 |  | Home  |  | | About Us | | | Order Products | | | Press Center | | | Customer Service | | | Career Opportunities | |
|
CCH can assist you with stories, including interviews with CCH subject experts.
Also, the 2006
Link to special CCH Tax Briefings on key topics from 2005:
| |
Retirement Revisited: Roth 401(k) Gains Headlines While Automatic Enrollment Gains SteamBankruptcy Law Protects Your Retirement Nest Egg, So Long as Nesting in Right Plans(RIVERWOODS, ILL., January 2006) – New Roth 401(k) plans were expected to ring in the New Year in a big way, but it is more of a pop than a bang as employers seem to be adopting a wait-and-see approach before adding this choice to their retirement plan options, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and pension law information, software and services (tax.cchgroup.com). However, participation in plain-old pre-tax 401(k) plans has gotten a shot in the arm, thanks to more employers now providing automatic enrollment programs to help boost retirement saving by employees. “Roth 401(k) plans do have a limited, though potential place in retirement planning, so they are worth employers evaluating. However, the potential application of Roth 401(k) plans is limited. The real issue is just getting employees to save, which the automatic enrollment programs are effectively addressing,” said CCH Pension Law Analyst Glenn Sulzer, JD, co-author of Retirement Plans for Individuals and Small Businesses, adding that surveys show about 20 percent of employers offering 401(k) plans now have automatic enrollment. Whereas traditional enrollment requires that an employee submit a request to participate, automatic enrollment enrolls all eligible employees and starts allocating deferrals to pre-determined investment targets. Employees who do not want to participate must take the initiative to file a request to be excluded from the plan. Meet the Newest RothsRoth 401(k) plans, which came into being as a result of the Economic Growth & Tax Relief Reconciliation Act of 2001 (EGTRRA), are being offered for tax years 2006 through 2010 (at which point like many provisions of EGTRRA, they will sunset unless extended by future legislation). The plans allow contributions to be made on an after-tax basis with subsequent qualified distributions and earnings realized tax-free. Roth 403(b) plans also can now be offered. As with traditional 401(k) and 403(b) plans, the maximum after-tax contribution level for 2006 for Roth 401(k) and 403(b) plans is $15,000, with those ages 50 years and older allowed to contribute an additional $5,000 in catch-up contributions in 2006. Despite the potentially attractive tax advantages, employees need to be aware that distributions from Roth 401(k) plans are subject to restrictions. Money can’t be withdrawn from a Roth 401(k) until the individual reaches age 59 ˝, becomes disabled or dies and must have been kept in the Roth 401(k) account for at least five years in order to qualify for tax-free treatment upon distribution. (For contribution and catch-up levels for other types or retirement plans, see Retirement by the Numbers, release 19). So far, employers have been reluctant to adopt Roth 401(k) plans because of recordkeeping and other administrative concerns. However, employer reluctance to offer Roth 401(k) plans should not significantly impact the retirement planning of most individuals because of the limited applicability of the tax and financial benefits of the arrangement. “Those employees who may benefit most from Roth 401(k) plans are generally on the extreme ends of the earning spectrum: either they’re low-earning workers that are in a lower tax bracket today than they believe they will be at the time they retire, or they’re very highly compensated individuals who are not eligible to participate in IRAs or invest in other retirement options given their income level,” said Sulzer. “But, despite the attention Roth 401(k) plans have received, the majority of individuals in the middle of the earning spectrum probably won’t benefit as they’d be losing the upfront tax benefit and subjecting themselves to immediate tax on a greater amount of taxable income.” For plan administrators, aside from the complexity and administrative and education costs of offering a new retirement plan option, one of the main concerns is the belief that plans wouldn’t be able to pass the applicable non-discrimination tests, which restricts the amount that can be deferred by highly qualified individuals compared to the deferrals made by the rest of employees. Another ongoing challenge for employers, as well as participants, will be keeping separate accounts with separate tracking and reporting mechanisms for pre-tax traditional 401(k) plans and after-tax Roth 401(k) plans. Employers offering Roth 401(k) plans are required to also offer traditional plans. Employers may allow employees to designate how they want to allocate their 401(k) investments between pre- and post-tax plans. However, employers may also impose restrictions on the timing and amount of pre- and after-tax deferrals. When employees leave a job and go to roll-over their 401(k) funds, they’ll need to continue to keep pre- and after-tax funds in separate accounts. So even if they only have a Roth 401(k) for the five years allowed under the current EGTRRA rules (2006 to 2010), they’ll have the administrative burden of continuing to hold the funds in two separate accounts. An interesting issue is whether employers may use Roth contributions as a default election under an automatic enrollment plan. Roth deferrals are treated, Sulzer explains, as part of cash or deferred election. Therefore, it is possible that plans featuring automatic enrollment may use Roth 401(k) accounts as the default election for the plan. However, because of the limited number of employees who will fully benefit from Roth 401(k)s, Sulzer cautions that employers considering this will need to be more vigilant in providing sufficiently accurate and comprehensive information to employees to enable them to make an informed choice as to whether or not to participate or elect out of the Roth 401(k) plan. Banking on Retirement, Even in BankruptcyIndividuals facing bankruptcy may have one thing to be grateful for – at least more of their retirement savings are safe, thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. There were nearly 1.75 million non-business bankruptcy filings in the United States. in the 12 months ending September 30, 2005, according to the Administrative Office of the U.S. Courts, up more than 10 percent over the preceding 12 months. “While the focus of bankruptcy reform on the individual level was to help make it more difficult for people to abuse the system by seeking to obtain a “fresh start” through Chapter 7 liquidation, instead of repaying debts under a Chapter 13 repayment plan, the legislators did look to extend special protections for retirement funds,” said CCH Pension Law Analyst Nicholas Kaster, JD and co-author of Retirement Plans for Individuals and Small Businesses. Under the new law, retirement savings, to the extent they are in a tax-favored accounts, are protected from creditors in a bankruptcy proceeding. This protection has always been available to funds held in 401(k) and other qualified plans, but the new law now extends this to funds held in traditional and Roth IRA plans as well as small business SEP and SIMPLE plans. Prior to the Bankruptcy Act, IRAs were governed under state bankruptcy statutes, which offered differing levels of protection. While the new federal law limits the amount of IRA account savings protected to $1 million (adjusted for inflation), this excludes any money that had been rolled over from qualified plans, making the protection essentially complete for all funds inside the IRA. The law goes a step further for small businesses, protecting all funds held in a SEP or SIMPLE retirement plan. The new law applies to bankruptcy cases starting on or after October 17, 2005. However, note that the relief does not afford outstanding loans taken from retirement accounts protection from creditors. Prior to the passage of the Bankruptcy Act, courts seemed to be leaning toward providing only limited protection to IRA accounts. For example, the Supreme Court had ruled earlier in 2005 (Rousey v. Jacoway) that only the IRA funds necessary to support a debtor and his or her dependents could be protected from creditors. “By eliminating the reasonably-necessary test, the bankruptcy law affords greater protection than was afforded under the Rousey decision,” said Kaster. Protections also were included for higher education savings along with special accommodations included for active duty military personnel, low-income veterans and those with serious medical conditions. (A CCH Tax Brief on the Bankruptcy Act is included in the Whole Ball of Tax package.) About CCH, a Wolters Kluwer businessCCH, a Wolters Kluwer business (tax.cchgroup.com) is a leading provider of tax, audit and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting Research Manager™ and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading multinational publisher and information services company. Wolters Kluwer has annual revenues (2004) of €3.3 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands (www.wolterskluwer.com). Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. -- ### -- nb-06-17 EDITORS NOTE: For a complimentary editorial review copy of Retirement Plans for Individuals and Small Businesses, members of the press can contact Neil Allen at 847-267-2179, neil.allen@wolterskluwer.com or Leslie Bonacum at 847-267-7153, mediahelp@cch.com.
|
© 2024, CCH INCORPORATED. All rights reserved. |
Back to Top | Print this Page |
|
|||||||||||||||||