May 2007 Pension Plan tip of the month...

NEW SPECIAL TAX NOTICE

The Special Tax Notice is given to any Retirement Plan Participant taking a withdrawal and summarizes distribution options for retirement plan accounts. The Notice is updated periodically as distribution rules change. The NEW version has added wording to incorporate some recent changes including the Roth 401(k) rollover rules. Roth 401(k) accounts were introduced in January of 2006.

The New Special Tax Notice may be found on our website www.TPAGroup.com by clicking on the Special Tax Notice Link or by clicking the link at the end of this email. The 401(k) Plan record keeper may also supply this notice.

Roth 401(k) Rollovers

The PREVIOUS version of the Special Tax Notice stated that designated Roth account could not be rolled over to a Roth IRA or to an employer plan.

Direct Rollovers

The NEW version addresses the new rollover rules of designated Roth 401(k) amounts.

A participant may request a Direct Rollover to an employer retirement plan if that plan accepts designated Roth 401(k) amounts. If the plan does not accept designated Roth 401(k) rollovers, the participant may request a rollover to a Roth IRA. The Plan Administrator will record how much of the Roth 401(k) distribution is the taxable portion and how much is the after-tax Roth contribution. Once the Roth 401(k) rollover is complete to a Roth IRA these amounts cannot later be rolled over to an employer plan.
A Direct Rollover of designated Roth contributions may be done from a qualified 401(k) plan, 403(a) annuity plan or a section 403(b) tax-sheltered annuity plan to another qualified 401(k) plan, a section 403(a) annuity plan or a section 403(b) tax-sheltered annuity. The other plan or annuity must provide separate accounting for amounts rolled over, including separate accounting for the designated Roth contributions (plus earnings).

Designated Roth 401(k) contributions cannot be rolled over to a government 457 plan.

Indirect Rollovers

If a participant has taken a cash out in a lump sum of the Roth 401(k) designated accounts and then decides to rollover the funds, the participant can roll over all or part of their designated Roth amounts to their Roth IRA or to an employer plan within 60 days after receipt of the payment. For designated Roth amounts, if they decide to roll over less than 100% of these amounts, the amounts rolled over to the Roth IRA will first consist of the taxable portion of the designated Roth amounts. Example #2 in the Special Tax Notice explains how the taxation will work on a partial Roth IRA rollover.

Mandatory Cash out

Another rule that is incorporated into the Notice concerns the mandatory cash out rule that pertains to most 401(k) plans. This rule applies if a participant does not respond to the 401(k) distribution paperwork from the previous employer. The Plan Administrator may be required to direct payment to a traditional IRA or a Roth IRA it establishes. The payment is subject to this rule and the Plan Administrator is required to provide information to the participant regarding the IRA(s) established.

Non Spousal Rollover

Also added to the Notice, effective January 1, 2007, in the event of death, a Direct Rollover of non-Roth amounts can be made to an alternate designated beneficiary other than the spouse. This alternate beneficiary designation must be made and approved by the spouse prior to the death of the participant. The payment will be made to an account that is titled "Inherited" IRA. Non-spouse beneficiaries cannot roll over a distribution to another qualified retirement plan.

Employer Securities

If a qualified Roth 401(k) distribution includes employer securities, the distribution is not includible in gross income and the basis of each security distributed is the fair market value of the security on the date of the distribution. In such case, a participant will receive capital gains treatment when you subsequently sell the security, to the extent of any post distribution appreciation.

http://www.tpagroup.com/Special%20Tax%20Notice.pdf