Retirement News

for Employers

Helping Business Owners with Retirement Plans

Internal Revenue Service Tax Exempt and Government Entities

Volume 2, Fall 2005

Inside This Issue

Critical FewPoints...by

Michael Julianelle

(Director, EP Examinations)

page 2

We Have a New Look

page 2

Product Profile - The

Retirement Plan Products

Navigator

page 3

More Relief for Hurricane

Victims

page 3

The Filing Cabinet

page 4

The 2006 Dollar

Limitations

page 5

DOL News

page 5

The Fix Is In

page 7

Calendar of Events

and Deadlines

page 8

Timing is Everything Flyer

page 9

Timing is Everything

In this edition of the Retirement News for Employers we bring you a new feature: “Timing is

Everything.” The inaugural flyer provides info on 401(k) plan and 403(b) plan contributions

and on tax credits for retirement saving in 2006. Just go the last page of this and each future

edition for the handy one-page flyer.

“Timing is Everything” is a flyer designed for employers to share with their employees and

provides bullet-point information about retirement. Each “Timing” flyer features:

· Printer-friendly graphics – We won’t drain your ink supply when you print them out;

· Plain-language tips – No translation needed; and

· The Retirement Plans Community web address – Your employees can just point

and click for even more retirement tips from the IRS.

Print the “Timing is Everything” flyer and include it in your employees’ pay envelopes or post it

on a bulletin board – we’ve made the flyer look good whether you print in color or in black &

white.

If you prefer, you can use the flyer in company e-mails or newsletters. Just like the rest of the

Retirement News for Employers the “Timing” flyer is in easy-to-use PDF format.

Each “Timing” flyer will have important tips for employees on

retirement issues. Future flyers will have info on receiving

retirement plan distributions, IRA contributions and more. We

welcome your suggestions on “Timing is Everything” topics –

just send them to RetirementPlanComments@irs.gov.

FYI: We’ll build an online archive of linkable “Timing is

Everything” flyers where viewers can click on linked items in

each flyer and find additional info. You’ll find them in both the

Plan Sponsor/Employer and Plan Participant/Employee

sections of the Retirement Plans Community web

page.
Fall 2005 Retirement News for Employers

Critical FewPoints...by Michael Julianelle (Director, EP

Examinations)

Hello again everyone. Thanks for returning to what I hope is a valuable tool for you and

your employees as I inform you about recent developments in the retirement plans

community. Please note that I am always willing to hear your feedback and/or questions

about this article or suggestions for future articles. You can do so by e-mailing me at

RetirementPlanComments@irs.gov.

Critical Few – Update

In the last issue, I shared with you some of my current “Critical Few,” or most important

items. In this issue, I’ll share with you my updated

“Critical Few.” This and future issues will expand

on these areas of focus to give you my in-depth

views and ideas. The highlighted items are

discussed below.

· Expand Compliance Contacts

· Improve Examination Timeliness

· ATAT

· Monitor Pension Funding

· Expand Focused Examination Concept

ATAT – Abusive Tax Avoidance

Transactions

One area we are currently examining is transactions

the IRS considers abusive. Because of our

examination experience with these arrangements,

the IRS issued Announcement 2005-80. This

Announcement gives taxpayers a limited-time

opportunity to come forward and settle any of 21

different transactions the IRS considers abusive.

For the retirement plans community, the

transactions eligible for this settlement initiative

involve (generally):

· Abusive Roth IRA transactions;

· Abusive situations in life insurance contracts;

· Abusive trust arrangements involving welfare benefit trusts; and

· Abusive transactions in management S Corporation Employee Stock Ownership

Plans, or ESOPs.

I strongly advise anyone currently in one of these arrangements to read the Announcement,

consult your pension representative if you believe your plan is affected by one or more of

these transactions, and consider applying for a settlement initiative via this Announcement.

Go to www.irs.gov for more information on the abusive transactions and the settlement

initiative.

We Have a New Look

Thanks to public feedback, changes have been made to

navigating the IRS.gov web site (and to the Retirement Plans

Community web page, too):

· “Information for” links on the main IRS.gov web site

are now located under the IRS banner. Note

“Retirement Plans Community.”

· Once at the Retirement Plans Community web page

(www.irs.gov/ep), the second level navigation of the

web page to “Information for” links for specific

content for Benefits Practitioner; Plan Participant/

Employee; and Plan Sponsor/Employer are now

located directly under the IRS banner.

· Search functionality has been upgraded to increase

search result accuracy and usability.

So give us a visit and take a look at the improvements.

News Release IR-2005-134 provides more information

about the improvements to the IRS.gov site.

2
Fall 2005 Retirement News for Employers

More Relief for Hurricane Victims

The IRS, DOL and PBGC have issued joint guidance on

relief – including filing and funding relief; loan and hardship

distribution provisions; and re-contribution rules – provided

in the Katrina Emergency Tax Relief Act (KETRA). See

this and all the recent information on disaster relief due to

the spate of deadly hurricanes in the Gulf Coast at the

Retirement Plans Community web page.

There’s information on provisions related to Hurricanes

Katrina, Rita and Wilma. You’ll also find links to relevant

newsletter articles, official IRS guidance and other

government agencies.

Go to www.irs.gov for all the latest news.

Expand Focused Examination Concept

I’m working to change the methodology and audit philosophy within Employee Plans Examinations

from one that stresses a comprehensive approach, to a more limited process that concentrates on a

framework of activities that are used to evaluate overall plan compliance. This philosophy will help

me increase examination coverage and have my agents work more productively. What’s in it for

you? You will only have to gather records for the issues initially identified by the agent. Depending

on the compliance level of your plan after conducting an opening interview, reviewing internal

controls and examining these few key issues; the examination will be expanded or closed at that

time. For the compliant taxpayers this approach will save them time and money. Also, my agents

will be spending less time on the examination, which provides you a quicker closing letter.

 My plan is to begin using this focused examination concept in January 2006. I intend to provide

agents with training toward the end of this year and to share my philosophy and goals for this

concept as I have done with you here.

If you are one of the “lucky” (I guess you might prefer

the term “unlucky”) ones who gets selected for a focused

examination and you would like to share your

experiences with me, I would welcome your comments

as well as ideas for improving the process. E-mail me at

RetirementPlanComments@irs.gov.

Product Profile – The Retirement

Plan Products Navigator

The Retirement Plan Products Navigator

(Publication 4460) is a new publication issued by the

Employee Plans office. This useful tool will help you find

the retirement plan assistance materials and lend you a

hand in answering these questions:

· Which plan is best for my business?

· What are the basic plan requirements?

· How can I keep my plan compliant with the tax law?

· What if I make mistakes?

The Navigator provides you a highway of retirement plan assistance materials and lists the

publication title, content and product description for resources to:

· Determine Your Direction

· Choose a Route

· Stay on Course

· Perform Regular Maintenance

· Make a Course Correction

From this collection of retirement plan products, learn the benefits of having a retirement

plan for your business, compare and discover which plan is best suited for your business,

roll-out your plan, and take the right steps to keep up your plan. Follow the highway and

you will also see that the IRS has helpful programs to catch and fix mistakes in your plan.

The publication, as well as the resources listed in the Navigator, can be found on the

Retirement Plans Community web page. The publication can also be ordered by

calling toll-free (800) TAX-FORM (829-3676).

3
Fall 2005 Retirement News for Employers

The Filing Cabinet

Forms – you can’t live with them, you can’t live without them. Just like you use forms when

running your business – everything from spreadsheets to receipts to invoices – you also use

forms when dealing with a retirement plan.

New Form

The IRS is drafting Form 8915, Qualified Hurricane Katrina Retirement Plan

Distributions and Repayments, which will be used by taxpayers to report distributions and

determine the amount included in income. The new form should be available sometime after

January 1, 2006 by calling (800) TAX-FORM (829-3676).

Pub Update

In keeping with our promise to supply basic information on different types of retirement

plans, we’re happy to announce the release of a cornucopia of new publications:

· Publication 4333, SEP Retirement Plans for Small Businesses, is a customer

education and outreach tool designed for small business owners and tax

practitioners with clients that may be able to start or already have a Simplified

Employee Pension (SEP) plan. It provides guidance on the establishment and

operation of such plans and was produced in conjunction with the U.S. Department

of Labor.

· Publication 4460, The Retirement Plan Products Navigator,

highlights publications and brochures targeted to small business

owners. (See the article on Pub 4460 on page 3.)

· Publication 4482, 403(b) Tax-Sheltered Annuity for

Participant, is directed at participants in a 403(b) annuity who are

interested in learning more about the basic provisions and

requirements in the operation of their plan along with pitfalls common

with many 403(b) annuities.

· Publication 4483, 403(b) Tax-Sheltered Annuity Plan for

Sponsor, is directed at plan sponsors/employers who are interested in

learning more about a 403(b) annuity plan, the operational mistakes

common to many of these plans, and how to avoid and correct them.

· Publication 4484, Choose a Retirement Plan for Employees

of Tax-Exempt and Government Entities, is designed for plan

sponsors/employers of tax-exempt organizations and government

entities who are interested in establishing a retirement plan for their

employees. It contains a chart that highlights the different types of

plans available and key features specific to each plan.

In addition, we’ve updated the two following publications:

· Publication 3998, Choosing a Retirement Solution for Your

Small Business, is designed for tax practioners with clients that may

be able to sponsor a retirement plan. It contains a chart that highlights the primary

types of retirement plans and key features specific to each type of program. It was

produced in conjunction with the U.S. Department of Labor.

CONTACTING

EMPLOYEE PLANS

The Retirement News for Employers welcomes your

comments about this issue and/or your suggestions for

future articles.

Send comments/suggestions to:

EP Customer Education & Outreach

SE:T:EP:CEO

1111 Constitution Avenue, N.W., PE-4C3

Washington, D.C. 20224

or FAX (202) 283-9525

or E-Mail: RetirementPlanComments@irs.gov

For EP Taxpayer Assistance:

For retirement plans technical and procedural

questions:

Please call (877) 829-5500

Or visit the EP Customer Account Services section at

www.irs.gov/ep.

For questions relating to retirement income,

IRAs, Roth IRAs, educational IRAs, medical

savings accounts and section 125 cafeteria

plans:

Please call (800) 829-1040

For further Employee Plans Information: Go to

www.irs.gov/ep.

4
Fall 2005 Retirement News for Employers

· Publication 4222, 401(k) Plans for Small Businesses, is designed for small business

owners and tax practitioners with clients that may be able to start or already have a 401(k)

plan. It contains basic information dealing with the establishment and operation of 401(k) plans,

including highlights of the basic types of 401(k) plans. It was produced in conjunction with the

U.S. Department of Labor.

All of these new publications are available on the Retirement Plans Community web page by

clicking on “EP Forms & Publications” under the “Retirement Plans Community Topics” section.

They’re Here: The 2006 Dollar Limitations!

To quote the Scarecrow: “Oh joy! Rapture!” They’re here: the 2006

retirement plan dollar limits are now available. Once again, we’ve

gathered all the dollar limit numbers you know and love – along with

perhaps some strangers – and put them on the Retirement Plans

Community web page.

We’ve got dollar limits starting in 1989 and continuing all the way

through 2006. Or, if you just want to see the 2006 numbers, click on

2006 COLA News Release.

We’ve got all your favorite limits. You’ll discover such goodies as the

deferral limit for 401(k) plans ($15,000) and the section 401(a)(17)

compensation limit ($220,000). We also include – as part of this

special offer – some lesser known figures. For example, the chart has

the compensation amount under section 408(k)(2)(C) for SEPs ($450

in 2006 and unchanged from 2005) and the amount for determining

who is a “Key Employee” – as defined in Internal Revenue Code

section 416 – increased in 2006 from $135,000 to $140,000.

So, if you want to see if your 2006 COLA is flat or bubbly, click on

COLA Table or go to the Retirement Plans Community web

page, click on “Published Guidance” and go to “Cost-of-LivingIncreases.”

Finally, if you act now, we’ll include a bonus link to the Social Security

Administration. Just click on 2006 SSA Limits and you’ll get extras

like the 2006 taxable wage base ($94,200, up from $90,000 in 2005)

and much, much more!

DOL News

The Department of Labor’s Employee

Benefits Security Administration (DOL/

EBSA) announced new guidance and

education to assist plan sponsors and

practitioners in complying with ERISA. In

addition, DOL/EBSA worked with the IRS

and PBGC to provide relief to plan officials

and participants impacted by Hurricanes

Katrina, Rita and Wilma.

Relief for Those Impacted by

Hurricanes Katrina, Rita and Wilma

· DOL/EBSA launched a web site

providing contact information on employee

benefit plan sponsors whose operations have

been disrupted by Hurricanes Katrina and

Rita. Employers who sponsor benefit plans

are being encouraged to update their contact

information with DOL/EBSA if it has

changed. This information will allow

employees, plan participants and their

families, as well as the many other support

organizations assisting victims of the

hurricanes, to reach plan administrators with

questions and information related to their

retirement and health benefits. The web site

contains a searchable database with prehurricane contact information from Form 5500 Annual Reports previously filed.

Employers/plan sponsors who wish to update or correct their contact information on

this site may do so by calling toll-free (866) 444-EBSA (3272) or by submitting a

Verification of Contact Information Form found on the web site.

· DOL/EBSA and the IRS announced guidance for employers and plan officials to help

victims of Hurricane Katrina obtain hardship distributions and loans through 401(k) and

similar employer-sponsored plans. The guidance extends the circumstances under which

workers are able to gain access to their retirement funds and eliminates the need for

certain documentation.

5
Fall 2005 Retirement News for Employers

How to Subscribe to

Retirement News for

Employers

The Retirement News for

Employers will be issued only

through IRS e-mail. For your

free subscription, please go

to the Retirement Plans

Community web page and

subscribe online by selecting

“Newsletters” under

“Retirement Plans

Community Topics.” All

editions of the Retirement

News for Employers will be

archived at the Retirement

Plans Community web page.

For your convenience, we

have included Internet links

to referenced materials

throughout the electronic

version of Retirement News

for Employers. These links

are identified on the printed

version by the underlined

text. The electronic version

may be found at the

Retirement Plans Community

web page.

· DOL/EBSA announced that the agency will not seek enforcement action against plan

fiduciaries in the Hurricane Katrina-affected regions unable to comply with certain DOL

regulations, while urging the fiduciaries to use their best efforts to comply with the law.

· Along with the IRS, DOL/EBSA used the Secretary’s existing authority to

extend a number of deadlines related to health plan coverage, enabling affected

workers more time to make critical decisions regarding health coverage and giving

affected employers more time to comply with certain notice requirements in the

areas affected by Hurricane Katrina.

· DOL/EBSA announced an extension of the deadline for filing the Form 5500

and Form 5500-EZ annual report/returns for the affected counties in Louisiana,

Mississippi, Alabama and Florida due to property damage and destruction from

Hurricanes Katrina, Rita and Wilma.

The extension applies to plan administrators, employers and other entities located in

the areas directly affected, as identified by the Federal Emergency Management

Agency. The extension also applies to firms located outside the affected areas who

are unable to obtain the necessary information from service providers, banks or

insurance companies whose operations were directly affected by the hurricane.

Additional information on this guidance and relief is available on DOL/EBSA’s

web site.

Electronic Filing of Form 5500 Annual Reports

As part of its continuing effort to update and streamline the annual reporting process,

DOL/EBSA published in the Federal Register on August 30, 2005, a proposed

regulation that would require plans to file the Form 5500 Series report electronically

beginning with plan filings due in 2008.

Adopting an electronic filing system is consistent with recommendations made by the

Government Accountability Office and the ERISA Advisory Council. The proposed

regulation would apply to all employee benefit plans required to file Form 5500

reports with DOL. In conjunction with this regulatory initiative, DOL/EBSA will also

update its current forms processing system – known as EFAST – to ensure that plans

and service providers have secure internet-based methods for transmitting filings.

The comment period closed on October 31, 2005.

The proposed regulation is available on DOL/EBSA’s web site. The comments

are also available online.

In addition, DOL/EBSA, along with the IRS and PBGC, will propose revisions to the

2007 plan year forms to streamline and improve the information filed by plans. The

revised forms, to be filed in 2008, are expected to be published for public comment

this year.

Fiduciary Education Seminar Series

DOL/EBSA has announced another seminar scheduled for this fall:

Norfolk, Virginia – December 8, 2005

6 More information on the seminar and registration is available on DOL/EBSA’s web site.

IRS employees contributing to

this edition of the Retirement

News for Employers are:

Evelyn DeWald,

Larry Isaacs,

Michael Julianelle,

Joyce Kahn,

Peter McConkey,

Todd Newman,

Mark O’Donnell,

Nancy Payne,

Keith Ruprecht,

John Schmidt,

Brenda Smith-Custer

Susan Taylor, and

Mikio Thomas
Fall 2005 Retirement News for Employers

7

The Fix Is In: Common Plan Mistakes

In each issue of the Retirement News for Employers we’ll present a common mistake that occurs in

retirement plans. We’ll describe the problem, how it happened, how to fix it and how to lessen the

probability of the problem happening again. This edition of the column focuses on “Top-Heavy Errors in

Defined Contribution Plans.”

The Issue

Many of you have a 401(k) plan or some other form of defined contribution plan that needs to meet what

are called “top-heavy plan rules.” These rules are found in section 416 of the Internal Revenue Code. The

top-heavy rules are designed to ensure that lower paid employees receive at least a minimum benefit in plans

where most of the assets are owned by higher paid employees (referred to as “key employees”). When a

plan is top-heavy, certain minimum vesting and allocation requirements must be satisfied. Plans with fewer

than 100 participants are the most likely to become top-heavy and thus affected by the top-heavy rules. See

our full “The Fix is In” article under the “Plan Sponsor/Employer” section of www.irs.gov/ep for

more details on The Issue.

The Problem

To properly comply with the top-heavy rules, unless the plan has been designed to satisfy the top-heavy

rules in all years, employers must test their plans every year to determine their status. If the plan is topheavy for a given year, the minimum benefits and vesting must be given for that year. The failure to properly

follow the top-heavy rules can cause the plan to lose its qualified status.

Some commonly overlooked top-heavy rules that lead to problems include:

· If the participant is a key employee at any time during the previous plan year, the person is

considered a key employee for the entire year.

· If the key employee account balances exceed 60%, the plan is top-heavy. There is no leeway.

· The plan may provide that only employees employed on the last day of the plan year are entitled

to the top-heavy contribution.

· There is no 1,000 hour requirement in a defined contribution plan for a top-heavy allocation.

· The top-heavy minimum contribution is based on a total compensation definition (not just

compensation while a participant).

· Elective deferrals made by a non-key employee to a 401(k) plan cannot be considered for the

top-heavy minimum contribution.

The Fix

A top-heavy violation will cause a plan to become disqualified, resulting in adverse tax consequences to the

employer and employees under the plan; however, employers may get relief from these adverse

consequences through the Employee Plans Compliance Resolution System (EPCRS) by

correcting the top-heavy failures. The Self-Correction Program (SCP) or Voluntary Correction Program

(VCP) can be used to correct these mistakes. In order to fix the mistake under SCP, generally the mistake

must be fixed within two years after the end of the plan year is which the failure occurred. Unless the failure

can be classified as insignificant, VCP must be used after this time.

To correct a top-heavy allocation failure, the employer must make a corrective contribution on behalf of the

employee who received an insufficient allocation in an amount equal to the insufficiency, adjusted for

earnings. There is more than one way to correct a vesting failure under EPCRS.
Fall 2005 Retirement News for Employers

8

Under the Contribution Correction Method, the employer makes a corrective contribution on behalf of

the employee whose account balance was improperly forfeited by the amount of the improper forfeiture.

The corrective contribution is adjusted for earnings. If, as a result of the improper forfeiture, an amount was

improperly allocated to the account balance of another employee, no reduction need be made to the

account balance of that employee.

Another way to correct these errors is the Reallocation Correction Method. Generally, the account

balance of the employee who incurred the improper forfeiture is increased by the amount of the improper

forfeiture and the amount is adjusted for earnings. The account balance of each employee who shared in the

allocation of the improper forfeiture is reduced by the amount of the improper forfeiture that was allocated

to that employee’s account.

Making Sure It Doesn’t Happen Again

Calculating the top-heavy status of a plan accurately and timely is vital for plan sponsors. The plan

document, employee data, etc., should be carefully reviewed to ensure that the test is done correctly.

Important Tip: A plan can be structured so that the top-heavy minimum allocation requirement and vesting

schedule is automatically satisfied every year. This eliminates the need to test for top-heavy status.

However, despite all of your good efforts, mistakes can happen. In that case, the IRS can help you correct

the problem and retain the benefits of your qualified retirement plan.

Let’s Just Take It One Three-Month

Period at a Time

Operating a retirement plan can be a time-consuming job. There are deadlines, not just for

reports and forms but also for making contributions. There are conferences and seminars. And

then there is information you need to give to participants.

So to help you navigate the retirement plan timeline, here is our month-by-month look at some of

the important moments in the months to come. Please note that all of the filing dates below are

for calendar-year plans - adjust the dates for non-calendar year plans:

December 8: DOL Seminar: Getting It Right – Know Your Fiduciary

Responsibilities - Norfolk, VA

December 31: Deadline for -

• Making required minimum distributions for 2005.

• Distributing prior year’s excess 401(k) plan contributions - including

 income or losses - without losing plan’s tax-qualified status.

January 15, 2006: Fourth quarterly contribution due date for 2005

calendar-year defined benefit plans.

January 31: Deadline for -

• Filing Form 945, Annual Return of Withheld Federal Tax.

• Giving payees Form 1099-R, Distributions From Pensions, Annuities,

 Retirement or Profit-Sharing Plans...

For a comprehensive list of upcoming EP Educational Events, visit the

Retirement Plans Community web page, select “Plan Sponsor/

Employer” and then “Upcoming EP Educational Events.”

Department of the Treasury Publication 4278 (12-2005)

Internal Revenue Service Catalog Number 37968B

www.irs.gov

= contribution

= conference

= file forms
Fall 2005 Retirement News for Employers

Timing is Everything

Some helpful retirement tips for employees from the IRS...

How much can I save for retirement in 2006?

• If you participate in a 401(k) or a 403(b) plan:

o You can make up to $15,000 in pre-tax contributions.

o Over age 50? You may be eligible to make “Catch-Up Contributions” up to an additional

$5,000.

• If you participate in a SIMPLE IRA plan:

o You can make up to $10,000 in pre-tax contributions.

o Over age 50? You may be eligible to make “Catch-Up Contributions” up to an additional

$2,500.

Are there any tax credits for making retirement plan contributions?

• Some workers qualify for the “Retirement Saver’s Credit”:

o This is a tax credit of up to $1,000 or up to $2,000 if filing jointly.

o To qualify for the credit, there are limits on your adjusted gross income:

 $50,000 if married filing jointly,

 $37,500 if head of household, or

 $25,000 if single, married filing separately or qualifying widow(er).

o Use Form 8880, Credit for Qualified Retirement Savings Contributions, to calculate the

credit.

For more retirement tips, talk to your employer or visit www.irs.gov/ep, select “Plan Participant/

Employee” and click on “Timing is Everything.”

Department of the Treasury Publication 4278-B (12-2005)

Internal Revenue Service Catalog Number 47879D