Volume 27 Number 4, Fall 2006

• What the Pension Protection Act of 2006 Means to You
  
   
• Changes to Contributions
  
   
• Happy Birthday to You!
  
   
• Year-End Tax Planning Time
  
   
• The Better Way
  
   
• Outsourcing Tax Returns
  

What the Pension Protection Act of 2006 Means to You

On August 17, 2006 President Bush signed into law what the White House calls "the most sweeping reform of America's pension laws in over 30 years." The Pension Protection Act of 2006 (PPA) provides for many changes to both defined contribution and defined benefit plans. In general, plan amendments reflecting PPA's changes are required by the end of the 2009 plan year, with governmental plans having an additional two years to amend.

The provisions are widespread; what follows is a summary of how the new law may affect your plan.

Automatic Enrollment

PPA provides several incentives for employers to create an automatic deferral arrangement under which salary deferrals to an applicable employer plan can be automatically deducted at a specified uniform rate unless the employee elects otherwise. The deferrals will continue until the employee elects, in writing, to discontinue contributions, or to defer a different amount.

Some of the incentives include:

v  Provides additional time to test for discrimination and to make corrective distributions, if needed;

v  Creates an optional "safe harbor" arrangement that automatically passes certain discrimination tests by providing lower required employer contributions than under pre-existing safe harbor matching rules;

v  Provides a grace period for employees to request a withdrawal if they decide not to have a portion of their wages deferred;

v  Eliminates conflicts with any state laws that in the past may have prohibited or restricted automatic enrollment arrangements.

Reporting and Disclosure Provisions

Benefit Statements. As of 2007, all defined contribution plans must provide quarterly benefit statements to participants who have the right to direct the investment of their accounts, and annual benefit statements to all other participants. Special requirements apply to the content of the statement for participant directed plans.

Electronic display of annual report information. Form 5500 must be filed with the Department Of Labor in an electronic format that can also be displayed on the Internet. The DOL will display the information on their website within 90 days of filing. The information must also be displayed on any nonpublic intranet website maintained by the plan sponsor or administrator for communication with employees.

Portability and Distribution Rules

Inherited benefits. Beginning in 2007, non-spouse beneficiaries may now roll over inherited benefits to an IRA. While non-spouse beneficiaries must generally begin their distributions immediately, surviving spouses can continue to defer payouts until they attain age 70-1/2.

Faster vesting. Generally applicable to contributions for plan years starting after 2006, employer contributions under a defined contribution plan, including a match, profit sharing or money purchase contribution, must vest based on either a 3-year cliff or 6-year graded schedule.

Miscellaneous Provisions

IRA distribution to charity. PPA allows tax-free distributions of up to $100,000 per year to be paid to a qualified charity from a traditional IRA or a Roth IRA, provided the IRA owner is a least 70-1/2, effective through 2007.

Hardship withdrawals. Hardship distributions are expanded to any person who is listed as the participant’s beneficiary under the plan. Hardship provisions previously were limited to participants, spouses and dependents.

Education savings plans now are tax-free forever. If you’ve been saving for education through a Section 529 education savings plan, you can now rest assured. The tax-free status of 529 plan withdrawals, which were set to expire in 2010, are now permanent.

EGTRRA provisions. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) contained many advantageous changes to qualified plan and IRA rules, which were set to expire in 2010. The PPA makes EGTRRA provisions related to retirement plans and IRAs permanent.

The Pension Protection Act of 2006 makes many significant changes to the rules governing retirement plans. These changes will affect nearly every plan sponsor and plan participant. Since many of these changes are rather complex, we recommend that you seek professional advice to ensure compliance.

We can help! SEK&Co’s Retirement Plan Services Group can help you understand and implement the new rules in a cost-effective manner. Give us a call at 888-272-7351.

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Changes to Contributions

The Pension Protection Act (PPA) of 2006 was passed in August 2006 providing new opportunities for charitable giving as well as additional guidelines and limits to cash and contributions of clothing and household items. The new guidelines become effective as of the date the PPA was passed.

All monetary (cash) contributions made after the date of the PPA, regardless of the amount, must now be supported by a bank record (cancelled check) or a receipt from the organization that shows the following three items: (1) the name of the organization; (2) the date the contribution was made; and (3) the amount of the contribution. Any contribution without this support will be disallowed by the Service.

The IRS will also disallow a deduction for contributions of household and clothing items that are  not considered to be in "good used" or better condition.

The IRS has however added an income tax exclusion for taxable distributions from a traditional IRA or Roth IRA of up to $100,000 for tax years 2006 and 2007 provided that the distribution is to a qualified charity and the owner of the IRA is at least age 70 1/2.

To find out more on the above and additional changes related to contributions made by the PPA, notify one of our professionals at SEK&Co.

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Happy Birthday to You!

Everyone is having a birthday this year, but some are more important than others. Here are some choices and opportunities that come with reaching a "milestone" age in 2006.

Age 50. You become eligible to make "catch-up," or extra, contributions to your IRA and 401(k) or similar retirement plan. This year, the 401(k) catch-up amount is $5,000 more than the basic limit of $15,000, which brings the total contribution allowed to $20,000. For an IRA, the catch-up is $1,000 more than the basic $4,000 contribution, for a total of $5,000.

Age 55. If you leave your job or retire, you may be able to withdraw savings from your 401(k) without paying a 10 percent early withdrawal penalty. However, you will need to pay income tax unless you roll the money into an IRA or another 401(k).

Age 59 1/2. You may withdraw money from a 401(k) or your IRA without paying the 10 percent penalty, regardless of whether or not you leave your job or retire. You'll have to pay income tax unless you roll the money into an IRA or another 401(k).

Age 62. You are eligible to start receiving Social Security. However, you may want to consider waiting. The longer you wait (up until age 70), the higher your benefit will be. Another reason to delay is the "earnings test." If you receive Social Security while you're earning money from a job, your benefit will be reduced if your earnings exceed the annual minimum.

Age 65. You're now entitled to Medicare coverage. Take it, even if you don't plan to go on Social Security yet. Medicare and You 2006 is a good, basic source of information (go to www.medicare.gov for a copy). If you want to retire before you turn 65, be sure to explore other options for health insurance because this expense could eat up a substantial portion of your retirement income.

Ages 62 to 70. You can start collecting Social Security any time now, but the longer you wait, the larger your benefit will be. The size of your benefit will depend on the year you were born, which determines your "full retirement age," an arbitrary point when you will receive what Social Security calls your full benefit.

Age 70 1/2. Uncle Sam requires you to start withdrawing money from your 401(k) and traditional IRA (but not a Roth IRA) in the form of a "required minimum distribution" (RMD). The exact amount you must withdraw, based on a formula pegged to your life expectancy, is subject to income taxes (ask your financial or tax advisor to calculate your RMDs and potential tax consequences). Failure to take an RMD will result in a 50 percent tax penalty on the balance not withdrawn.

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Year-End Tax Planning Time

The period from now until the end of 2006 holds unique opportunities for you to save taxes. It is the ideal time of year for tax planning for at least three reasons:

1.   You finally have a good fix on what your taxable income and expenses are shaping up to be for 2006 and for several months into 2007, allowing you to effectively use acceleration or deferral techniques to maximize your overall tax savings between 2006 and 2007.

2.   Time still remains to take advantage of new-for-2006 tax laws before the door to do so for the 2006 tax year shuts tight behind you.

3.   Last, but not least, you can use this time to fully prepare for new tax breaks that will begin immediately on January 1, 2007.

Shifting income and expenses. Having only a little time left to the year, you usually can forecast fairly well what income and deductions you will be reporting on your 2006 tax return next April if things continue the way they have been. You can also forecast fairly well your income and expense situation for the first few months of 2007. Therein lies a golden opportunity to shift some income or expenses into one year or the other depending on what will save you the most overall taxes.

Income and expense shifting is the "bread and butter" of year-end tax planning. It requires information gathering and a proactive approach in determining your final tax bill. It allows you to do something about your taxes rather than "just writing the check out" to the IRS at tax time.

The year-end techniques that may be used to accelerate or defer income and/or expenses are as varied as there are situations to be addressed. Some of the more frequently used strategies include:

v  Smoothing out taxable income between 2006 and 2007 by accelerating and postponing transactions that either produce income or yield deductible expenses;

v  Matching long and short term capital gains with losses to lower overall capital gains tax and possibly maximize the $3,000 amount of capital losses that can offset other income;

v  Bunching deductible expenses into one or the other year depending upon whether the standard deduction may be taken in one of the years, or whether the adjusted gross income limits for medical (7.5%) or miscellaneous itemized deductions (2%) may be more easily met;

v  Maximizing the tax law limits on annual contributions to your retirement plan accounts, since one year's limits cannot be added to the next year's when not taken in time;

v  For businesses, taking advantage of the full $108,000 expensing deduction for 2006 and the $112,000 deduction available for 2007; and

v  If you're an S corp shareholder, making certain that your stock basis is high enough to entitle you to any available loss deductions.

2006 opportunities and pitfalls. The tax law changes constantly. Literally scores of changes have been made to the tax law that impact 2006 tax year returns. Among those impacting the largest groups of taxpayers are:

v  Start of the extended "kiddie tax" under which a child's income is taxed at a parent's tax rate, under age 18 (up from age 14 and applied retroactively from January 1, 2006);

v  Start of the hybrid vehicle credit available to purchasers, along with its reduction once a manufacturer sells more than 60,000 units (which is already the case for Toyota hybrids starting October 1, 2006);

v  Start of the residential energy credits of $500 for residential energy improvements, $2,000 for solar equipment and $500 for fuel cells per half kilowatt capacity, restricted to 2006 and 2007 only;

v  Start of the new (and generally unfavorable) limitations on the housing allowance for those working abroad, retroactive to January 1, 2006;

v  Start of strict limitations on the quality of clothing and household items that are entitled to a charitable deduction, beginning August 17, 2006; and

v  Start of allowing direct, tax-free charitable contributions from IRAs for those 70 1/2 and older, for 2006 and 2007 only. (See articles on  Page 1 for more on the 2 items.)

Telephone Tax. Taxpayers -- both individuals and businesses -- are able to request refunds of the long distance portion of their telephone tax. Taxes paid over a 41-month period, from 3/1/03 through 7/ 31/06, are eligible for the refund.

In lieu of computing the amount of tax actually paid individuals can use the standard safe harbor amount.

Standard safe harbor amounts are:

v  One exemption: $30;

v  Two exemptions: $40;

v  Three exemptions: $50; and

v  Four exemptions: $60;

AMT relief is temporary. The alternative minimum tax (AMT) was designed to ensure that wealthy taxpayers were not able to escape taxation by exploiting deductions. However, the AMT has not been appropriately indexed for inflation, which means that it affects a growing number of taxpayers every year. Congress has passed a few legislative "patches" to keep it from hitting too many people, the latest one in 2006 to cover 2007.

There are a lot of tax considerations at this time of year. We look forward to hearing from you to discuss your opportunities.

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The Better Way

Hi Bracket read about the advantages of a Roth IRA. Earnings on the money in the Roth IRA were not currently taxed. Also, there was no minimum required distribution at age 70 1/2 and even the beneficiaries of the account would not have to pay income tax on funds withdrawn. Not bad! How can he get a piece of this?

Hi learned that some 401(k) plans had a Roth feature, but he wasn't in such a plan. But what about a direct contribution to a Roth IRA? Too bad he didn't qualify because his income was too high. Looks like he struck out again!

The Better Way would be to contribute to a "non-deductible" IRA that he did qualify for (the Roth contribution wasn't deductible either). Then, in 2010 when the earnings cap is eliminated, he could roll the money into a Roth IRA by paying tax on only the earnings. And better yet, he could pay the tax over a two-year period with no penalty. Now we're talking!

There are a lot of tax planning strategies available. However with the recent shift in congressional power in Washington, many of them could change. We will be pleased to help you plan even in changing times.

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Outsourcing Tax Returns

From time to time we are asked about the national trend in the accounting profession to outsource tax return preparation to other countries.

We want you to be confident in knowing that we will not send your tax information to a foreign country for preparation. We are committed to the local communities in which we serve and feel that outsourcing would not allow us to maintain the personal relationships with our clients that we value.

These relationships have been our hallmark for over 43 years, and we take your trust seriously. Thank you for the opportunity to assist you with your tax, accounting and consulting needs.

Our Mission Statement

SEK&Co is committed to serving our clients by providing professional accounting and consulting services that are based on a clear understanding of our clients and their business.

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We will work to be proactive in response to our clients' needs and complete each engagement in a timely manner for a reasonable fee.

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Members of our firm will strive to be active in our communities and will work to continue to foster growth and vitality by managing a quality-driven, successful organization.

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