Experience the Gold Standard Distribution Issues 2014

Agenda DISTRIBUTION CASE STUDIES Hardship distributions RMDs Determining amount available RMDs Required beginning date Missed RMDs Beneficiary issues © Goldleaf Partners

Hardship Distributions Case Study #1 Facts: April requests a hardship distribution from her 401(k) plan to pay for medical expenses in the amount of $14,000 She has both pre-tax and Roth deferrals in the plan, and has been contributing since 2007 The plan permits elective deferrals only to be taken for hardship reasons, under the safe harbor rules April’s elective deferral balance is $22,000 Can April take the requested $14,000 from the plan? What are the issues raised by her hardship request? What other information is needed to answer these questions? © Goldleaf Partners

Hardship Distributions Aggregate amount of elective deferrals is available for hardship Reduced by prior distributions of deferrals for hardship Earnings are not included in amount available May include earnings credited before 1989, if tracked properly Recordkeeping issue: Plan must track amount available for hardship separately from normal plan accounting Distribution is actually pro rata portion of deferrals and earnings, while amount available is deferrals only © Goldleaf Partners

Hardship Distributions Total deferral amount is available for hardship Available amount determined by subtracting out earnings and prior hardship amounts Distribution can be from either pre-tax or Roth account Designated Roth deferrals are available for hardship, plan permitting Must track hardship available amount Actual distribution is pro rata portion of deferrals and earnings – affects taxation Designated Roth contributions are after-tax, basis must continue to be tracked in the plan Recordkeeping issue compounded further by distribution of non-qualified Roth dollars © Goldleaf Partners

Hardship Distributions Case Study #1 What other information is needed? Amount of deferrals, not including earnings Amount of prior hardship distributions, if any Total deferral contributions – prior hardship = hardship available amount © Goldleaf Partners

Hardship Distributions What if records are not properly maintained? Can a hardship distribution be processed without historical data? How is available amount determined? © Goldleaf Partners

Required Minimum Distributions Case Study #2 Facts: Joe requests a distribution of his account balance He wants to rollover his balance to an IRA Joe is 72 years old and still employed He is not an owner of the business Can Joe take a distribution? Any concerns with completing a rollover to an IRA? What other information is needed to answer these questions? © Goldleaf Partners

Required Minimum Distributions Participants are required to take a portion of their account balance each year upon their “required beginning date” RBD is generally the later of April 1 following the year attained 70½, or April 1 following the year of retirement Exception for more than 5% owners—RBD is always April 1 following 70½ year (cannot delay) © Goldleaf Partners

Required Minimum Distributions Participant will be 70½ this year, not an owner, still employed—can he take a distribution? Must he take an RMD? What is the plan’s RBD? Does the participant have a choice to start RMDs or delay? Does he have another trigger for distribution? Is there a difference between an RMD and in-service distribution? Case Study #2 What other information is needed? © Goldleaf Partners

Required Minimum Distributions Case Study #3 Facts: Bree started taking RMDs by 4/1 following her 70½ year She is an owner of the business At age 73 she sells her share of the business but continues to work there Does this affect her RBD? Can she, or must she, stop taking RMDs? © Goldleaf Partners

Required Minimum Distributions Once RMDs begin, they must continue RMDs begin for owner who later becomes a non-owner, can he stop taking RMDs? Plan does not permit delayed RBD option, plan amends to add this option, can a participant who started RMDs stop now? Employee has a choice to delay RMD or start RMD, chooses to start RMDs, can he change his mind later? Participant separates from service, begins RMDs, and is later rehired, can he stop taking RMDs? © Goldleaf Partners

Required Minimum Distributions Case Study #4 Facts: Jacob has his first RMD due by 4/1 Due to administrative error, the distribution does not get processed It is now months later and the plan administrator has just realized the error What are the consequences? Any option to correct the situation? © Goldleaf Partners

IRS penalty for missed RMDs Assessed against participant or beneficiary 50% of the amount required that was not distributed RMD is still required to be taken or risk plan disqualification Option to correct (avoid penalty) Participant can request waiver of the penalty on IRS Form 5329 Plan can file under IRS’ VCP to waive penalties for all participants who missed RMDs (reduced fee of $500 for VCP) © Goldleaf Partners

Beneficiary Issues Case Study #5 Facts: Jeff named spouse (Ann) as beneficiary Jeff and Ann divorce, Ann receives a portion of the account pursuant to a QDRO They have no children Jeff dies with no one named as a beneficiary Who is the beneficiary? How are the assets distributed? What is the availability of an inherited IRA to his sister, his intended beneficiary? © Goldleaf Partners

The plan document defines beneficiary in the absence of one Beneficiary Issues The plan document defines beneficiary in the absence of one If married at the time of death, the spouse will be the beneficiary unless consents to another named beneficiary Beneficiary options vary based on the beneficiary’s relationship to the participant Who is the beneficiary? © Goldleaf Partners

Beneficiary Issues Death before RBD Death on or after RBD Spouse How are the assets distributed? Death before RBD Death on or after RBD Spouse 5-year rule Life expectancy payments Nonspouse Nonperson (e.g., estate) Nonperson © Goldleaf Partners

Questions? Thank you! © Goldleaf Partners