alternatively, a governmental plan that does not make in-service distributions may contain a definition of normal retirement age that does not conform to the requirement of the 2007 Final Normal Retirement Age Regulations that normal retirement age not be attainable until the participant has reached a specified chronological age."

  34. NEW FORM SS-4 ISSUED • Effective 5/22/2012 they will issue only one EIN per day to each "responsible party", whether online or by phone, fax or mail. This is to ensure "fair and equitable treatment for all taxpayers".

  35. FORM 5558 INSTRUCTIONS • May 3, 2012 IRS advises that a separate 5558 must be filed for each request for an extension. A list of plans may not be attached. • The form has room for three such requests. • Any form submitted with a list, will not be returned but will simply be ignored by the IRS.

  36. FORM 5558 INSTRUCTIONS • Many users submit the forms in a single mailing with a cover sheet listing all the forms enclosed. The Service stated that the cover sheet will not serve as part of the request for an extension. • When submitted this way, at times, only the top form gets processed, or one or more of the attached forms get lost. • Signatures are still required for extension to file 5530 or 8955-SSA. Only enrolled people are allowed to sign the form. • See ASPPA for common mistakes when filing the form.

  37. FORM 5558 AND FORM 8955-SSA • Although there is no requirement to have Form 5558 signed to request an extension to file Form 5500, no such exception exists if requesting an extension to file Form 8955-SSA. • Many applications to extend the deadline for the 8955-SSA have been returned. • ASSPA in November 2011 requested that Treas. Reg. 1.60811-11 be expanded to include the 8955-SSA. • 6/20/2012: Proposed guidance to eliminated the signature requirement on Form 5558, when requesting an extension of Form 8955-SSA, (still required to file extension of Form 5330).

  38. FORM 5558 AND FORM 8955-SSA • Per a member of the IRS, they intend to issue a proposed Reg. that would eliminate the signature requirement for the 5558 when requesting an extension to Form 8955-SSA. • See ASAP 12-10. • On June 11, 2012, several members of GAC met with individuals from the Treasury Department and the IRS. At the meeting, ASPPA was notified that regulations will be issued that will allow the Form 5558 to be filed to extend the due date for filing Form 8955‐SSA without a signature. ASPPA was also informed that regulations are expected to be issued before the end of July 2012.

  39. MISSED THE DEADLINE OF 4/30 TO RESTATE YOUR DB PLAN • Service on May 5, issues a “kit” that can be used under the VCP to submit late adopters. • This kit is designed for plan sponsors who failed to restate their pre-approved defined benefit retirement plan documents for EGTRRA by the April 30, 2012, deadline. Defined benefit plan sponsors who use pre-approved plan documents (i.e., documents that are reviewed by the IRS and sold to plan sponsors through law firms, banks, brokers, other financial institutions, or plan administrative firms) were generally required to sign new plan documents, amended to reflect the Economic Growth and Tax Relief Reconciliation Act of 2001 (commonly referred to as “EGTRRA”), by April 30, 2012.

  40. MISSED THE DEADLINE OF 4/30 TO RESTATE YOUR DB PLAN • Fee Schedule: Number of Participants Fee if submitted on or before April 30, 2013, and you have no other qualification failures other than your failure to timely restate your plan for EGTRRA by the April 30, 2012 deadline Fee if submitted after April 30, 2013, or if you are reporting additional failures • 20 or fewer $375 $750 • 21 to 50 $500 $1,000 • 51 to 100 $1,250 $2,500 • 101 to 500 $2,500 $5,000 • 501 to 1,000 $4,000 $8,000 • 1001 to 5,000 $7,500 $15,000 • 5,001 to 10,000 $10,000 $20,000 • Over 10,000 $12,500 $25,000

  41. IRS's surprising position on 415 limits could mean lower pension benefits • A new IRS interpretation of Section 415 limits could sharply reduce pension benefits for some defined benefit plan participants whose distributions begin before normal retirement age or are paid as a qualified joint and survivor annuity. So far, agency officials have expressed only informal, individual views, but authoritative guidance confirming the new interpretation may be published soon. If so, the guidance would mark a fundamental break with the long-standing, widely held understanding of how Section 415 limits work.

  42. IRS's surprising position on 415 limits could mean lower pension benefits • This is a large plan issue, and most small plans limit the NRB to the 415 limit then actuarially reduce that benefit for early commencement. Rather than reduce the benefit first then limit it to the 415 Max. benefit. Apparently a common practice for large plans. • IN MY OPINION THE Service is correct

  43. NEW POA FORM • March 2012, IRS issues yet another new POA form. • A separate form must now be completer for each taxpayer/plan of the Er. • Will need a separate form for the Er. and one for the Plan and perhaps even one for the Trust.

  44. NEW POA FORM • Special language now required if the authorization is to be able sign a form: This power of attorney is being filed pursuant to Treasury regulation section 16012-1(a)(5). Which requires a power of attorney to be attached to a return if the return is signed by an agent by reason of {enter the specific reason listed under (a), (b), or (c) under Authority to sign your return, earlier}. No other acts on behalf of the taxpayer are authorized.

  45. LAW SUIT AGAINST THE IRS • Filed 3/12/2012 • Challenges federal licensing of Tax Preparers. • Suit claims the law is unwarned and designed to benefit big tax preparers.

  46. IRS CAUTIONS AGAINST “SHAM” RETIREMENTS • In PLR 201147038 the Service, once again, expresses its opinion that retirement may not be before age 62. In Service distributions prior to age 62 may be consider as a inappropriate retirement age and the plan disqualified.

  47. GUIDANCE ON LIFETIME INCOME OPTIONS • 2/2/2012 Four different sets of regulatory guidance issued. • 1)Proposed guidance: RIN 1545-BJ55 would substantially decrease the complexity of having a partial lump sum and annuity with the rest of the benefit (bifurcated benefit) by amending the final regulations under 417(e). • Would remove the requirement that 416 also apply to the benefit as well as the lump sum.

  48. GUIDANCE ON LIFETIME INCOME OPTIONS • 2)Proposed guidance would provide that any investment in a QP or IRA that is a longevity annuity (an annuity which provides for the commencement of benefit at a later age i.e. 80 or 85), would not be considered when determining the MRD.

  49. GUIDANCE ON LIFETIME INCOME OPTIONS • 3) RR 2012-3: clarifies that when a participants invests in a deferred annuity contract under a DC plan, the participant’s account is not subject to the QPSA requirements before the participant affirmatively elects to commence annuity distributions. • See ASAP 12-04.

  50. GUIDANCE ON LIFETIME INCOME OPTIONS • RR 2012-4: Rollovers from DC plans to DB plans. • Participants may roll their DC money to the DB plan and receive a actuarially equivalent annuity from the DB plan.

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