1. Qualified Plan Distributions and Loans Chapter 25

2. Distribution Prior to Retirement In Service Distributions –Prohibited in pension plans –Profit-sharing plans, ESOPs may permit them –401(k), 403(b) may be allowed in case of financial hardship –IRAs and SEPs allow withdrawals

3. Distributions when changing Employers –Cash-out provision: lump-sum distribution for balances <= $5,000 –No cash-out provision: former employee’s funds are held

4. Distribution of Benefits Normal Form of Benefits: plan must specify the amount and form. DB plans: –straight life –lump-sum –life annuity with a period certain Pension plan must provide a qualified-joint- and survivor annuity

5. DC: annuity and lump sum 10% tax penalty for early distribution Exceptions for tax 10% penalty –On or after age 59 1/2 –Upon the participant’s death –Upon disability of participant –As part of series of periodic payments

6. –To pay health insurance costs while unemployed (IRA only) –To pay higher education costs (IRA only) – To pay acquisition costs of a first home (IRA only) –After separation from service for early retirement after age 55.

7. – Delaying Benefit Payments: payment of benefits no later than the 60th day after the latest of 3 dates: age 65 or NRA (if earlier) 10th anniversary of entry in the plan Termination of service – Incidental Benefit Requirements: in case of death benefits will be paid to a beneficiary

8. Federal Taxation of Distribution Determine taxable amount= distribution – nondeductible contributions by employee –Employer contribution taxed to employee –cost of life insurance reported as taxable income Installments: annuity rule Section 72 applies Lump-sum: amount in excess of the cost basis is taxable as ordinary income 5-year average if received on or after 591/2

9. Minimum distribution rules –Required beginning date: April 1 of the year following the year in which the participant attains age 70 1/2 –Subsequent distributions must be made by December 31 of each year –Applicable Life Expectancy: minimum=balance divided by ALE for distribution year

10. Loans from Qualified Plans Loans are allowed if the plan document states No loans from IRAs and SEPs Loans to owner/proprietor are prohibited Limit = Min[50,000, 1/2 PV accrued benefits] Loan must be repayable in 5 years (unless used acquire first home) Loans must be secured and have a reasonable rate

11. Plan Installment, Administration Investment and Termination Chapter 27

12. Plan Installation Plan year = same as the employer’s taxable year Advance Determination letter: application to IRS Master, Prototype, and Pattern Plans: written document

13. Plan Administration Record-keeping, receipt and disbursement of funds, claim administration and investments Plans not subject to ERISA requirements: –Government plans –Church plans –WC, UI and DI laws Plan administrator must be named in the document

14. Reporting and Disclosure: provide information to government and plan participants –SPD –Annual Report (Form 5500 series) –Report on termination, merger or other changes –Individual benefit statement

15. Fiduciary Requirements of ERISA and IRC Fiduciary: someone who holds and administers money or property that belongs to others. Each plan must specify a named fiduciary Duties of the fiduciary are stated in Section 404 Prohibited transactions

16. Investment Policy Growth oriented strategies DC plans: directed investment is allowed DB: no such provision ERISA rules are designed to avoid risk Assets in retirement plans: about $3 trillion

17. Plan Termination Qualification rule: plan must be permanent Asset reversion termination: DB to recapture excess assets if the plan is fully funded Consequences of termination: immediate 100% vesting –DB: all accrued benefits –DC: 100% vested associated to employer contributions

18. PBGC: ERISA requires mandatory insurance for DB plans (excluding government, church plans) Basic benefits are insured (see requirements on page 639) Cost: $19 /participant (2005)