Mary Beth Braitman and David N. Levine P2F2 Annual Conference October 20, 2009 Tax Panel, Part 1: Operational Compliance Reviews

v2 2 Overview of Compliance Reviews Common Compliance Issues for Governmental Plans 401(a)(9) and Missing Participants 415 Testing Welfare Benefits – Proposed IRS Regulations Irrevocable Elections Leave Conversions Funding Health Care – 401(h)/420 Forms and Procedures What We’ll Cover

v2 3 Overview of Compliance Reviews Why Do Compliance Reviews? Accuracy for Members Risk Mitigation Oversight Responsibilities Prior Problems Parties to a Compliance Review In House Staff and Counsel Outside Counsel Accountants and Actuaries Consultants

v2 4 Overview of Compliance Reviews (cont’d) Scope of Compliance Reviews Limited Versus Complex Data Testing or Not Process Document Review Follow-Up Questions Reports Remediation

v (a)(9) and Missing Participants Lost Members and the 401(a)(9) Required Minimum Distribution (“RMD”) Rules RMDs RMD Rule Failure to Commence Excise Tax Penalties EPCRS

v (a)(9) and Missing Participants (cont’d) Missing Participants IRS EPCRS Standard Locator Services – Public / Private How to Handle Payments to Missing Participants Interaction of State Laws With IRS Requirements

v Testing Final 415 Regulations were issued in April 4, 2007 Governmental plans compliance with final regulations required: "Limitation years that begin more than 90 days after the close of the first regular legislative session of the legislative body with authority to amend the plan that begins on or after July 1, 2007."

v Testing (cont’d) DC Plan limits For a "pure" DC plan, the limit applies to the combined total of employer and employee contributions – the lesser of 100% of compensation or $49,000 (for 2009 and 2010) For a DB plan, the limit still applies to the employee after-tax contributions. The limit does not apply to the picked-up contributions. The definition of compensation is changed.

v Testing (cont’d) DB Plans The basic annual limit is $195,000 (2009 and 2010). For general employees, that limit is reduced if the member's age is lower than 62. However, that reduction is not applicable to employees who have 15 years of service as public safety employees or 15 years of military service.

v Testing (cont’d) Special Issues for Defined Benefit Plans A DROP benefit must be taken into account for benefit testing purposes. Post-retirement adjustments (COLAs) will have to be examined.

v2 11 Welfare Benefits General Taxation Rules Section 402(a) provides, in general, that any amount actually distributed by a qualified plan is taxable under section 72 in the taxable year in which distributed. Section 72(a) provides that, with few exceptions, gross income includes any amount received as an annuity (or periodic payment). Sections 72(d) and (e) provide rules for determining the portion of any distribution that is not includable in gross income as a recovery of a participant’s investment in the contract (generally the amount of the un-recovered after-tax employee contributions) under a qualified employer retirement plan (Basis Recovery).

v2 12 Welfare Benefits (cont’d) Section 402(l) provides a limited exclusion from gross income for distributions from an eligible retirement plan used to pay health or long-term care insurance premiums of an eligible retired public safety officer to the extent that the aggregate amount of the distributions for the taxable year is not in excess of the qualified health insurance premiums of the retired public safety officer and his or her spouse or dependents. The total amount excluded from gross income cannot exceed $3,000. (“HELPS” Exclusion).

v2 13 Welfare Benefits (cont’d) Qualified Plan Benefit Rules Section (b)(1) provides that a plan is not a pension plan within the meaning of section 401(a) if it provides for the payment of benefits not customarily included in a pension plan such as benefits for sickness, accident, hospitalization, or medical expenses (except for medical benefits described in section 401(h)). Incidental death and disability benefits.

v2 14 Welfare Benefits (cont’d) Taxation Rules Regarding Payments from Qualified Plan for Health Insurance Premiums New proposed regulations clarify that a payment from a qualified plan for an accident or health insurance premium generally constitutes a distribution under IRC 402(a) that is taxable to the distributee under IRC 72 in the taxable year in which the premium is paid.

v2 15 Welfare Benefits (cont’d) The general rule that accident and health insurance premiums are taxable distributions would not apply to amounts paid under a medical account that satisfies all the requirements of IRC 401(h). See Treas. Regs. § (h). The preamble to the regulations notes that: “The existence of narrow exceptions for retiree medical benefits under section 401(h) and for distributions for the payment of premiums on behalf of eligible retired public safety officers under section 402(l) is consistent with a general rule for inclusion in gross income of the payments of premiums for accident and health insurance.”

v2 16 Irrevocable Elections Historical Role 414(h)(2) Pick-Ups 403(b) Plans Other Current Status Older PLRs Revenue Ruling IRS Study and Current Informal Position

v2 17 Irrevocable Elections (cont’d) Common Current Issues Purchase of Service Credit Plan Formula Election Other Remediation Amendment Interaction With IRS

v2 18 Leave Conversions 2008 Report on IRS Position Very restrictive view. Audits of programs. Freeze on determination letters and private letter rulings. New Guidance IRS Revenue Rulings and

v2 19 Funding Health Care – 401(h)/ (h) and 420 Rule Overview Common Errors Shifting Funds Asset Allocation Concerns Interaction With Newer Health Care Structures Health Reimbursement Arrangements

v2 20 Forms and Procedures Role in “Plan Document” Consistency With IRS Rules and Other Plan Documents Updating Process

v2 21 Questions Mary Beth Braitman Ice Miller LLP (317) David N. Levine Groom Law Group, Chartered (202)