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CCH can assist you with stories, including interviews with CCH subject experts.
Also, the 2006 CCH Whole Ball of Tax is available in print. Please
contact:
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
Neil Allen
(847) 267-2179
neil.allen@wolterskluwer.com
Link to special CCH Tax Briefings on key topics from 2005:
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2006 CCH Whole Ball of Tax
Retirement Revisited: Roth 401(k) Gains
Headlines While Automatic Enrollment Gains Steam
Bankruptcy 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
Roths
Roth 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 Bankruptcy
Individuals 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 business
CCH, 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.
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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.
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