Otherwise, the answers are somewhat intuitive – if you believe that your own tax rates will be higher when the money comes out than when the money goes in, then Roth contributions make sense, and vice versa – if you expect your own rates to be lower when the money comes out, then you’re better off making regular deductible IRA or plan contributions. (I think most of us believe that rates in general are going up, but it is the rates that you pay that are relevant.)

As far as converting existing pre-tax IRA or plan accounts – I find it tough to pay, or recommend that someone else pay, large taxes voluntarily sooner than necessary, unless there is a truly compelling reason for it, like being in a low bracket temporarily (possibly due to other investment or business losses). I figure that I can control, to some extent, the taxable distributions on the back end, and would generally not be anxious to do conversions now, at least not large conversions.

I’ve had a couple of phone conversations lately about required annuitization of 401(k) accounts. (“Annuitization” means converting a lump sum into a monthly income stream.) It’s something the Department of Labor (DOL) is looking at (wasting a lot of taxpayer money, of course). I wouldn’t take it too seriously, but it’s worth a quick discussion, and some of the public comments are definitely worth reading!

The DOL made a request for information earlier this year about using annuities to pay out retirement benefits. They recognize, correctly, that we do have a retirement problem in this country. Unfortunately, they think it can be solved by changing the way monies are paid out, the theory being that a lifetime income can’t be pissed away like a lump sum can. Unfortunately, the problem is that people don’t have enough money in their accounts! If you take a $50,000 account and pay it at $163.27 a month, that doesn’t really solve the problem. But, they needed something to do so they had the GAO do a study, and the GAO considered a few alternatives, and one of the more radical alternatives was not only to require annuitization, but to (essentially) confiscate everyone’s 401(k) accounts and force them to buy US Government securities with a guaranteed rate until they actually retired. Well, this got someone’s attention, Glenn Beck maybe, it went viral, and when the DOL asked for comments, they got ‘em! Check out this page – scroll down to Request For Information Comments, and click on a few…#s 10 and 184 are good, but really, just about all of them carry a venom that belies a profound hatred of our government that is just waiting to come out. Enjoy! (But don’t worry about this becoming a reality.)

1)    The key limitation numbers for 2011 (and the old 2010 numbers) are:

(No change for the last two years.)

2)    Year-end reminders…

~Remember to check the appropriate boxes on your W-2s for employees who are covered by your plans…this can sometimes get a bit tricky, especially for profit sharing plans which make contributions after the end of the year, so call if you’re not sure.

~Remember, when you get your 5500 tax return postcard from the DOL, you do not have to send it to us.

~If you’d like to see a trial allocation of a profit sharing contribution, or estimated required contributions to a pension plan, call or e-mail or fax us an estimated census (names, compensations, dates of termination if applicable).

~Please be sure to include all employees on your year-end census (for calendar year plans, we mail out blank forms in early January).  We like to know about all part-time employees, even if you think they’ll never enter the plan.  If you have “leased employees” or work with “independent contractors”, these individuals may have to be covered, or at least considered in certain coverage and participation tests.  (Although true independent contractors are not employees, we sometimes run across a client or prospective client who says they have no employees, but then the phone is answered by someone else.  If that someone else is paid hourly and works in your office, he or she is most likely an employee in the eyes of the Employee Benefits Security Agency and the IRS.)  Please call if you have any questions about this area.

~Employee deferrals (401(k) contributions) must be deposited as soon as they can reasonably be segregated from your business assets.  Small plans (under 100 participants) have a safe harbor of 7 business days, and you simply must meet this safe harbor!  There is absolutely no reason not to make the deposits immediately after each payroll; if participants did not have deferrals withheld then you would have paid the money in their paychecks.  If we know of late deposits, we will advise you to make up for lost earnings and charge for those calculations.
~Employee deferrals (401(k) contributions) should generally be withheld from all pay (including bonuses).  (For instance, if a participant has elected a 10% withholding rate, you should withhold 10% of bonuses as well as regular pay.)  We have a handful of plans where this does not apply, so check with us if you’re not sure.

~You should have a signed form on file for eligible participants who are not deferring to a 401(k) plan.  We’re getting hints that the IRS might think you should make contributions for them if they haven’t properly elected not to contribute (!)

~In general, you MUST maintain a fidelity bond for the greater of 10% of plan assets or 100% of the assets that are not “Qualifying Plan Assets” (generally, “Qualifying Plan Assets” are assets held at a financial institution, and plan loans).  Most of our clients’ assets are “Qualifying Plan Assets”, but you must nevertheless make sure that you maintain the appropriate bond!  We look at this each year, but the minimum bond is supposed to be in place at the beginning of the year, and we might not recognize a deficiency until we do the review during the (next) year.

3)    Terminated participants

Terminated participants are paid according to the terms of your plan document – in most cases, after the end of the plan year in which they terminate, or later.  It’s a good idea to remind these people, when they leave, that they have plan benefits and should keep you posted as to their whereabouts.  (I know, they’re the last ones you want to keep in touch with, but it saves some problems down the road.  And no, you can’t just hope they disappear and use their money for other participants!)  We often have problems finding these “lost” participants, and as always, an ounce of prevention is worth a pound of cure.

4)    1099-R reporting

If your plan is on a self-directed platform, Form 1099-R distribution reporting will generally be handled by the investment custodian and you don’t have to do anything.  Otherwise, we will outsource that reporting for electronic filing…which means you don’t have to do anything except file copies that will be sent to you!  (However, if there was withholding during the year, you still have to file Form 945, which reconciles the deposits made during the year.  We will prepare this form for you with filing instructions.)

5)    Withholding on distributions (new for 2011)

If your plan is on a self-directed platform, tax withholding on distributions will generally be handled by the investment custodian and you don’t have to do anything (see 1099-R reporting above).  If not, we’ve had you make a tax deposit at your bank, or else write a check to Financial Agent (the Federal Reserve) and mailed it for processing.  That is changing in 2011 – all deposits must be made electronically.  We are exploring ways to assist you in this process, and will contact you if you are affected.  If you received a letter from the IRS urging you to enroll in EFTPS (Electronic Federal Tax Payment System), you can ignore it, for now.

Best wishes for a happy and healthy holiday season!

The rules could be clearer, and many of the specifics are not in the bill but are in the Technical Explanations accompanying the bill, but here’s what we think we know, and some pros and cons:

• A Roth conversion occurs when you transfer money from a pre-tax IRA (or now, a pre-tax plan account) into a Roth IRA (or Roth plan account).  Any money not previously taxed is taxable, although there are no penalties for premature withdrawal.  Under a special rule, the income on 2010 conversions may be recognized in 2011 and 2012.  Subsequent distributions from the Roth IRA/account are tax-free, as long as certain holding requirements are met, generally, 5 years and reaching age 59½.
• In qualified plans, a conversion of elective deferrals (401(k) money) may be made only after age 59½.  Some fully vested employer money, such as profit sharing and matching contribution accounts (but not “safe harbor” accounts) may be converted after aging for two years, or after the participant has been in the plan for five years.
• The plan must permit ongoing Roth deferral contributions – it can’t just allow for the conversion.
• The plan will have to be amended to permit conversions, although perhaps not in 2010.
• If the plan does not already permit distributions at age 59½ (or after aging 2 years or after 5 years of participation), it does not have to allow other distributions from the plan under similar circumstances.  That is, the age 59½ and 2 year/5 year rules can be restricted to Roth conversions only.
• All things being equal (current and future tax rates, earnings, etc.) Roth contributions are “better” than regular IRA or 401(k) contributions if you can afford to pay the taxes with other money.  Otherwise, they are neutral from a tax standpoint.  With Roth conversions, you generally can’t use the converted money to pay the taxes, so, generally speaking, if you can afford to do it, it is a good deal – again, all things being equal.
• You could push yourself into a higher tax bracket and make things “unequal” by dong a conversion.  And you should always think very carefully before incurring taxes that could be deferred.
• Many people think that tax rates will go up in the future, making the case for a Roth conversion now, but others are concerned that an insatiable need for tax revenue will cause Congress to break its promise that distributions from these accounts will be tax-free, making the case against a Roth conversion.
• IRA conversions may be “undone” as late as the extended date for filing a personal return (October 15 of the following year, including extensions).  This would be attractive where a conversion is done but the value of the investments subsequently decreases.  In-plan conversions may not be undone.

We’ll keep tuned as details continue to unfold.  Please contact us if you think you’re interested.

You may recall that plan tax return filings (Form 5500 series) must be filed electronically, starting with the 2009 plan year – for calendar year plans, those are the returns that are due this July 31.  As noted before, this will involve you, the plan sponsor, doing some on-line registration that will be, at best, a nuisance.  Under current rules, you must do a lot of the work yourself; the Department of Labor shares the job of collecting plan information with the IRS and is obsessed with making sure that plan sponsors really and truly understand their filing responsibilities and so far, are unwilling to change their rules.  We’re holding off on asking you to do anything yet because my pension group, the American Society of Pension Professionals and Actuaries (ASPPA), has made a last-ditch appeal to allow third parties such as ourselves to file for you, if you just sign a form (as is commonly done with personal tax returns).  We can’t wait too much longer but are certainly hoping the DOL sees the light.

By the way, “one-man” plans (these generally cover only one person but the term extends to plans also covering spouses, or plans only covering partners in a partnership) are not under the DOL’s jurisdiction because they don’t cover common-law employees, and are not required to file electronically.  The IRS just released the 2009 form so we can start preparing those filings soon.

2)    Roth conversions

Starting in 2010, individuals can convert a traditional IRA to a Roth IRA, regardless of income.  (Prior to 2010, conversions were allowed, but only for those below certain income thresholds.)  Under current law, qualified retirement plan participants may not similarly convert their pre-tax 401(k) accounts to Roth 401(k) accounts.  If you’re interested in this (and you might be, if you think tax rates are only going to go up), ASPPA is lobbying to include a Roth 401(k) conversion provision in one of the many bills working its way through Congress.

3)    IRS checklist and survey

Not long ago, the IRS posted a 401(k) plan checklist and fix-it guide (http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf#page=2) on its website.  The whole thing, with corrective actions, runs to 58 pages…we’ve included the checklist on the back, which actually only begins to cover some of the “compliance” work we do for your plan(s).  We firmly believe it’s best to avoid operational and document compliance errors and avoid the hassle and expense of correction; that’s why we ask for a lot of information and why it’s important that the information be accurate and timely.

On a related note, we’ve heard that the IRS will be conducting a “survey” with similar, or maybe the same questions, in order to evaluate plan compliance.  A response is required, and the IRS has made conflicting statements about whether the information will or will not be used for enforcement.  As always, it’s best to contact us if you receive any such communication!