Changing the Game for Retirement Plan Sponsors – What You Need To Know

May 23, 2012 – IMA CFO Breakfast Roundtable – Collier County
May 24, 2012 – IMA CFO Breakfast Roundtable – Lee County
Sponsored by HBKS Wealth Advisors

Most CFOs have some responsibility for their company’s qualified retirement plan. Therefore, a CFO’s understanding of how the U.S. Department of Labor’s new fee disclosure regulations will impact your company, employees, and plan’s operation is critically important.

Become informed and take action now or you may put your company’s qualified retirement plan at risk for committing a prohibited transaction, which may trigger interest, penalties and endanger the viability of the plan. A change of this scale has never occurred before in the pension industry and has the potential to be disruptive to the marketplace. On a national basis, as many as 483,000 retirement plans and 72 million participants will be affected.

These two regulations including ERISA Regulation 408(b)(2) which goes into effect on July 1st and ERISA Regulation 404(a)(5) which takes effect on August 30th will shine a spotlight on fees charged by service providers against plan assets that impact participant returns. Together, they require specific disclosures to both sponsors of retirement plans and participants. After plan sponsors receive these disclosures on July 1, they will have to make an assessment as to whether not these fees are reasonable. Additionally, for the first time ever, actual hard dollar fees taken from participant accounts for various services will be disclosed to participants beginning this year.

At this roundtable, Dean Piccirillo will discuss the most pertinent aspects of these regulations which require close attention by CFOs and plan sponsors, specifically those going into effect this summer. Mr. Piccirillo is a Principal and Senior Financial Advisor who also heads the Retirement Plan Unit at HBKS Wealth Advisors, a regional firm affiliated with top 100 accounting firm Hill, Barth & King.

There is no charge to attend, but reservations are required.  Please click on one of the links at the top of the article for the Collier or Lee County event, or visit www.swflima.org.

The estates of wealthy individuals who died in 2010 didn’t pay any federal estate tax, but that situation has changed. Under the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” the federal estate tax, which disappeared for 2010, sprung back to life in 2011 and is imposed at the top rate of 35% of the estate’s value after the first $5 million. I hope, in this blog article, to provide some useful information via this brief overview of the new law.

Background

The modern estate tax dates back to 1916, when it was imposed at a rate of 10% on the portion of estates above $50,000. Over the following years, the rates and exemption amounts have varied, reaching a high of 77% from 1941 to 1976 with a $60,000 exemption amount.

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the first of the two large legislative packages that contain most of what are now commonly referred to as the Bush tax cuts. EGTRRA gradually lowered the maximum estate tax rate and substantially raised the applicable exclusion amount over the years 2002 through 2009. The maximum tax rate fell from 60% under prior law in 2001 (a 55% marginal rate on taxable estate values over $3 million plus a 5% surtax from $10 million to $17 million) to 45% in 2007-2009. EGTRRA repealed the estate tax completely for decedents dying in 2010. That led to several well-publicized instances in which famous people died in 2010 leaving multibillion-dollar estates that will pass to their heirs without paying so much as a penny in federal estate tax. However, all of those provisions were scheduled to sunset on December 31, 2010, meaning that if Congress had not acted, starting January 1, 2011, the estate tax would have sprung back at a level that no one seemed to want. Where the exclusion was $3.5 million ($7 million for couples) in 2009 – a level at which it affected relatively few households – it would have been $1 million ($2 million for couples) in 2011. The tax rate would also have risen, from a top rate of 45% in 2009, to a top rate of 55% in 2011.

New law

The new law brings back the estate tax, for 2011 and 2012 anyway. During 2011 and 2012, the top rate is 35%. For 2011, the exemption amount is $5 million per individual (indexed for inflation after 2011). At those levels, the vast majority of estates (all but an estimated 3,500 nationwide in 2011) will not be subject to any federal estate tax, and the tax will raise about $11.4 billion for the government. By way of comparison, the 55% tax with a $1 million exemption would have resulted in about 43,540 taxable estates in 2011, and raised about $34.4 billion. Tax historians would also note that except for the temporary repeal of the estate tax in 2010, the estate tax rate has not been less than 45% since 1931.

The new law also gives heirs of decedents dying in 2010 a choice of which estate-tax rules to apply – 2010′s or 2011′s. That’s important because although there is no estate tax in 2010, some inherited assets are subject to higher capital gains tax under the 2010 rules, a situation that actually raises the tax burden for some heirs. Inherited assets under the 2010 rules have a tax basis equal to the price when they were purchased (referred to in tax parlance as “carryover basis”) rather than their value at death. That could lead to a significant tax burden for heirs who sell assets such as stocks that had been held for many years and have greatly appreciated in value. Under the 2011 rules, by contrast, heirs are allowed to inherit assets with a “stepped-up basis.” While most heirs would choose the 2011 regime ($5 million exemption from both estate and generation-skipping tax and an unlimited step-up in the basis of assets to their current market value), the heirs of superrich decedents could find it more advantageous to elect the original 2010 law (limited step-up in the basis of assets and no estate tax). If the executor does not elect to have the original 2010 rules apply, the estate tax return’s due date will not be earlier than the date that’s nine months after the new law’s enactment date (Sept. 19, 2011).

For gifts made after December 31, 2010, the gift tax is reunified with the estate tax. Under the new law, the estate and gift tax exemptions are reunified in 2011, which means that the $5 million estate tax exemption will also be available for gifts. The law in effect prior to 2010 provided a $3.5 million lifetime exemption for estates, but only $1 million for gifts. The gift tax rate, starting in 2011, is 35%. The exemption from the generation-skipping tax (GST) – the additional tax on gifts and bequests to grandchildren when their parents are still alive – also rose to $5 million from the $1 million it would have been without the new law. The GST tax rate for transfers made in 2011 and 2012 is 35%.

From a planning standpoint, a nice feature of the new law is that it makes it easier to transfer the $5 million exemption to a surviving spouse, so married couples can shield $10 million of their assets from taxes. In the language of tax professionals, the estate tax exemption will be “portable.”

I hope this article provided useful information or was at least thought provoking. If you would like more details about the estate tax or any other aspect of the new law, please do not hesitate to call me or any other principal at HBK.

J. Michael Sowers, CPA is a Principal with Hill, Barth & King LLC in the Fort Myers, Florida office and has extensive experience in accounting, auditing and litigation support. He joined the firm in 2010 when Gilbert, Wallace, Stewart, Stramel & Sowers, P.A. merged with HBK.  Mike can be contacted by phone at 239-482-5522 or email at msowers@hbkcpa.com.

In addition to extending the Bush tax cuts, providing relief from the AMT, and cutting the payroll tax by two percentage points, the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (Tax Relief Act) extends a host of other important tax breaks for businesses and individuals. I’m writing to give you an overview of these key tax breaks that were extended by the new law. Please call our office for details of how the new changes may affect you or your business.

Individual tax relief

The following tax breaks for individuals that expired at the end of 2009 have been retroactively reinstated by the Tax Relief Act and extended through 2011.

• The election to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes
• The above-the-line deduction for qualified higher education expenses
• The $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary materials used by the educator in the classroom
• The increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes
• The provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year. Individuals also will be allowed to make charitable transfers during January of 2011 and treat them as if made during 2010
• The look-thru rule for certain regulated investment company (RIC) stock in determining the gross estate of nonresidents
• The increase in the monthly exclusion for employer-provided transit and vanpool benefits to equal that of the exclusion for employer-provided parking benefits

In addition, the new law extends for an additional year (i.e., through 2011) the rule allowing premiums for mortgage insurance to be deductible as qualified residence interest.

Business tax relief

On the business side, the following business tax breaks that expired at the end of 2009 have been retroactively reinstated and extended through 2011 by the Tax Relief Act.

• The research and development credit
• 15-year writeoffs for qualified leasehold and retail improvements, and restaurant buildings (and certain improvements to such restaurant buildings)
• 7-year writeoffs for certain motorsports racetrack property
• The employer wage credit for activated military reservists
• The active financing exception from the Code’s Subpart F rules for a controlled foreign corporation predominantly engaged in the conduct of a banking, financing, or similar business
• Look-through treatment of payments between related controlled foreign corporations
• The Indian employment credit
• The new markets tax credit
• Accelerated depreciation for business property on an Indian reservation
• The railroad track maintenance credit
• The special expensing rules for certain film and television productions
• The mine rescue team training credit
• The election to expense advanced mine safety equipment
• Expensing of environmental remediation costs
• The deduction allowable for domestic production activities in Puerto Rico
• The American Samoa economic development credit
• The rules exempting from gross basis tax and from withholding tax the interest-related dividends and short-term capital gain dividends received from a RIC by certain foreign persons (extended to apply to tax years of a RIC beginning before 2012)
• The inclusion of a RIC within the definition of a “qualified investment entity” under the provisions of the Foreign Investment in Real Property Tax Act as codified in Code Sec. 897
• The enhanced deduction for contributions of food and book inventories, and computer equipment for educational purposes
• A liberal rule for S corporations making charitable donations
• The special rules for interest, rents, royalties and annuities received by a tax-exempt entity from a controlled entity
• Empowerment zone tax incentives
• Tax incentives for investments in the District of Columbia
• The work opportunity credit (extended for four months (through the end of 2011))
• Qualified zone academy bonds

In addition, the new law extends for an additional year (i.e., through 2011) the temporary exclusion of 100% of gain on the sale of certain small business stock.

Energy provisions

The following energy provisions were extended by the Act (through 2011).

• The credit for manufacturers of energy-efficient new homes
• Incentives for biodiesel and renewable diesel
• The credit for refined coal facilities
• Excise tax credits and outlay payments for alternative fuel and alternative fuel mixtures
• The special rule to implement FERCs and State electric restructuring policy
• Suspension of the limitation on percentage depletion for oil and gas from marginal wells
• Grants for specified energy property in lieu of tax credits
• Provisions related to alcohol used as fuel
• The energy efficient appliance credit
• The credit for energy-efficient improvements to existing homes
• The 30% investment tax credit for alternative vehicle refueling property

Disaster relief provisions

The following disaster relief provisions are extended through 2011.

• New York Liberty Zone tax-exempt bond financing
• Increased rehabilitation credit for structures in the Gulf Opportunity Zone
• Low-income housing credit rules for buildings in Gulf Opportunity Zones
• Tax-exempt bond financing for the Gulf Opportunity Zones
• Bonus depreciation deduction applicable to specified Gulf Opportunity Zone extension property

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

Keith A. Veres, CPA is a Principal with Hill, Barth & King LLC in the Fort Myers, Florida office.   Keith has worked as a CPA helping clients in Fort Myers, Cape Coral and other Southwest Florida communities for the last 8 years.  He has been with Hill, Barth & King LLC, a top 75 accounting firm, since 1991.  Keith can be contacted by phone at 239-482-5522 or email at kveres@hbkcpa.com.

On November 26th the Internal Revenue Service issued Notice 2010-84, providing guidance under Section 402A(c)(4) relating to rollovers from Section 401(k) to designated Roth accounts in the same plan.

The guidance, which also generally applies to rollovers from Section 403(b) plans applies to contributions after Sept. 27, 2010. The guidance is in the form of questions and answers for sponsors of these plans, and provides details on when amendments to the plan are required, the tax consequences of in-plan Roth rollovers, and what exceptions are permitted.

Specific Guidance for 401(k) Roth Rollovers

• For a participant in a 401(k) plan who is still working, an in-plan Roth rollover from the participant’s pre-tax elective deferral account is permitted only if the participant has reached age 59, has died or become disabled, or receives a qualified reservist distribution as defined in Section 72(t)(2)(G)(iii).
• The 20 percent mandatory withholding requirement does not apply to an in-plan Roth direct rollover
• In-plan Roth direct rollovers are not treated as a distribution in situations involving plan loans, spousal annuities, participant consent before an immediate distribution of an accrued benefit in excess of $5,000, and in situations involving elimination of optional forms of benefit.
• A plan that offers in-plan Roth rollovers must include a description of this feature in the written explanation the plan provides pursuant to Section 402(f) to an individual receiving an eligible rollover distribution.
• A participant who elects an in-plan Roth rollover cannot later unwind the in-plan Roth rollover, as can be done with rollovers to Roth IRAs.
• The taxable amount of the in-plan Roth rollover must be included in the participant’s gross income.

The guidance also stated that a plan amendment providing for in-plan Roth rollovers in a 401(k) plan is not required to be adopted by the end of the 2010 plan year. Instead, the deadline for adopting a plan amendment is extended to the later of the last day of the plan year in which the amendment is effective or Dec. 31, 2011, provided that the amendment is effective as of the date the plan first operates in accordance with the amendment.

James M. (Jim) Rosa, CPA, PFS is the Principal in charge of the Tax Department at Hill, Barth & King LLC.  Jim has worked as a CPA helping clients in Fort Myers, Cape Coral and other Southwest Florida communities for the last 23 years. He has been with Hill, Barth & King LLC, a top 75 accounting firm, since 1986.

R. Dean Piccirillo, financial advisor and principal with HBK Sorce Financial, LLC, is participating as a panelist for The Center for Due Diligence (CFDD) 2010 Advisor Conference held October 6-8, 2010 at the Fairmont Chicago-Millennium Park Hotel in Chicago, Illinois.

Piccirillo is one of four panelists for the session entitled “The Intersection of Inbound Marketing, New Media and SALES” which will address social media strategy, blogging, compliance issues, and practical tools for managing online efforts.  Piccirillo is one of a handful of financial advisor bloggers embracing the use of social media for business.

Read more here…

by R. Dean Piccirillo, CFP®, CRPS®, AIFA®
Principal/Senior Financial Advisor
HBK Sorce Financial LLC

Currently, for Americans living on $45,000 or more per year during retirement, 18% of that income is generated from personal savings and investments. For millions of Americans, the personal savings and investments component of our income consists largely of Individual Retirement Accounts (IRA). IRAs are tax deferred personal retirement funds that allow you to save up to $5,000 per year ($6,000 if you’re age 50 or older). Tax deferral means you’re not currently paying income taxes on dollars earned inside of these investment vehicles; instead, the tax is deferred until you withdraw your money. Consequently, your money is working harder for you during the accumulation phase.
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