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Current developments: this two-part article provides an overview of current developments in employee benefits, including executive compensation, welfare benefits and retirement plan requirements. Part II focuses on qualified plans and welfare benefits.


* The IRS issued regulations effective in 2006 on Sec. 401(k) cash-or-deferred arrangements, including rules on ADP tests, QNECs and designated Roth contributions.

* The DOL issued guidance on missing participants, abandoned defined-contribution plans and the simplified VFC Program.

* The Service offered additional clarification on HSAs, HRAs and MRAs provided through profit-sharing plans.


This two-part article covers the most significant developments in employee benefits and pensions in the past year. Part I, in the November 2005 issue, focused on executive compensation and certain fringe benefits. As noted therein, the American Jobs Creation Act of 2004 made far-reaching changes to the rules on executive compensation and certain welfare benefits. Part II, below, focuses on updates and changes in the rules on qualified retirement plans and the taxation of welfare benefits.

Qualified Plans

Sec. 401(k) Cash-or-Deferred Regs.

On Dec. 29, 2004, the IRS published final Sec. 401 (k) regulations, effective for plan years beginning after 2005. (33) Plan sponsors may, however, apply them to plan years ending after Dec. 29, 2004, as long as they apply such rules for that plan year and all subsequent plan years.

The new regulations confirm that plan sponsors can make elective deferrals a default option for employees who fail to make an affirmative election to receive cash. The default compensation reduction percentage can be set at any level permitted by the plan's terms, does not have to be tied to the plan's matching contributions and can have scheduled increases as long as the schedule is properly disclosed.

Under the final regulations, a contribution is made pursuant to a cash-or-deferred election only if it is made after (1) the relevant election and (2) the employee's performance of services relating to the compensation that otherwise (but for the election) would have been paid to the employee. Thus, employers may not pre-fund elective contributions to accelerate their deductions (consistent with the IRS's position in Rev. Rul. 2002-46, (34) but overturning the guidance in Notice 2002-4835). An exception applies when contributions for a pay period are occasionally made before services are performed, (1) to accommodate bona fide administrative considerations and (2) without a principal purpose of accelerating deductions. For these rules, partners (or other self-employed individuals) are not precluded from making elective contributions during the year.

ADP tests: The regulations require Sec. 401(k) plans to satisfy either the actual deferral percentage (ADP) test or the alternative safe-harbor method. Plans :nay incorporate the ADP test by reference, but must specify whether they are using a current- or prior-year testing method. Plans must specify whether the safe-harbor contribution will be the nonelective or the matching safe-harbor contribution. Additionally, plans using the safe-harbor method as of the beginning of a plan year cannot use ADP testing if the safe-harbor requirements are not met and, generally, plans cannot be amended in the middle of the plan year to revert to ADP testing for that year. Similar rules apply to the actual contribution percentage (ACP) test and safe harbor, if relevant.

QNECs: The regulations are also designed to curb the use of qualified nonelective contributions (QNECs) for non-highly-compensated employees (NHCEs) with the lowest compensation, to pass the ADP or ACP test. This technique made it possible for employers to correct a testing failure by contributing small amounts to NHCEs with very low compensation for the plan year. Under the new regulations, targeted QNECs may not be counted for ADP or ACP testing purposes to the extent they are more than double the QNECs that at least 50% of the other NHCEs are receiving, when expressed as a percentage of compensation.

Hardship distributions include distributions used for certain postsecondary education expenses for an employee or his or her spouse or dependents, and burial or funeral expenses for the employee's deceased parent, spouse or dependents. The new regulations clarify that, for purpose of the hardship distribution rules for education and funeral expenses, the term "dependent" is to be applied without reference to the otherwise applicable Sec. 152 gross income limit for "qualifying relatives."

Designated Roth Contributions

Beginning in 2006, employers will be permitted to give their employees the option of making designated Roth contributions to their Sec. 401(k) plans. A designated Roth contribution will be treated like a contribution to a Roth IRA. Thus, it will be subject to income and employment taxes at the point of contribution, but subsequent distributions of these contributions--and any related earnings--will not be taxed if certain requirements are met. Designated Roth contributions will be subject to the Sec. 402(g) limit on elective deferrals ($15,000 in 2006), instead of the Sec. 219(b) limit on contributions to Roth IRAs ($4,000 in 2006). All participants, regardless of income, will be eligible to make designated Roth contributions.

Prop. Regs.: On March 2, 2005, the IRS issued proposed guidance for Roth Sec. 401(k) features. (36) These rules would require employees to irrevocably designate elective deferrals as Roth contributions at the time of the cash-or-deferred election. Employees could change or revoke the designation only for future deferrals.

Plans will have to specify the extent to which participants can designate elective deferrals as Roth contributions and keep designated Roth contributions-including earnings attributable thereon--in separate accounts. The proposed regulations also would clarify that this separate accounting requirement begins when the contribution is made to the plan and continues until all assets in the designated Roth account have been distributed. The rules would require plans to maintain a record of each employee's investment in the contract (i.e., designated Roth contributions that have not been distributed), and to allocate gains, losses and other credits or charges to each employee's designated Roth account and other accounts under the plan, on "a reasonable and consistent basis." The proposed regulations would prohibit forfeitures from being allocated to designated Roth accounts.

Designated Roth contributions will be subject to the same requirements as other elective deferrals to Sec. 401(k) plans. The proposed regulations specify that designated Roth contributions will be immediately nonforfeitable and subject to the Sec. 401(k)(2)(B) restrictions on distributions and Sec. 40 l(a)(9) minimum required distribution rules. Direct rollovers of designated Roth contributions will be possible, but only to another designated Roth account or a Roth IRA.

The proposed regulations would also provide that designated Roth contributions are elective contributions for ADP test purposes. For a plan that uses corrective distributions of excess contributions to cure a failed ADP test, the proposed regulations would permit highly compensated employees (H C E s) to elect whether excess contributions are attributable to designated Roth contributions or to pre-tax elective deferrals. Any corrective distributions of excess contributions attributable to designated Roth contributions will not be taxable, but the income attributable to them will be. Under the proposed regulations, similar rules will apply for using corrective distributions to cure ACP testing failures.

Applying Sec. 415 Limits to Lump Sums

Notice 2004-78 (37) provided guidance on the actuarial assumptions qualified plan administrators must use to apply the Sec. 415(b) limits to lump-sum payments made in 2004 and 2005. The guidance reflects a temporary change to the minimum interest rate plan administrators can use.

In general, Sec. 415(b) limits the annual benefit a defined-benefit plan can pay to an individual, to the lesser of $170,000 or 100% of his or her average compensation for the highest three years. (38) To apply this limit to lump sums, the plan administrator must determine an equivalent straight-life annuity with specified interest and mortality assumptions. For distributions in 2004 and 2005, 5.5% is the applicable interest rate for Sec. 417(e)(3) purposes.

Nondiscrimination Rules

On Oct. 22, 2004, the IRS's Employee Plans division issued a staff directive (39) on certain schemes that use short service employees to ensure that most of the benefits paid under a retirement plan go to HCEs. According to the directive, these schemes may violate nondiscrimination rules, even though they satisfy objective regulatory criteria for determining whether the Code's nondiscrimination rules are met.

The directive stresses that, under the regulations, the criteria must be interpreted in a reasonable manner consistent with the purpose of preventing such discrimination and cannot be interpreted to permit an unreasonable disparity in the benefits paid to HCEs over those paid to NHCEs. (40)

The directive applies to plans that allow only HCEs and the lowest-paid employees to participate, and that may use cross-testing in an effort to satisfy the nondiscrimination rules. Under these arrangements, the lowest-paid employees are limited primarily to those with short periods of service and, consequently, small amounts of compensation. Thus, although these workers receive substantial allocations relative to their compensation, the allocations are small, providing little or no benefits to them. The directive states that even though these plans may satisfy objective tests in the regulations, they are not a reasonable interpretation of them.

On Feb. 4, 2005, a subsequent IRS communication (41 )clarified the scope and meaning of the prior directive. According to the later directive, the original directive's intent had been "to focus upon plans that attempt to satisfy the nondiscrimination tests by using nominal contributions or benefits for the lowest paid ... employees where the nominal contributions or benefits result from very short periods of service." The clarification continued, stating that "attempts to satisfy the nondiscrimination tests should and will fail where virtually all of the plan contributions or benefits, except for nominal contributions or benefits for these lowest-paid employees, are accrued by the highly compensated employees." Additional guidance on this issue is expected.

ESOP Holding S Stock

On Dec. 17, 2004, the IRS issued temporary and proposed regulations (42) on the prohibited allocation rules for employee stock ownership plans (ESOPs) holding S corporation stock, updating temporary and proposed regulations issued in 2003 (43) and incorporating Rev. Rul. 2004-4. (44) Failing to comply with Sec. 409(p) can result in a deemed distribution of the value of the ESOP account (and possible early distribution penalties) to a "disqualified person," a 50% excise tax on the plan sponsor, disqualification of the ESOP and subsequent unrelated business income taxation and possible prohibited-transaction penalties.

Under the 2003 regulations, both "disqualified persons" and "nonallocation year" were determined by comparing the individual's deemed owned shares and "synthetic equity" to the overall ESOP shares and related synthetic equity. Employers could have satisfied the Sec. 409(p) tests under those regulations by issuing stock options or stock appreciation rights (SARs) that were never expected to be exercised (because of the establishment of an unfavorable exercise price) to a broad-based group of employees. These options and SARs, however, would be included in the synthetic equity calculation to prevent an individual from becoming a disqualified person, or the year from becoming a nonallocation year.

The temporary regulations closed the loophole with a new "person-by-person" test, under which the determination of either a disqualified person or a nonallocation year is made by reference only to an individual's synthetic equity. Thus, the test for a disqualified person apples a ratio of the individual's deemed owned shares and his or her synthetic equity as the numerator, over a denominator of all ESOP shares and only that individual's synthetic equity (rather than all synthetic equity, as under the 2003 regulations).The test for a nonallocation year focuses on whether the total share ownership of the disqualified persons is at least 50% of total outstanding shares or 50% of such shares, plus the synthetic equity of just the disqualified persons.

The temporary regulations note that a nonallocation year can sometimes be avoided by transferring employer securities held in a disqualified person's account from an ESOP to a non-ESOP portion of a plan or a wholly separate employer-sponsored profit-sharing or Sec. 401(k) plan. Additionally, the temporary regulations established rules for converting synthetic equity into a number of underlying shares of employer stock, including new rules relating to SARs and similar interests, synthetic equity rights to acquire employer shares with greater voting power than ESOP-owned shares, and synthetic equity in S corporations less than wholly owned by the ESOR Finally, under the temporary regulations, the number of synthetic equity shares resulting from non-qualified deferred compensation (that is not otherwise tied to employer stock) is determined by share value on a "determination date. "The regulations specify that this value must be recalculated every three years, thus alleviating concerns raised by the 2003 requirements that there might be a need for daily revaluations.

The temporary regulations apply only for plan years beginning after 2004, subject to specific exceptions. For example, ESOP shares held for a disqualified person before the first plan year beginning after 2004 will not be treated as an impermissible accrual in 2005 if the shares were disposed of before July 1, 2005. However, if that period is part of the ESOP's first nonallocation year, the excise tax will still apply. Additionally, the "person-to-person" testing approach was not required until July 1, 2005.

Automatic Rollover Guidance

On Sept. 28, 2004, the Department of Labor (DOL) issued final regulations (45) implementing a fiduciary safe harbor for automatic rollovers of mandatory cashouts from tax-qualified pension plans. (46) If the safe-harbor conditions are met for distributions subject to rollover provisions, the employer is deemed to have met its fiduciary duties as to missing participants' accounts and has no future liability for them. (47)

Concurrently with the regulations, the DOL published a class exemption (48) allowing banks to direct automatic rollovers from their own plans into IRAs for which they serve as trustees or custodians and to invest the IRA assets in their own products while receiving standard fees. The exemption was effective on March 28, 2005.

Notice 2005-5 (49) provided additional guidance on the new automatic rollover rules, including a sample amendment. Plans generally need to adopt good-faith amendments reflecting the automatic rollover rules by the end of the first plan year ending after March 27, 2005.The notice reiterated that the plan administrator can execute the necessary documents to establish an IRA under Sec. 408(k) or a deemed IRA under Sec. 408(a) on the participant's behalf, without the participant's involvement but, like the DOL regulations, did not address potential conflicts with state signature and escheat laws.

When a participant fails to affirmatively elect a direct payment or direct rollover for a mandatory distribution after March 27, 2005, the plan administrator can delay the distribution and, thus, the automatic rollover, until as late as Dec. 31, 2005.

The automatic rollover rules apply to Sec. 414(d) governmental plans, governmental Sec. 457(b) plans (but not nongovernmental Sec. 457(b) plans), Sec. 403 (b) plans and Sec. 414 (e) church plans (nonelecting plans).The notice also provides a delayed compliance deadline for governmental plans and certain nonelecting church plans.

The Code does not require tax-qualified plans to make mandatory distributions, so only plans that make them need to be amended to comply with the automatic rollover rules. To avoid the rules, plan sponsors can reduce their plan's cashout amount to $1,000 (or less) or eliminate existing mandatory distribution provisions, without violating the Sec. 411(d)(6) anti-cutback rule. Plan sponsors opting to reduce their mandatory cashout amount or eliminate their mandatory cashout provisions have until the end of the first plan year ending after March 28, 2005 to amend. (50) For purposes of determining whether a participant's accrued benefit is less than $1,000, plans must count amounts attributable to rollover contributions. By contrast, amounts attributable to rollovers do not count in determining whether a participant's accrued benefit is $5,000 or less and, thus, subject to the mandatory cashout rules.

DOL Guidance

Missing participants: Under Employee Retirement Income Security Act of 1974 (ERISA) Section 4050, the Pension Benefit Guarantee Corporation usually assumes responsibility for benefits owned by terminated defined-benefit plans of participants who cannot be found. A DOL field assistance bulletin (51) provides guidance on the search plan administrators must conduct for missing participants to meet their fiduciary obligations, and actions they should take if the search fails.

The effort put into searching for a participant should depend on the size of his or her account balance. Relatively easy and inexpensive steps--such as checking plan records, asking the participant's beneficiary for an address, sending a notice by certified mail and using either the IRS's or Social Security Administration's letter forwarding program--should be taken in all cases. More costly and effective methods should be used if the amount involved justifies them. If the costs are more than nominal, the plan is permitted to charge the account.

When a reasonably diligent search has failed, the balance can be rolled over to an IRA set up on the participant's behalf or transferred to a taxable bank account or to a state unclaimed property fund. If the first option is chosen, the plan administration can discharge its fiduciary duties by following the safe-harbor regulations for automatic rollovers.

Abandoned defined-contribution plans: The DOL has issued a series of comprehensive proposed rules that authorize financial institutions to terminate abandoned defined-contribution plans and make benefit distributions to participants and beneficiaries. (52) The DOL also has proposed a class prohibited-transaction exemption that would permit these financial institutions to use the plan's assets to pay for the services they provide in connection with terminating and winding up such plans. (53)

Prop. DOL Regs. Section 2578.1 establishes standards under ERISA and procedures for determining if a plan has been abandoned, whether it can be deemed terminated, winding up the plan's affairs and distributing benefits to participants and beneficiaries. The proposed regulation also provides guidance on who may initiate and execute the winding-up process--the so-called qualified termination administrator (QTA). Prop. DOL Regs. Section 2550.404a-3 establishes a fiduciary safe harbor for QTAs and fiduciaries of terminated defined-contribution plans that have not been abandoned, for selecting an IRA provider to accept rollovers of unclaimed benefits and deciding how to invest them. Prop. DOE Regs. Section 2520.103-13 requires QTAs to file a terminal report with the DOL no more than two months after an abandoned plan's assets have been distributed and the winding-up process has been completed, and relieves the QTA of otherwise applicable reporting obligations under ERISA Title I.

The IRS has agreed not to challenge the tax-qualified status of terminated plans, as long as (11 the QTA determines whether the joint-and-survivor annuity requirements apply to any benefit payable under the plan, (2) participants' and beneficiaries' accrued benefits are vested as of the date of deemed termination and (3) the QTA furnishes a Sec. 402(f) notice to participants and beneficiaries.

Simplified VFC Program: On April 6, 2005, the DOL issued proposals to expand and simplify the Voluntary Fiduciary Correction (VFC) Program, which permits ERISA fiduciaries to correct voluntarily certain prohibited and other transactions that constitute a breach (or potential breach) of fiduciary duties. (54) If the fiduciary is eligible for the VFC Program and satisfies all of its requirements, the DOL will issue a "no action" letter effectively waiving its rights to initiate a civil enforcement action and to assess a 20% civil penalty under ERISA Section 502(1).A separate prohibited-transaction exemption (55) provides excise tax relief for certain prohibited transactions corrected under the VFC Program. Even though the changes are proposed, employers and other fiduciaries can begin using the amended and restated VFC Program immediately.

To use it, a plan sponsor must (11 identify any violations and determine whether they fall within the transactions covered by the Program; (2) follow the process for correcting specific violations; (3) calculate and restore any losses or profits with interest (if applicable) and distribute any supplemental benefits to participants; and (4) file an application with the appropriate DOL regional office, including documentation showing evidence of the corrective action taken.

The VFC Program is not available if the applicant or the plan is under investigation (i.e., if the "EBSA [Employee Benefits Security Administration] or any other Federal agency is conducting an investigation or examination of the plan, the applicant, or the plan sponsor in connection with an act or transaction involving the plan, or if a written or oral notice of an intent to conduct such an investigation or examination has been received by the plan, a Plan Official, or other plan representative.") A plan or applicant is not under investigation merely because the EBSA has contacted the plan, applicant or plan sponsor about a participant complaint, unless the complaint involves a transaction that is the subject of the VFC Program application. A plan, plan sponsor or applicant is under investigation only if the investigation at issue is in connection with an act or transaction involving the plan.

The updated VFC Program is available to correct violations resulting from 18 types of transactions, including delinquent participant contributions, various issues with loans, purchase, sale or leaseback of assets, illiquid assets, asset valuations and compensation paid by the plan.

Employers can use the updated VFC Program to correct loans that exceed applicable limits, by requiring a participant to return the excess loan amount to the plan and amortizing the remaining principal balance as of the correction date over the remaining duration of the original loan. For loans that exceed the duration limit, plans must reform the loan to require repayment within five years of the loan origination date.

A fiduciary of a plan that has previously acquired illiquid assets--such as restricted stock, limited partnership interests, real estate and collectibles--may determine that it is no longer in the plan's or the participants' best interests to continue holding such assets. However, the fiduciary may not be able to sell the assets, because the only available purchaser is a party in interest of the plan. The updated VFC Program permits fiduciaries to sell the illiquid assets to a party in interest, as long as the plan is returned to a financial position that is no worse than if the acquisition had never taken place.

A proposed amendment to PTE 2002-51 would provide relief from the prohibited-transaction excise tax for the acquisition of illiquid assets. (56) The proposed amendment cannot provide excise tax relief until adopted in final form.

Welfare Benefits

Additional HSA Guidance

While Treasury and the DOL provided guidance on most of the fundamental questions on health savings accounts (HSAs) last year, additional issues have arisen as these arrangements are actually used, prompting additional guidance.

In an advisory opinion, (57) the DOL addressed whether cash credits can be used to encourage individuals to establish HSAs with a particular trustee or custodian, without violating the Code's prohibited-transaction rules. In general, Sec. 4975(c) prohibits transactions between a "plan" and a "disqualified person" and also bans disqualified persons who are fiduciaries from using the plan's assets for their own benefit. An HSA is a "plan" under the Code's prohibited-transaction rules; under Sec. 4975(e), a "disqualified person" includes a plan fiduciary and anyone providing services to the plan, among others. Disqualified persons who engage in prohibited transactions are subject to excise taxes.

The advisory opinion concludes that a trustee or custodian's cash credit to an accountholder's HSA is not a prohibited transaction under Sec. 4975. Specifically, the cash contribution is not a sale or exchange of property between a plan and a disqualified person, and does not constitute a transfer of the HSA'S assets for the benefit of a disqualified person or an act of self-dealing by the trustee. Likewise, the HSA's receipt of a cash credit from the trustee or custodian is not a prohibited transaction, because it is not an act of self-dealing by the accountholder, and because the accountholder is not receiving any consideration from a party dealing with the HSA in connection with a transaction involving the HSA's assets.

In Notice 2005-8, (58) the IRS provided guidance on the tax treatment of a partnership's contributions to a partner's HSA. The notice also provides guidance on the tax treatment of an S corporation's contributions to a 2% shareholder-employee's HSA. Contributions for these individuals are not contributions by an employer to an employee's HSA.

On Aug. 26, 2005, the IRS issued proposed rules (59) that would further explain existing HSA comparability rules provided in Notices 2004-2 (60) and 2004-50, (61) and the 35% tax on noncomparable HSA contributions imposed under Sec. 4980G. Note: These rules will not affect HSA contributions made through Sec. 125 cafeteria plans.

The HSA comparability rules establish a system to prevent employer discrimination in HSA contributions. Under the proposed rules, an employer could provide different (or no) contributions, based on whether the employee had individual or family coverage. Differences in contributions would also be permitted for three categories of employees: (1) current fulltime employees, (2) current part-time employees (defined as working fewer than 30 hours per week) and (3) former employees (excluding those with coverage under a high-deductible health plan (HDHP) through the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)). Comparability rules would apply separately to each category, but only to these categories. For example, collectively bargained employees are not a separate group, nor are management and nonmanagement employees. If the employer offers separate types of HDHPs, separate comparability rules could apply for each type of HDHP.

For purposes of these rules, additional points of interest include: entities treated as a single employer under Sec. 414(b), (c), (m) or (o) are treated as one employer. Independent contractors, sole proprietors and partners are not taken into account under the comparability rules. (62) Comparability rules will separately apply to employees with HSAs and those with medical savings accounts. Employers can limit HSA contributions to only those employees (or former employees) covered by the employer's HDHR As in earlier guidance, the proposed rules would prohibit employer HSA "matching contributions" or contributions varying by age or years of service, because these varying levels would violate the comparability requirement. The Sec. 4980G penalty may be waived or reduced for errors due to reasonable cause and not due to willful neglect.

Unlike many of the proposed regulations released in recent years, employers may rely on the proposed rules now; generally, the regulations will apply to employer contributions made on or after the date they are published as final in the Federal Register.

Additional HRA Guidance

A letter ruling (63) confirmed that employers may offer health reimbursement arrangements (HRAs) that only pay (or reimburse) medical expenses incurred after retirement or other termination of employment. These post-employment HRAs also can pay or reimburse medical expenses incurred by the retiree's spouse and dependents, including medical expenses incurred after the retiree dies.

MRAs within Qualified Retirement Plans

A tax-qualified profit-sharing plan may not maintain a separate account for participants that only reimburses medical expenses, according to Rev. Rul. 2005-55. (64) The ruling holds that such an arrangement violates the Sec. 411 vesting requirements, "because it imposes conditions on the use of the amounts held in the participants' accounts." Alternatively, if the arrangement permits distributions unrelated to Sec. 213(d) medical care (so as to meet the vesting requirements), the distributions would not meet the exclusion from income under Sec. 105(b). However, the ruling also provided a limited grace period for employers to make necessary changes to profit-sharing plans that already include such medical reimbursement accounts (MRAs).

Amending a plan to make distributions from an MICA available under the same terms as the profit-sharing account for plan years beginning Aug. 14, 2005, will not cause distributions from such accounts to lose the Sec. 105(b) gross income exclusion for eligible distributions occurring before the first day of the first plan year beginning after Aug. 15, 2005.

Military Benefits

On Sept. 20, 2004, the DOL's Veterans' Employment and Training Service issued proposed regulation (65) that would implement the Uniformed Services Employment and Reemployment Rights Act (USERRA), the first major administrative interpretation of the 1994 statute that extended and modernized prior laws requiring companies to rehire workers who enter military service. In addition to rules prohibiting discrimination in employment on account of military service, and on the conditions under which reemployment rights are exercisable and enforcement measures, the proposal specifies how employee benefits are to be continued or restored.

When welfare benefits (such as vacation entitlement) or qualified plan benefits depend on seniority, service credit must continue to accrue during protected military service. For benefits that do not depend on seniority, military duty must be treated in the same manner as other unpaid leaves of absence. When different types of leave are differently treated, military absences are entitled to the most favorable treatment. An employee who enters the military cannot be required to use any of his or her accrued vacation; he or she may choose to take vacation to continue his or her salary. Sick leave benefits do not have to be continued. The USERPA's rules for continuation of health coverage are similar to COBRA's, but with no exception for small employers. Returning veterans must be allowed to resume coverage without any waiting period or exclusion of pre-existing conditions. The regulations will become effective when issued in final form.

For more information about this article, contact Ms. Walker at or Mr. Haberman at

Authors' note: The authors thank Robert Davis, Elizabeth Drigotas and Tom Veal for their valuable contributions to this article.

Deborah Walker, CPA


Deloitte Tax LLP

Washington, DC

Michael Haberman, J.D., LL.M.

Tax Senior

Deloitte Tax LLP

Washington, DC

(33) TD 6169 (12/29/04).

(34) Rev. Rul 2002-46, 2002-2 CB 917.

(35) Notice 2002-48, 2002-2 CB 130.

(36) REG-152354-04 (3/2/05).

(37) Notice 2004-78, IRB 2004 48, 879.

(38) The dollar amount is adjusted annually for inflation; see Sec. 415(d)(1)(A) and Notice 2004-72, IRB 2004-46, 840.

(39) IRS Field Directive, "Short Service Employees and Other Meaningful Benefit Schemes and Abuses," Tax Exempt and Government Entities Division (10/22/04).

(40) See Regs. Sec. 1.401(a)(4)-1(c)(2).

(41) Memorandum of Carol D. Gold, IRS Director, Employee Plans (2/4/05).

(42) TD 9164 and REG-129709-03 (12/17/04).

(43) TD 9081 and REG-129709 (7/21/03).

(44) Rev. Rul. 2004-4, IRB 2004-6, 414.

(45) 29 CFR Section 2550.404a-2.

(46) The Economic Growth and Tax Relief Reconciliation Act of 2001 amended Sec. 401(a)(31)(B), requiring retirement plans to make direct transfers to individual retirement plans the default distribution option for mandatory cashouts exceeding $1,000. Sec. 401(a)(31)(B)'s effective date was tied to the DOL regulations, which took effect on March 28, 2005; thus, the automatic rollover rule applies to distributions after March 27, 2005.

(47) DOL Field Assistance Bulletin (FAB) 2004-2 (9/30/04) extended the sate harbor to distributions from terminated defined-contribution plans.

(48) DOL Prohibited Transaction Exemption (PTE) 2004-16 (9/28/04).

(49) Notice 2005-5, IRB 2005-3, 337.

(50) See IRS Tax Exempt and Government Entities Division, Employee Plans News: Protecting Retirement Benefits through Educating Customers, News Flash (2/16/05), available at,,id=96719,00.htm, then click on "News Flash, February 16, 2005."

(51) FAB No. 2004-2, note 47 supra.

(52) 70 Fed. Reg. 12,046 (3/10/05).

(53) 70 Fed. Reg. 12,074 (3/10/05).

(54) 70 Fed. Reg. 17,515 (4/6/05).

(55) DOL PTE 2002-51 (11/25/02).

(56) 70 Fed. Reg. 17,476 (4/6/05).

(57) DOL Advisory Opinion 2004-09A (12/22/04).

(58) Notice 2005-8, IR.B 2005-4, 368.

(59) REG-138647-04 (8/26/05).

(60) Notice 2004-2, IRB 2004-2, 269.

(61) Notice 2004-50, IRJ3 2004-33, 196.

(62) See Notice 2005-8, note 58 supra.

(63) IRS Letter Ruling 200452013 (9/14/04).

(64) Rev. Rul. 2005-55, IRB 2005-33, 284.

(65) 69 Fed. Reg. 56, 266 (9/20/04).
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Title Annotation:part 2
Author:Haberman, Michael A.
Publication:The Tax Adviser
Date:Dec 1, 2005
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