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1. Pension Protection Act of 2006
On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006. The President declared, “this is the most sweeping reform of America’s pension laws in over 30 years.” The Act focuses on pension laws as they relate to define contribution and define benefit plans, as well individual retirement accounts. The Act also addresses several non-pension related items such as charitable contributions. This summary is not intended to be a complete and comprehensive analysis of the Act, but rather a brief review of the components of the Act as they relate to 401(k) plans and other related retirement and employee benefits. The highlights of the Act, as they relate to 401(k) plans and other employee benefits are as follows:

· Increasing access to High-Quality, Professional Investment Advice

· Encouraging Greater Individual Savings for Retirement, Personal Care

o Automatic Enrollment in Defined Contribution Plans

o Enhancing Retirement Savings in IRAs

o Improved Benefits for Members of the Military

o New Benefits for Public Safety Employees

o Ensuring Affordability of Health Care and Long-Term Care

Increasing Access to High-Quality, Professional Investment Advice

Now more than ever, rank-and-file workers need access to high quality investment advice to help steer them through today’s maze of investment options. What many workers may not realize, however, is that outdated federal rules discourage employers from providing workers with access to professional advice. As a result, millions of rank-and-file workers today are needlessly denied tools that could help them make better investment decisions to enhance their retirement security. Thousands of rank-and-file Enron and WorldCom employees might have been able to preserve their retirement savings if they’d had access to a qualified adviser who would have warned them in advance that they needed to diversify.

The Pension Protection Act includes a comprehensive investment advice proposal that has passed the House three times in the last several years with significant Democrat support, twice in the 107th Congress and once in the 108th Congress. It allows employers to provide rank-and-file workers with access to a qualified investment adviser who can inform them of the need to diversify and help them choose appropriate investments. The bill also includes tough fiduciary and disclosure safeguards to ensure that advice provided to employees is solely in their best interest.

Important Fiduciary Safeguards. The Pension Protection Act includes important fiduciary safeguards and new disclosure protections to ensure that workers receive quality advice that is solely in their best interests. Under the bill, only qualified “fiduciary advisers” that are fully regulated by applicable banking, insurance, and securities laws may offer investment advice. This ensures that only qualified individuals may provide advice. Under the bill, investment advisers who breach their fiduciary duty will be personally liable for any failure to act solely in the interest of the worker, and may be subject to civil and criminal penalties by the Labor Department and civil penalties by the worker, among other sanctions. Fiduciary standards are the highest form of duty and loyalty the law provides. In addition, existing federal and state laws that regulate individual industries will continue to apply.

Comprehensive Disclosure Protections. In order to provide advice under the Pension Protection Act, advice providers must disclose in plain, easy-to-understand language any fees or potential conflicts. The bill requires advisers to make these disclosures when advice is first given, at least annually thereafter, whenever the worker requests the information, and whenever there is a material change to the adviser’s fees or affiliations. The disclosure must also be reasonably contemporaneous with the advice so that employees can make informed decisions with the advice they receive.

Clarifies the Role of the Employer. The Pension Protection Act also clarifies that employers are not responsible for the individual advice given by professional advisers to individual participants; this liability is assumed by the individual adviser. Under current law, employers are discouraged from providing this benefit because liability issues are ambiguous and employers may be held liable for specific advice that is provided to their employees. Under the bill, employers will remain responsible under ERISA fiduciary rules for the prudent selection and periodic review of any investment adviser and the advice given to employees.

Voluntary Process. The bill does not require any employer to contract with an investment adviser and no employee is under any obligation to accept or follow any advice. Workers will have full control over their investment decisions, not the adviser.

Encouraging Greater Individual Savings for Retirement, Personal Care.
A growing number of workers have significant retirement savings in defined contribution retirement plans. These plans allow an employee to set aside a certain amount or percentage of money each year for his or her retirement security, and their portability and ease of tracking make them an increasingly viable retirement security option. The Pension Protection Act makes several common sense reforms to the defined contribution system to increase participation, while making permanent a number of worker-friendly reforms set to expect over the next several years.

Automatic Enrollment in Defined Contribution Plans. Under current law, workers who have access to a defined contribution pension plan through their employer must elect to participate by enrolling in the plan and making investment choices. Studies show that many employees who have access to employer pension plans never enroll. Many pension experts believe that pension participation would increase if employees were automatically enrolled in the plan and given the option to opt out.

The Pension Protection Act encourages employers to offer automatic enrollment arrangements by establishing several non-discrimination rules and requirements for vesting and matching contributions that employers must meet to offer an automatic enrollment arrangement. These rules include: (1) employee contributions must equal to three percent of pay in the first year, increasing annually by one percentage point until reaching six percent of pay (up to a maximum of 10 percent); (2) employer matching contributions must be at least 50 percent. Alternatively, employers may contribute two percent of pay on behalf of all employees regardless of whether employee contributions are made; and (3) employer contributions must fully vest after two years.

Enhancing Retirement Savings in IRAs. A 2001 tax relief law includes several provisions to enhance pension participation and retirement savings. For example, the law increased annual contribution limits for Individual Retirement Accounts (IRAs) and qualified pension plans, created additional “catch-up” contributions for individuals age 50 and older, and created incentives for small employers to offer pension plans. These reforms are scheduled to expire in 2010, but the Pension Protection Act would make them permanent.

Another 2001 reform allows eligible individuals who make contributions to an IRA or qualified pension plan receive a federal “match” in the form of an income tax credit for the first $2,000 of annual contributions. The credit – known as the “Savers’ Credit” – equals 50 percent of the contribution for individuals with adjusted gross incomes (AGI) of $15,000 or less ($30,000 or less for married couples). The credit phases down to zero for individuals with AGI of $25,000 or less ($50,000 or less for married couples). The credit is scheduled to expire after December 31, 2006, but the Pension Protection Act would make this reform permanent as well.

Finally, the bill directs the Internal Revenue Service (IRS) to provide for “split tax refunds.” In other words, taxpayers who are due a federal income tax refund may choose to have the IRS deposit a portion of that refund directly to an IRA chosen by the taxpayer. The option would be made when the individual files his or her tax return.

Improved Benefits for Members of the Military. Under current law, early distributions from an IRA or pension plan are subject to a 10-percent penalty if the distribution is made prior to death, disability, or attainment of age 59 and a half. The bill waives this penalty for military reservists and national guardsmen who are called to active duty for at least 180 days. Withdrawn amounts may be repaid to the IRA or pension plan within two years of the distribution without regard to the annual contribution limits.

Furthermore, the bill allows combat pay to be treated as earned income the purposes of IRA eligibility. As a result, military personnel whose only source of income is combat pay may make IRA contributions. As provided under current law, combat pay will continue to be tax-free.

New Benefits for Public Safety Employees. State and local governments may offer employees a Deferred Retirement Option Plan (DROP) as a feature of a defined benefit pension plan. If an employee retires early, he or she may choose to receive annuity payments from the plan, or the DROP feature may be exercised. Under this feature, the employee receives individual account credits not to exceed the pension benefit. Employees who exercise this option give up their right to accrue additional benefits under the pension plan if they continue to work after the DROP election is made. Distributions from the DROP are subject to the 10-percent early distribution penalty. However, the Pension Protection Act waives this 10-percent penalty for distributions made by public safety employees in connection with a DROP benefit. The waiver applies only to amounts that would have been payable as an annuity had the employee retired and taken defined benefit annuity payments. The provision applies to state and local police officers, firefighters, or emergency medical employees.

Under current law, distributions from qualified pension plans are taxable if the contributions were made on a pre-tax basis. The Pension Protection Act allows public safety officers who retire or become disabled to make tax-free distributions of up to $5,000 annually from their pension plans if the distribution is used to purchase health or long term care insurance. The benefit is available to police officers, fire fighters, chaplains, rescue squad members, and ambulance personnel.

Ensuring Affordability of Health Care and Long-Term Care.
In another common sense reform, the Pension Protection Act creates combination insurance products for long-term care, life, and other insurance products, allowing consumers to bundle various insurance protections into a single product. Current law discourages the development of combination insurance products. Such products may be more attractive to consumers because they provide individuals with various insurance protections in a single product, while also providing a saving feature.



2. Selecting an Auditor
Having practiced as a CPA in California for over 20 years it has become quite obvious to us that it is very difficult to evaluate CPA firms since all firms tend to have excellent credentials. Accordingly, this decision usually reduces itself to the lowest common denominator - price. Let us give you what we believe are the three key issues in selecting an audit firm in addition to price.

1. Has the firm attended the AICPA National Conference on Employee Benefit Plans? This is the AICPA's second largest conference and it is designed for those firms who are serious about auditing employee benefit plans. The conference is well attended by the Department of Labor and Internal Revenue Service and provides participants with invaluable access to these agencies as well as other firms and professionals practicing in this area. In our conversations with local DOL and IRS personnel, they are quite surprised that we would know and have had conversations with the national leaders of their respective agencies. Simply put, if the firm did not attend this conference then they should be eliminated as a viable candidate

2. Our experience has been that the most efficient and complete audit will occur when the auditor has a close working relationship with your plan's third party administrator (TPA). After all, it is your TPA who designed your plan and maintains all of the plan's accounting records. Knowing how the TPA performs their duties, the controls and reports that are in place, and having a personal relationship with those individuals assigned to your account are, in our opinion, the key elements of complete audit. Wouldn't you want your TPA and CPA to operate as a team rather than as incompatible firms?

3. How many plans does the firm audit? We think it is quite evident that a firm that audits 50 plans or more  is substantially more committed and better experienced (from the partner on down to the junior accountants) than a firm that audits 10. By far the most common complaint among TPA's is that they have to deal with so many inexperienced junior accountants in these audits. Why should you endure this from any professional service provider?

3. Deposits of Participant Deferrals

When are employee deferrals required to be deposited into the Plan?

The Department of Labor (DOL) requires the plan sponsor to remit participant deferrals to the Plan as soon as those deferrals can be segregated from the plan sponsor’s assets, but no later than the 15th business day of the following month (29 CFR 2510.3-102). The timing of participant deferrals into the plan continues to be one of the Department of Labor’s top priorities. In fact, failure to comply with this rule will require the plan sponsor to reimburse the participants for lost earnings on those deferrals as well as result in the plan sponsor paying an excise tax on the value of those funds held by the plan sponsor. The DOL requires the plan sponsor to attest to the timing of such deposits on Form 5500 (Schedule H, part IV, 4a).

Let’s look at the rule – “remit participant deferrals as soon as those deferrals can be segregated from the plan sponsor’s assets.” As soon as the plan sponsor knows the amount of the deferral by participant, then the assets have been segregated and need to be deposited into the plan. According to the DOL, they will permit the plan sponsor to remit deferrals to the plan on a "reasonable and consistent basis". For example, if the plan sponsor remits participant deferrals regularly on the fourth business day following the end of a payroll cycle, the DOL will consider that reasonable. However, if the plan sponsor remits deferrals in an inconsistent and haphazard manner, then the plan sponsor bears the risk that deferrals made after the earliest date possible for deposit could be considered late by the DOL. The plan sponsor will have to justify why they can make payroll deposits within three business days but can’t remit deferrals to the plan on at least a similar basis.

The second part of the rule – “but no later than the 15th business day of the following month” is not a safe harbor provision for depositing deferrals. What the DOL is saying is that in the event deferrals cannot be segregated from the plan sponsor’s assets, they nevertheless must be deposited to the plan by the 15th business day of the following month.

Common mistakes to avoid

!Depositing deferrals for more than one payroll period at one time.

!Holding deposits until the payroll person returns from vacation.

!Depositing the funds into a bank account in the name of the plan without following up to determine that the funds are timely invested as directed by the participant.

What to do if you have late deferrals. First of all, realize that it is not the end of the world and most likely will not cause the plan to be disqualified. You will have to reinstate lost earnings to the participants (even if the plan had negative earnings), pay a very small excise tax (Form 5330), and disclose on Form 5500 that late deposits were made and the corrective action taken.

Please note that our analysis of the interpretation of this rule is simply that. We have found that the Department of Labor has interpreted this rule in an inconsistent manner. The DOL stated that they expect to issue a release giving plan sponsors a "safe harbor" period of time to remit participant deferrals. However, the DOL has only issued one for small plans (less than 100 participants).

4. Small Plans may be required to be audited.

Generally, small plans (fewer than 100 participants at the beginning of the plan year and who are filing Schedule I to Form 5500) are exempt from the audit requirement. However, effective for plan years beginning on or after April 18, 2001, this exemption is only available for those plans which have the following attributes:

1. At least 95% of the Plans assets are “qualifying plan assets.”

2. Any person who handles “nonqualifying plan assets” is bonded in accordance with Section 412. The amount of the bond may not be less than the fair market value of the nonqualifying assets.

3. Participants are notified in the summary annual report the names of the regulated institutions holding qualified plan assets and the amounts held, and the amount of fidelity bond coverage and who the bonding company is.

Qualifying Plan Assets are:

1. Any loan meeting the requirements of ERISA Section 4087(b) (1). These are participant loans.

2. Any assets held by a bank, insurance company, registered-broker dealer, or other organization authorized to be trustee of an IRA.

3. Investment and annuity contracts issued by an insurance company qualified to do business in that state.

4. In the case of an individual account plan, any assets in the account of a participant in which the participant has the opportunity to exercise control and is furnished, at least annually, a statement from a regulated financial institution of the assets held and the amount of such assets.

5. Qualifying employer securities (publicly traded stock, notes, or other securities) as defined in ERISA Section 407(d)(5) and related DOL Regulations.

Example
The Bottoms Up 401(k) Plan, has $500,000 in assets, comprised as follows:

$400,000 in investments in various mutual fund products, (80%)

$25,000 in qualifying employer securities, ( 5%) and

$75,000 in a real estate limited partnership. (15%)

Since the only non-qualifying assets represent 15% of the plan’s assets, a fidelity bond of at least $75,000 would be required.

5. Fidelity Bond
The Department of Labor's Rules and Regulations require that the plan sponsor maintain a fidelity bond at the lesser of 10% of net plan assets at the beginning of the year or $500,000. What has been troubling the Department of Labor is that plan sponsors have been getting fiduciary insurance rather than a fidelity bond. Generally, fiduciary insurance covers the fiduciaries from breach of their fiduciary duties with the exception of any fraud or other criminal act. Since these acts are exempted from coverage, fiduciary insurance is not an acceptable alternative to fidelity bonding coverage. A fidelity bond will generally cover all defalcations including fraud and criminal acts, and not be subject to a deductible. Moreover, the Plan must be named as a covered party under a fidelity bond.

6. Participant Distributions
The following rules apply to all eligible rollover distributions from a qualified retirement plan:

A participant must be provided with a special tax notice and information describing the various distribution options offered by the plan. Such a participant must then submit a written election to receive a plan distribution before they can be paid out of the plan. A distribution package that contains the notice, information and election forms should be prepared.

A participant with an account balance of $5,000 or less can be cashed-out of the plan if he or she does not return a distribution election. Such a cash-out would require Federal Income Tax withholding. Check with your State for any State Tax withholding requirements.

If an eligible rollover distribution is not rolled over to an IRA or another retirement plan, 20% must be withheld for Federal Income Tax.

If an eligible rollover distribution is not rolled over to an IRA or another plan, 2% must be withheld for California State Tax unless the participant completes a written waiver of California withholding. Check with other States for any State Tax withholding requirements.

Income Tax withheld must be deposited immediately, or the IRS and/or State will assess interest & penalties. The Federal withholding must be transmitted electronically to the IRS via a Federal Depository Bank. If a check is sent directly to IRS, IRS will assess a penalty.

If Federal tax is withheld from distributions during the calendar year, IRS Form 945 must be filed. Check with your State for any filing requirements when State tax is withheld.


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