1. Retirement Plans: A Changing Landscape Martha Hutzelman and Shirley Broz ASBO Encounters February 2006

2. Presented by Martha L. Hutzelman, J.D. Employee Benefits Counsel, Law Offices of Martha L. Hutzelman, Burke, Virginia Member, American Bar Association Joint Committee on Employee Benefits Fellow, American College of Employee Benefits Counsel Former Senior Attorney, Employee Benefits Division, Office of Chief Counsel, Internal Revenue Service Member, ASBO International Legislative Affairs Committee

3. Presented by Shirley Broz, CPA Director of Finance, Rockwood School District, Eureka, MO RSBA

4. Cost of Living Adjustments IRS News Release – IR 2005-120 – 10/14/05  New cost of living adjustments issued for 2006 dollar limitations for retirement plans 2006 limit on elective deferrals to 403(b) and 457(b) plans - $15,000 2006 limit on age 50 catch-up contributions to 403(b) and 457(b) plans - $5,000 2006 limit on annual additions to defined contribution plans - $44,000

5. 403(b) Plans 403(b) Proposed Regulations – 11/16/04  Clarifications: Vesting is permitted – but separate accounting is required for non-vested contributions Ordering rule for elective deferrals must be followed:  (1) Annual elective deferrals  (2) Special 403(b) catch-up deferrals  (3) Age 50 catch-up deferrals 5-Year post-severance contributions must be non-elective employer contributions

6. 403(b) Plans 403(b) Proposed Regulations – 11/16/04  Clarifications (continued): 403(b) and 401(a) contributions may be disaggregated Meaningful notice required for universal availability Hardship distributions made under 403(b) plans must follow 401(k) hardship distribution rules FICA tax must be withheld on:  Employee elective deferrals  One-time irrevocable employee elections  Mandatory “condition of employment” employee deferrals Life insurance contracts are subject to incidental benefit rules and new restrictions apply to new life insurance contracts after 2/15/05

7. 403(b) Plans 403(b) Proposed Regulations – 11/16/04  New Proposed Rules: Written plan document requirement 90-24 transfers restricted to only funds offered by employer Elimination of Notice 89-23 good faith reasonable standard for non-discrimination requirements  Exclusion under universal availability for collective bargaining employees will no longer be permitted New definition of controlled group 403(b) plan termination permitted if no contributions are permitted to another plan for 12 months after termination and other conditions are satisfied

8. 403(b) Plans 403(b) Proposed Regulations – 11/16/04  Comment period ended 2/14/05, but comments are still accepted ASBO Int’l submitted comments  Public hearing held 2/15/05  Clarifications were effective 11/16/04  New rules will not be effective until after final regulations are issued – IRS anticipates effective date will be January 1, 2007

9. 403(b), 457(b) and 401(k) Plans Post-Severance Deferrals - 415 Proposed Regulations – 5/25/05  Employees may make deferrals to 403(b), 457(b) and 401(k) plans from post-severance compensation if: Payments are made within 2-1/2 months after termination of employment and  Employee would have received such payments if he continued employment (e.g. payments are for compensation, bonuses, overtime, etc.) OR  Payments are for unused sick leave, vacation time, etc., that employee could have used if employment continued Deferrals may not be made from severance pay This provision may be relied upon as of 5/25/05

10. 403(b), 457(b) and 401(a) Plans Automatic Rollover Rules for Mandatory Cash-Out Distributions - IRS Notice 2005-5 – 12/29/04  Plan must operationally comply by 3/28/05 and must be later of EGTRRA remedial amendment period or December 31, 2005: Automatic rollover to an IRA for mandatory cash-out payments of account balances of $5,000 or less, Mandatory cash-out payments of account balances of only $1,000 or less OR No mandatory cash-out payments  Rollover contributions must be considered in these amounts

11. 457(b) Plans Model plan language set out in Rev. Rul. 2004-56 EGTRRA Amendments required to be adopted by 12/31/05

12. 403(b) and 401(k) Plans Roth 403(b) and 401(k) Contributions – Proposed Regulations – 3/2/05 and 1/24/06  Effective 1/1/06  Contributions from employee after-tax dollars only  Roth contribution must be designated at deferral in irrevocable election  Roth contributions and earnings must be held in a separate account within the plan  Roth contributions are counted toward annual deferral limit

13. 403(b), 457(b) and 401(a) Plans E-Sign Proposed Regulations – 7/14/05  Electronic delivery of notices to employees is permitted if either electronic consent is obtained or employee has effective ability to access computer and is advised that a paper copy is available  An electronic notarization of benefit elections and consents is valid if notary physically witnesses the acknowledged signature  Rules cannot be relied upon until final regulations are issued

14. 403(b) and 401(k) Plans 401(k) and 401(m) Final Regulations – 12/29/04  Safe harbor hardship distributions are expanded to include: Burial expenses for employee’s parent, spouse, child or dependents Expenses to repair damage to employee’s principal residence resulting from casualty loss  Automatic enrollment is permitted if employee is given option to elect out and receive cash  Effective 1/1/06

15. Defined Benefit Retirement Plans Elimination of certain optional forms of benefits – 411(d)(6) Final Regulations – 8/12/05  Permits elimination of redundant or non-core optional forms of retirement benefits included in defined benefit plans  Issued in conjunction with new rules that require employees to receive notice of the relative actuarial value of all distribution options available under the plan – notice rules effective 2/1/06  Effective 8/12/05

16. 401(a) Qualified Plans Staggered Remedial Amendment Period for Requesting Determination Letters for Qualified Plans – Rev. Proc. 2005-66 – 8/26/05  Individually designed plans apply for new determination letter every 5 years  Master and prototype plans apply for new determination letter every 6 years  Annual plan amendments are recommended  Cycles begin 2/1/06; Governmental plan cycle begins 2/1/08 and ends 1/31/09

17. USERRA Continuation coverage under cafeteria plan, including health flexible spending account (FSA), must be offered during active duty Health insurance may be cancelled during active duty if employee does not elect or pay for continuation coverage, subject to certain limitations Comparable leave of absence is clarified

18. USERRA Deferrals permitted from differential pay during active duty Non-matching employer contributions to retirement plan must be made up within 90 days after reemployment (or when contributions due if later) Matching employer contributions must be paid per terms of plan Employee make-up deferrals permitted only while employed

19. New Bankruptcy Act Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 – enacted 4/20/05 Excludes from individual’s bankruptcy estate funds held in 401(a), 403(b) and 457(b) plans and IRAs Limits IRA exclusion to $1 million (excluding rollovers) Permits plan loan repayments during individual’s bankruptcy An employer in bankruptcy must continue to act as plan administrator Effective 10/17/05

20. IRS Circular 230 Regulations Effective 6/20/05 Governs tax advisors who practice before the IRS – including lawyers, accountants, actuaries and administrators Provides that written advice, including e-mails and faxes, will not be treated as a reliance opinion if practitioner prominently discloses such advice cannot be used for purposes of avoiding tax penalties Rules not intended to apply to summary plan descriptions, enrollment materials, etc.

21. Fiduciary Responsibilities Directed Trustee Duties – Field Assistance Bulletin 2004-03 – 12/17/04  Directed trustee is a plan fiduciary with respect to its limited duties  Directed trustee may not follow named fiduciary’s directions if directed trustee knows or should know that such directions are inconsistent with terms of plan or contrary to ERISA  Directed trustee has duty to request and review all relevant plan documents

22. 5500 Returns DOL Proposed Regulations – 8/30/05  Proposes that all Forms 5500 filed for years beginning on and after January 1, 2007 must be filed electronically  Not effective until final regulations are issued

23. 457(f) and Other Non-qualified Deferred Compensation Plans 409A Proposed Regulations – 9/29/05  457(f) Plans must comply with both 409A and 457(f) rules  409A applies to any deferred compensation not paid out within 2-1/2 months after date it is earned

24. 457(f) and Other Non-qualified Deferred Compensation Plans 409A Proposed Regulations – 9/29/05  409A restrictions: Employee deferral must be made in year prior to year deferred compensation is earned Distributions may only be made upon separation from service, disability, death, a certain date, change in ownership or unforeseeable emergency Distributions may not be accelerated or delayed  Penalty for failure to satisfy 409A – 20% penalty tax  Effective – 1/1/05; Plan amendments required – 12/31/06

25. Hurricane Katrina and Rita Relief Katrina Emergency Tax Relief Act of 2005 – enacted 9/23/05 and Related Guidance  No 10% early distribution penalty for up to $100,000 distributed between 8/25/05 and 1/1/07  Tax-free repayment of distributions received within 3 years from distribution date

26. Hurricane Katrina and Rita Relief Plan loan or hardship distribution may be made to any employee located in affected area or whose lineal ascendant or descendant, dependent or spouse is located in affected area Plan loans permitted up to $100,000 and commencement of loan repayment may be delayed up to one year Conforming plan amendments may be delayed until 12/31/07 for calendar year plans

27. Questions and Comments Martha L. Hutzelman, Esq. Law Offices of Martha L. Hutzelman 9025 Andromeda Drive Burke, Virginia Phone: 703-282-3271 mhutzelm@insight.rr.com