The Week That Shook Wall Street: Inside the Demise of Bear Stearns discusses the details behind the sale of Bear Stearns to J.P. Morgan Chase & Co. Since it is estimated that about 30% of Bear Stearns were employee owned, the issue of being Too Concentrated in Employer Stock is again being revisited. The Job/Stock Double Whammy discusses how employees that are heavily invested in employer stock are at risk of losing their jobs and their savings. It mentions how owning company stock was a part of their culture, as well as for Lehman Brothers Holdings Inc. and Merrill Lynch & Co., who reportedly are each more than 25% employee owned. The article also contains comparisons to Enron and Lucent.
In December we wrote about how the Supreme Court started hearing arguments in the LaRue Case. The Supreme Court finally issued their ruling in LaRue v. DeWolff, Boberg & Assoc. Inc., No. 06-856 (Feb. 20, 2008) (PDF file).
Prior to 2008, a two-step process was required to move funds from a pre-tax retirement plan to an after-tax IRA. First, the funds were rolled to a traditional IRA (pre-tax). Second, the traditional IRA (pre-tax) was converted to a Roth IRA (after-tax) and included in gross income (subject to the $100,000 AGI limitation).
While the new rules provide for a direct rollover (still not subject to IRC Section 72(t) - 10-percent additional tax on early distributions from qualified retirement plans), the distribution must still be included in income and the AGI limitation still applies (until 2010). For more information on rollovers and conversions, here are links to the IRS Rollover Chart and Conversion Eligibility - Find out if you're allowed to convert to a Roth IRA.
IRC Section 402(f) Notice
The article also reminds you to make sure your 402(f) Notice (required by IRC Section 402(f) - Written explanation to recipients of distributions eligible for rollover treatment) has been updated. It also notes areas that the IRS has not recently updated their Safe Harbor Explanation - Certain Qualified Plan Distributions:
"The IRS has not updated its model 402(f) notice for the non-Roth plan to Roth IRA law change. In addition, the Service has not yet updated its model 402(f) notice to take into account distributions from Roth 401(k) plans or other expanded rollover options (such as rollover of after-tax contributions to a 403(b) plan). Nor has the IRS issued a model notice for a nonspouse beneficiary entitled to roll over a death distribution."
FYI - The automatic rollover requirements under IRC Section 401(a)(31) - Direct transfer of eligible rollover distributions are also not included in IRS Notice 2002-3 - Safe Harbor Explanation - Certain Qualified Plan Distributions.
UPDATE 5/10/08: The Safe Harbor Explanation provided in IRS Notice 2002-3 also does not include the PPA change that changed the notice effective time from 90 days to 180 days. This is also discussed in IRS Issues Additional PPA Guidance
Distribution Notices. PPA requires changes to distribution notices (including joint and survivor annuity rule notices) given in plan years that begin after December 31, 2006, regardless of the actual distribution date. Under the PPA changes, a distribution notice may remain in effect for up to 180 days instead of 90 days as under pre-PPA law. In addition, the notice must contain a description of the consequences of a participants failure to postpone the distribution. The plan must modify its distribution notices to provide this description for any notice given after the 2006 plan year. However, until 90 days after the IRS issues regulations on the subject, the plan administrator need only make a reasonable attempt to comply. The Notice provides a safe harbor for the description of the consequences statement. To meet the safe harbor, the description must be written in a manner reasonably calculated to be understood by the average participant. In the case of a defined contribution plan, it must include: (i) a description of the plan investment options and fees available if distribution is deferred; and (ii) the portion of the SPD that contains any special rules that might affect materially the participants decision to defer. The Notice does not give any example of the latter, but this might include special taxation available such as income averaging. In the case of a defined benefit plan, the notice must include the same SPD material information and, in lieu of investment information, it must describe how much larger benefits will be if the participant defers distribution. That description may be one that includes the financial effect of deferral as described under Treas. Reg. §1.417(a)(3)-1(d)(2)(i).UPDATE 6/11/08: Is Your 402(f) Safe Harbor Special Tax Notice Out of Date? discusses how several law changes must be incorporated into the Safe Harbor Explanation :
- The automatic rollover requirements under IRC Section 401(a)(31) - Direct transfer of eligible rollover distributions
- Information regarding Rollovers to Roth IRAs, as provided by IRS Notice 2008-30 -Miscellaneous Pension Protection Act Changes
- Changing the days a 402(f) Safe Harbor Special Tax Notice may remain in effect from 90 to 180, as provided by Pension Protection Act of 2006 (PPA) (Public Law 109280Aug. 17, 2006)
- "Rollover rules for Roth 401(k) and 403(b) deferrals"
Here is a link to the Relius Special Tax Notice that has been updated for the law changes.
UPDATE 6/12/08: Reporting a Rollover to Roth IRA on IRS Form 1099-R
This post discusses an example. In the example, the participant is 50 years old, is requesting a distribution of his $100,000 account balance, and is electing that $25,000 be withheld for voluntary withholding. The article discusses how this scenario requires two IRS Forms 1099-R:
The first Form should report $75,000 as a gross (Box 1. Gross Distribution) and taxable (Box 2a. Taxable Amount) distribution and code GDirect rollover and rollover contribution (Box 7. Distribution Code(s)) to indicate the rollover. Please note that it is unusual for an IRS Form 1099-R with a code G distribution to also report taxable income. Also note that this portion of the distribution is a rollover and is not subject to the IRC Section 72(t) - 10-percent additional tax on early distributions from qualified retirement plans.
The second Form should report $25,000 as a gross (Box 1. Gross Distribution) and taxable (Box 2a. Taxable Amount) distribution and as withholding in Box 4. Federal Income Tax Withheld. Since this portion is not a rollover, code 1Early distribution, no known exception (Box 7. Distribution Code(s)) should be used to indicate the taxpayer is under age 59 ½ and is subject to IRC Section 72(t) - 10-percent additional tax on early distributions from qualified retirement plans.
Rangel's Corporate-Tax Bill May Frame Future Debate discusses how the "top tax writer is calling for a cut in the corporate income-tax rate, but would replace the lost revenue with other tax changes that would hit businesses." While the proposal is unlikely to make it through Congress, it sets the stage for a 2009 debate:
The ESOP Promotion and Improvement Act of 2007 (S. 1322) was introduced on May 7, 2007 by Sen. Blanche Lincoln [D-AR] and now has four co-sponsors: