1. IRS Determination Letter Process and January 2011 Submission Presentation to the FCERA Board of Retirement December 15, 2010 Laurie S. DuChateau Reed Smith LLP

2. 2 What is a Tax-Qualified Plan?  Definite written program setting forth all provisions essential for Internal Revenue Code (“IRC”) qualification  Written document that details how the plan will operate in conformity with IRC Section 401(a); and  The plan must be operated in accordance with its terms  In 1988 FCERA plan was determined by the IRS to be tax-qualified

3. 3 Advantages of Maintaining Qualified Plan Status  Employer contributions not currently taxable to members  Plan earnings and income are not currently taxable to members  Favorable tax treatment available for distributions (e.g., rollover treatment)  No employment taxes paid on contributions or distributions

4. 4 Advantages of Maintaining Qualified Plan Status (cont’d)  Eligible “picked-up” employee contributions treated as pre-tax contributions  Grandfathering and transitional rules apply  Favorable benefit limits

5. 5 What is a Determination Letter?  The IRS’s opinion that the plan terms conform to the tax-qualification requirements in the IRC  IRS bound by the determination  Plan currently has an IRS determination letter issued May 6, 1988

6. 6 Advantages to Obtaining a Determination Letter  Protection from retroactive disqualification of plan for plan term deficiencies upon plan audit  Binding opinion of the IRS as to the qualified status of the plan  Full access to IRS program - Employee Plans Compliance Resolution System (“EPCRS”)

7. 7 Advantages to Obtaining a Determination Letter (cont’d)  Evidence of qualification to provide to third parties including other plans accepting member’s rollover distributions or investment transaction partners  May avoid foreign tax withholdings in some countries  Members may have additional protection in the event of personal bankruptcy

8. 8 Disadvantages to Obtaining a Determination Letter  Financial costs  IRS filing fee $1,000  Legal Fees  EPCRS filing fee of up to $25,000  Diversion of staff time  Disclosure of deficiencies to IRS may result in a loss of control addressing such issues

9. 9 Determination Letter Filing Process  File under IRS Cycle E which ends on January 31, 2011  Next scheduled filing is Cycle C (February 1, 2013 – January 31, 2014)  Filing off-cycle may result in delayed processing of the request and loss of remedial amendment period  IRS filing fee $1,000  EPCRS filing fee up to $25,000

10. 10 EPCRS  IRS program available for self correction of plan document and operational failures  If plan not under IRS audit, plan may present deficiencies to IRS, pay required filing fee and correct deficiencies

11. 11 EPCRS (cont’d)  Upon approval by IRS, a compliance letter is issued by IRS  Compliance letter is binding on IRS and cannot, upon audit, penalize plan for corrected issues subject to the compliance letter

12. 12 Proposed 2010 Internal Revenue Code Compliance Policy  Plan must be established and maintained by an employer or employers as a government defined benefit plan (IRC § 401(a)(1)  Proposed compliance policy supplements the plan by incorporating the IRC required provisions as needed  Proposed compliance policy clarifies IRC required provisions as may be necessary  Changes may eventually be included in CERL

13. 13 Exclusive Benefits – No Reversion – IRC § 401(a)(2)  Plan must be operated for the exclusive benefit of its members  Change clarifies current intention of plan

14. 14 Vesting – IRC § 401(a)(17)  Plan subject to pre-ERISA vesting requirements  To the extent funded plan must provide 100% vesting upon termination of the plan or complete discontinuance of contributions  Vesting would also be required for accrued benefits upon a member’s attainment of normal retirement age  Change clarifies required vesting provisions

15. 15 Forfeitures – IRC § 401(a)(8)  Forfeitures of benefits may only be used to reduce future employer contributions  Change clarifies existing plan terms  Proposal to update CERL for this provision to be proposed by SACRS

16. 16 Required Distributions – IRC § 401(a)(9)  Benefits must be distributed, or begin to be distributed, by the required beginning date (RBD)  RBD is April 1 of calendar year following the later of the calendar year in which:  the member attains age 70-1/2; or  separates from service

17. 17 Required Distributions – IRC § 401(a)(9) (cont’d)  Benefits must be distributed over member’s life expectancy or life expectancies of member and designated beneficiary  Benefits must meet the incidental benefit rule which requires certain minimum distributions to ensure that the benefit is primarily a retirement benefit  Change clarifies CERL provisions

18. 18 Compensation Limits – IRC § 401(a)(17)  The plan must limit the compensation used to calculate benefits to $200,000 (as adjusted for inflation - $245,000 for 2011)  Additional clarifying language included

19. 19 Compensation Limits – IRC § 401(a)(17) (cont’d)  Members who first joined plan prior to July 1, 1996 are grandfathered  Grandfathering based on plan provisions in effect on July 1, 1993  No compensation limit for grandfathered members

20. 20 Rollovers – IRC § 401(a)(31)(A)  The plan must provide for tax-free rollovers of distributions out of the plan by members and beneficiaries  Notice requirements must be satisfied  Changes provide technical clarification

21. 21 Rollovers – IRC § 401(a)(31)(A) (cont’d)  Distributions from the Plan may be rolled over into:  401(k) qualified plans  403(b) plans  governmental 457(b) plans, and  IRAs, including after 2009 Roth IRAs

22. 22 Rollovers – IRC § 401(a)(31)(A) (cont’d)  Beginning in 2010, the plan must extend to non-spouse beneficiaries rollover rights to inherited IRAs

23. 23 Qualified Domestic Relations Orders (“QDROs”) – IRC § 414(p)  Permits favorable income tax treatment for allocation of member benefits made pursuant to a domestic relations order  A domestic relations order will be treated as a QDRO if it meets the Code definition  Spouse or former spouse receiving distribution under QDRO is taxed upon distribution, not member  Provides criteria for making determination

24. 24 Military Benefits (Heart Act and USERRA) – IRC § 414(u) and IRC § 401(a)(37)  USERRA - Uniformed Services Employment and Re-employment Rights Act of 1994  Contributions, benefits and service credit with respect to qualified military service must meet the requirements of USERRA  HEART Act – Heroes Earnings Assistance and Relief Act of 2008

25. 25 Military Benefits (Heart Act and USERRA) – IRC § 414(u) and IRC § 401(a)(37) (cont’d)  Survivors of member who dies while performing qualified military service are entitled to same benefits as provided if the member had been reemployed and terminated employment on account of his/her death  Accruals during period of qualified military service are not required

26. 26 Limits on Contributions – IRC § 415  Defined benefit plan benefits limited to the IRC “dollar limit” of $160,000 (as adjusted for inflation – $195,000 for 2011)  Testing based on straight life annuity beginning at age 62  Police/fire fighters with 15 or more years of service have more favorable limits  Benefits may be subject to other adjustment for testing purposes

27. 27 Limits on Contributions – IRC § 415 (cont’d)  Benefits in excess of dollar limit payable from the replacement benefit plan  Annual additions to a defined contribution plan and post-tax employee contributions to a defined benefit plan cannot exceed the “annual additions” to plan

28. 28 Limits on Contributions – IRC § 415 (cont’d)  Annual addition – the lesser of  100% of compensation or  $40,000 (adjusted for inflation by the IRS - $49,000 for 2011)  Limits are modified for permissive service credit purchases in a defined benefit plan (IRC § 415(n))  Special rules apply to restoration of withdrawals (IRC § 415(k)(3))

29. 29 Limits on Contributions – IRC § 415 (cont’d)  Pick-ups of members’ mandatory contributions will be tested under IRC § 415(b) (IRC § 414(h))  Rollovers and transfers are not subject to these limits

30. 30 Picked-Up Employee Contributions – IRC § 414(h)  Employers under a governmental plan may “pick-up” employee contributions to the plan  Pick-up is the pre-tax treatment of the contributions  Pick-up contributions available for permissive service credit  IRS guidance has restricted the ability to pick-up voluntary employee contributions, including service purchases (Rev. Rul. 2006-43)

31. 31 Picked-Up Employee Contributions – IRC § 414(h) (cont’d)  One time irrevocable pick-up election  If service purchase pick-ups are eliminated, a member may purchase the service using post-tax contributions, rollovers, and transfers

32. 32 Prohibited Transactions – IRC § 503 (b)  The plan may not engage in “prohibited transactions”  Limited exceptions apply to prohibited transaction rules  Prohibited transactions involve transactions between the plan and related parties such as the County

33. 33 Questions?

34. 34 Laurie S. DuChateau Reed Smith LLP 225 Fifth Avenue Suite 1200 Pittsburgh, PA 15222 412.288.3004 lduchateau@reedsmith.com