Transcript IRS Determination Letter Process Presentation

IRS Determination Letter Process
and January 2011 Submission
Presentation to the
FCERA Board of Retirement
December 15, 2010
Laurie S. DuChateau
Reed Smith LLP
What is a Tax-Qualified Plan?
 Definite written program setting forth all
provisions essential for Internal Revenue
Code (“IRC”) qualification
 Written document that details how the
plan will operate in conformity with IRC
Section 401(a); and
 The plan must be operated in
accordance with its terms
 In 1988 FCERA plan was determined by the
IRS to be tax-qualified
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Advantages of Maintaining Qualified
Plan Status
 Employer contributions not currently taxable
to members
 Plan earnings and income are not currently
taxable to members
 Favorable tax treatment available for
distributions (e.g., rollover treatment)
 No employment taxes paid on contributions
or distributions
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Advantages of Maintaining Qualified
Plan Status (cont’d)
 Eligible “picked-up” employee contributions
treated as pre-tax contributions
 Grandfathering and transitional rules apply
 Favorable benefit limits
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What is a Determination Letter?
 The IRS’s opinion that the plan terms
conform to the tax-qualification requirements
in the IRC
 IRS bound by the determination
 Plan currently has an IRS determination
letter issued May 6, 1988
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Advantages to Obtaining a
Determination Letter
 Protection from retroactive disqualification of
plan for plan term deficiencies upon plan
audit
 Binding opinion of the IRS as to the qualified
status of the plan
 Full access to IRS program - Employee
Plans Compliance Resolution System
(“EPCRS”)
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Advantages to Obtaining a
Determination Letter (cont’d)
 Evidence of qualification to provide to third
parties including other plans accepting
member’s rollover distributions or investment
transaction partners
 May avoid foreign tax withholdings in some
countries
 Members may have additional protection in
the event of personal bankruptcy
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Disadvantages to Obtaining a
Determination Letter
 Financial costs
 IRS filing fee $1,000
 Legal Fees
 EPCRS filing fee of up to $25,000
 Diversion of staff time
 Disclosure of deficiencies to IRS may result
in a loss of control addressing such issues
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Determination Letter Filing Process
 File under IRS Cycle E which ends on
January 31, 2011
 Next scheduled filing is Cycle C
(February 1, 2013 – January 31, 2014)
 Filing off-cycle may result in delayed
processing of the request and loss of
remedial amendment period
 IRS filing fee $1,000
 EPCRS filing fee up to $25,000
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EPCRS
 IRS program available for self correction of
plan document and operational failures
 If plan not under IRS audit, plan may present
deficiencies to IRS, pay required filing fee
and correct deficiencies
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EPCRS (cont’d)
 Upon approval by IRS, a compliance letter is
issued by IRS
 Compliance letter is binding on IRS and
cannot, upon audit, penalize plan for
corrected issues subject to the compliance
letter
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Proposed 2010 Internal Revenue Code
Compliance Policy
 Plan must be established and maintained by
an employer or employers as a government
defined benefit plan (IRC § 401(a)(1)
 Proposed compliance policy supplements
the plan by incorporating the IRC required
provisions as needed
 Proposed compliance policy clarifies IRC
required provisions as may be necessary
 Changes may eventually be included in
CERL
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Exclusive Benefits – No Reversion –
IRC § 401(a)(2)
 Plan must be operated for the exclusive
benefit of its members
 Change clarifies current intention of plan
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Vesting – IRC § 401(a)(17)
 Plan subject to pre-ERISA vesting
requirements
 To the extent funded plan must provide
100% vesting upon termination of the plan or
complete discontinuance of contributions
 Vesting would also be required for accrued
benefits upon a member’s attainment of
normal retirement age
 Change clarifies required vesting provisions
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Forfeitures – IRC § 401(a)(8)
 Forfeitures of benefits may only be used to
reduce future employer contributions
 Change clarifies existing plan terms
 Proposal to update CERL for this provision
to be proposed by SACRS
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Required Distributions –
IRC § 401(a)(9)
 Benefits must be distributed, or begin to be
distributed, by the required beginning date
(RBD)
 RBD is April 1 of calendar year following the
later of the calendar year in which:
 the member attains age 70-1/2; or
 separates from service
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Required Distributions –
IRC § 401(a)(9) (cont’d)
 Benefits must be distributed over member’s
life expectancy or life expectancies of
member and designated beneficiary
 Benefits must meet the incidental benefit
rule which requires certain minimum
distributions to ensure that the benefit is
primarily a retirement benefit
 Change clarifies CERL provisions
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Compensation Limits –
IRC § 401(a)(17)
 The plan must limit the compensation used
to calculate benefits to $200,000 (as
adjusted for inflation - $245,000 for 2011)
 Additional clarifying language included
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Compensation Limits –
IRC § 401(a)(17) (cont’d)
 Members who first joined plan prior to
July 1, 1996 are grandfathered
 Grandfathering based on plan provisions
in effect on July 1, 1993
 No compensation limit for grandfathered
members
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Rollovers – IRC § 401(a)(31)(A)
 The plan must provide for tax-free rollovers
of distributions out of the plan by members
and beneficiaries
 Notice requirements must be satisfied
 Changes provide technical clarification
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Rollovers – IRC § 401(a)(31)(A) (cont’d)
 Distributions from the Plan may be rolled
over into:
 401(k) qualified plans
 403(b) plans
 governmental 457(b) plans, and
 IRAs, including after 2009 Roth IRAs
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Rollovers – IRC § 401(a)(31)(A) (cont’d)
 Beginning in 2010, the plan must extend to
non-spouse beneficiaries rollover rights to
inherited IRAs
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Qualified Domestic Relations Orders
(“QDROs”) – IRC § 414(p)
 Permits favorable income tax treatment for
allocation of member benefits made
pursuant to a domestic relations order
 A domestic relations order will be treated as
a QDRO if it meets the Code definition
 Spouse or former spouse receiving
distribution under QDRO is taxed upon
distribution, not member
 Provides criteria for making determination
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Military Benefits (Heart Act and
USERRA) – IRC § 414(u) and
IRC § 401(a)(37)
 USERRA - Uniformed Services Employment
and Re-employment Rights Act of 1994
 Contributions, benefits and service credit
with respect to qualified military service
must meet the requirements of USERRA
 HEART Act – Heroes Earnings Assistance
and Relief Act of 2008
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Military Benefits (Heart Act and
USERRA) – IRC § 414(u) and
IRC § 401(a)(37) (cont’d)
 Survivors of member who dies while
performing qualified military service are
entitled to same benefits as provided if the
member had been reemployed and
terminated employment on account of
his/her death
 Accruals during period of qualified military
service are not required
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Limits on Contributions – IRC § 415
 Defined benefit plan benefits limited to the
IRC “dollar limit” of $160,000 (as adjusted for
inflation – $195,000 for 2011)
 Testing based on straight life annuity
beginning at age 62
 Police/fire fighters with 15 or more years of
service have more favorable limits
 Benefits may be subject to other
adjustment for testing purposes
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Limits on Contributions – IRC § 415
(cont’d)
 Benefits in excess of dollar limit payable
from the replacement benefit plan
 Annual additions to a defined contribution
plan and post-tax employee contributions to
a defined benefit plan cannot exceed the
“annual additions” to plan
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Limits on Contributions – IRC § 415
(cont’d)
 Annual addition – the lesser of
 100% of compensation or
 $40,000 (adjusted for inflation by the IRS $49,000 for 2011)
 Limits are modified for permissive service
credit purchases in a defined benefit plan
(IRC § 415(n))
 Special rules apply to restoration of
withdrawals (IRC § 415(k)(3))
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Limits on Contributions – IRC § 415
(cont’d)
 Pick-ups of members’ mandatory
contributions will be tested under
IRC § 415(b) (IRC § 414(h))
 Rollovers and transfers are not subject to
these limits
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Picked-Up Employee Contributions –
IRC § 414(h)
 Employers under a governmental plan may
“pick-up” employee contributions to the plan
 Pick-up is the pre-tax treatment of the
contributions
 Pick-up contributions available for
permissive service credit
 IRS guidance has restricted the ability to
pick-up voluntary employee contributions,
including service purchases
(Rev. Rul. 2006-43)
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Picked-Up Employee Contributions –
IRC § 414(h) (cont’d)
 One time irrevocable pick-up election
 If service purchase pick-ups are eliminated,
a member may purchase the service using
post-tax contributions, rollovers, and
transfers
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Prohibited Transactions –
IRC § 503 (b)
 The plan may not engage in “prohibited
transactions”
 Limited exceptions apply to prohibited
transaction rules
 Prohibited transactions involve transactions
between the plan and related parties such as
the County
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Questions?
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Laurie S. DuChateau
Reed Smith LLP
225 Fifth Avenue
Suite 1200
Pittsburgh, PA 15222
412.288.3004
[email protected]
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