Qualified Retirement Plans –ERISA Welfare Benefit Plans

1. Qualified Retirement Plans –ERISA Welfare Benefit Plans Presented by: Brad S. Arnold, J.D. Tycor Benefit Administrators, Inc. (610) 251-0670 barnold@tycorbenefit.com

2. Topics • Overview of PPA 2006 • Fiduciary Issues • Disclosure Rules • Portability • HSAs • New Limits • Roth 401(k)

3. EGTRRA Permanence In case you had forgotten – • IRA limits - $2,000 to $4,000 • 401(k) limits - $10,500 to $15,000 • Catch-up contributions - $5,000(qp) $1,000(IRA) • Higher contribution limits - $44,000 • Higher deduction limits – 25% profit sharing • Favorable treatment of salary deferrals • Higher usable compensation - $220,000 • Roth 401(k) • Portability rules

4. Non Pension EGTRRA Provisions • Still a 2010 Sunset • Estate Tax Prospects?

5. Automatic Enrollment • What is it? • 70% of employees will opt to participate in a 401(k) • Only 10% of employees will opt to not participate if automatically enrolled • 20% increase in overall participation through design • Why might it be important to Financial Planners? • Many participants will not realize they have a balance • Default investments

6. Deduction Rules • Major changes • Can now have a defined benefit plan AND a 6% profit sharing and fully deduct both • 401(k) deferrals can be added on top • Let’s look at one-life cases • Consultants and solo practitioners • No need for current income • Looking for maximum tax deduction • High Income

7. Example • Age 50 • Income: $150,000 • What’s available? • SEP: 25% of pay = $37,500 • Solo 401(k): profit sharing of $29,000, plus $15,000 elective deferral, plus $5,000 catch-up = $49,000 • Why is the profit sharing only $29,000?

8. Example – cont. • Defined Benefit: $110,000 (actuarially determined) • DB/DC Combo: Defined Benefit $110,000, plus 401(k) of $15,000, plus catch-up of $5,000, plus profit sharing of $9,000 = $139,000! • Advise clients who operate a business with no employees and are looking to maximize tax deductions to take advantage of the change in the law

9. How do you identify these clients? Factors to Consider • Age • Prior Income • Desire to save • Cost to implement • Complication/aggressiveness • Time horizon

10. Vesting Changes • Defined contribution plans can no longer use 5-year cliff vesting or 7-year graded vesting • Must use top-heavy schedules (or better) • What is top heavy? • Effective 1-1-2007

11. Defined Benefit Plan Changes • Major part of PPA • Funding reform • Will continue to erode large plan traditional DB market • Cash balance plan alternative will replace

12. 529 Plan permanence • Did you know that it wasn’t permanent? • Removed from EGTRRA sunset • Anti-abuse provision added • Pennsylvania • Full steam ahead on 529’s!

13. IRA Limits – now permanent *$500 increments

14. Active Participant status • Who is an Active Participant? • Phase out ranges • $10,000 ranges

15. Hardship Rule Expansion IRS safe harbor (expanded in Final 401(k) Regulations) • Medical expenses - Purchase of residence • Post-secondary tuition expenses - Prevent eviction/foreclosure • Burial or funeral expenses - Casualty damage to residence • PPA allows hardships for beneficiaries’ expenses • Need more guidance • Qualified Plans can be a source of money more often now

16. Fiduciary Issues • Investment Advice to Qualified Plans • Prohibited Transaction relief if: • Fees don’t vary based on funds chosen, or • Computer model used • Default plan investments • One of three alternatives: • Balanced fund • Life cycle funds, or • Individually managed • Notice required

17. Disclosure Rules • Notices • Funding, safe harbor, default investments, automatic enrollment • Benefit Statements: • DC plans – annual • If participant directed – quarterly • DB plans – at least every three years • Content – vesting, balance, permitted disparity, restrictions • Effective 1-1-2007, DOL will produce model by Aug 2007

18. Portability – Non-spouse rollovers • Prior to PPA, non-spouse beneficiaries could NOT rollover • Now they can - by direct rollover • Must go into an inherited IRA • Cannot be re-rolled • More guidance is needed on 70 ½ rules • Effective for distributions after 12/31/2006 • May want to wait if a death occurred in 2006

19. Portability – Rollovers to Charity • 2006 and 2007 only • Can rollover directly to a qualified charity with no taxation (IRC 170(b)(1)(A) with some exceptions) • Up to $100,000 in each year • Must be otherwise deductible • IRA accountholder must be 70½ • Time is of the essence! Only applies to 2006 and 2007 • If money is in a qualified plan, you may be able to roll money out to an IRA and then take advantage

20. Portability – Roth rollovers • Qualified Plan to Roth IRA rollovers permitted • Effective for distributions after 12/31/2007 • Pre-tax amounts will be taxed on rollover • Same tax rules as conversion of traditional IRA • $100,000 AGI requirement • When doing advanced planning, don’t forget TIPRA. In 2010, the AGI restriction will be lifted. Clients able to get distribution of qualified plan assets can convert them to ROTH using these rules.

21. Health Savings Accounts • What is it? • Health IRA • Accumulate tax preferred funds over time • What’s happening in the market? • Who can contribute to someone’s HSA? • Very large accumulations possible over time

22. Miscellaneous • Plan limitations sheet enclosed with outline • Savers credit extended • Roth 401(k) usage/Roth recommendations

23. Any Questions?