By now it is likely you have seen one of the impacts of PPA — GuideStone’s revised accounting statements. In this third in an on-going series of articles about the PPA, look for a brief discussion of two new items effective in 2007 that were not previously discussed in this series. In addition, be sure to review the added information regarding certain items becoming effective in 2008.
The IRS has provided a page on its Web site dedicated to
information about the PPA, including published guidance, articles and other resources useful in understanding the PPA.
Below is a brief reminder of certain provisions of PPA that became effective beginning Jan. 1, 2007. We also cover any guidance the IRS and DOL have released to-date related to these provisions. We will briefly discuss two items not previously mentioned — one that impacts only for-profit employers and another that discusses changes to the Saver’s Credit that was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
Remember, while we will discuss what impacts plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), this series will seek to point out how PPA impacts 403(b) church plans. Generally, ERISA plans include 401(k) plans and other employee benefit plans used in the for-profit sector. But church plans, governmental plans and other types of benefit arrangements are not subject to ERISA.
Remember, too, that this is just a high-level overview of some of the most important provisions in PPA impacting defined contribution plans. GuideStone is continuing to study the PPA and is analyzing how to respond in order make sure all plan documents impacted by the PPA, including notices and procedures, are updated. Since GuideStone cannot provide tax or legal advice, you are always encouraged to consult your organization's tax or legal advisers regarding the impact of the PPA upon your organization and its plans. However, we encourage you to become familiar with these new provisions and contact your relationship manager with questions regarding the PPA and its impact on your retirement plan.
Items impacting both 403(b) church plans and plans subject to ERISA
Effective in 2007
Saver’s Credit - Some of your employees may be eligible for an important tax credit that was created in 2001 by EGTRRA. The amount of the credit is based on contributions (up to $2,000) the participant makes to an IRA or to a Code section 403(b) or 401(k) plan. The credit can be as low as 10% of $2,000 or as high as 50% of $2,000, depending on the participant’s adjusted gross income. The PPA provides that the adjusted gross income limits are to be adjusted for cost-of-living increases beginning in 2007. For 2007, single filers earning $26,000 or less are eligible for at least a 10% tax credit. Joint filers earning $52,000 or less are eligible for at least a 10% tax credit, and heads of household earning $39,000 or less are eligible for at least a 10% tax credit.
Rollovers by non-spouse beneficiaries - Beginning with distributions made after 2006, non-spouse beneficiaries may roll over inherited 403(b) plans, qualified plans and governmental 457(b) plans in a direct rollover to an inherited IRA. Remember, non-spouse beneficiaries in the 403(b)(9) Retirement Plan are not faced with the issue that many non-spouse beneficiaries are in plans of providers other than GuideStone. Unlike plans of other providers that require non-spouse beneficiaries to receive a lump-sum distribution, the 403(b)(9) Retirement Plan allows the non-spouse beneficiary to base distributions on the non-spouse beneficiary’s life expectancy.
Rollover of after-tax contributions - Beginning with distributions made in 2007, after-tax contributions may be rolled over to a 403(b) plan from a qualified plan. GuideStone’s recordkeeping system is designed to separately recordkeep after-tax contributions, a requirement for a rollover of after-tax contributions.
Hardship withdrawals by participants if participant’s beneficiary incurs a hardship - Under the PPA, a plan may provide that if an event would constitute a hardship to the participant, if it occurred with respect to the participant’s spouse or dependent, the event will also constitute a hardship if it occurs with respect to the participant’s primary beneficiary under the plan. The regulations have not yet been issued. There are many unanswered questions related to this provision that we hope the regulations will answer.
As we were in the last edition, we are still awaiting regulations. You may recall that the last edition discussed Notice 2007-7, which provided interim guidance on this provision of PPA. Look for more information on this provision when the IRS releases related regulations.
Effective in 2008
Qualified Automatic Contribution Arrangements (QACAs) - The PPA created the QACA as one of a series of provisions designed to encourage automatic enrollment plans — an arrangement under which elective deferrals are automatically made to a retirement plan unless the participant makes a contrary election. A QACA is an automatic contribution arrangement that will satisfy the average deferral percentage test (ADP) applicable to 401(k) plans and the average contribution percentage test (ACP) applicable to both certain* 403(b) and to all 401(k) plans with employer-matching and/or after-tax contributions. Under a QACA, employees who do not make a contrary election will automatically have their salaries reduced by at least the amount shown in the following schedule:
| Plan Year |
Percentage |
| 1st |
3% |
| 2nd |
4% |
| 3rd |
5% |
| Subsequent years |
6% |
These automatic deferrals cannot exceed 10% of salary.
In addition, under a QACA, for each non-highly compensated employee, the employer must make a matching contribution of 100% of elective deferrals up to 1% of an employee’s compensation and match 50% of elective deferrals up to the next 5% of an employee’s compensation — essentially a matching contribution of up to 3.5% of compensation. Alternatively, an employer can make a 3% non-elective contribution for each non-highly compensated employee. Special vesting and withdrawal restrictions apply to these employer contributions.
QACAs are also subject to special notice requirements. Essentially, a notice must be provided within a reasonable period of time prior to each plan year and must be provided to each newly eligible employee within a reasonable amount of time before the first automatic reduction is made from the employee’s pay. Specific content requirements apply to the notice.
Finally, a QACA can be structured to exclude employees who were eligible immediately before the QACA is put in place.
GuideStone is reviewing these new provisions and determining how to respond. Look for more information about QACAs as regulations are issued.
* Generally only 403(b) plans of employers such as universities, colleges, hospitals, and retirement and children’s homes that receive large amounts of funding from other than the related denomination are subject to the ACP test.
Withdrawal of contributions from Eligible Automatic Contribution Arrangements (EACAs) - One of the drawbacks to implementing automatic contribution arrangements is the possibility of small account balances in plans if participants opt out of the automatic contribution arrangement after only a few contributions are made. To address this drawback, the PPA provides requirements under which “erroneous” automatic contributions can be withdrawn from EACAs. EACAs are automatic contribution arrangements that satisfy certain notice and Department of Labor default investment requirements. An EACA can be, but does not have to be, a QACA. As provided by the PPA, if a participant in an EACA requests a distribution within 90 days of the first automatic contribution under the plan, the erroneous automatic contribution can be withdrawn without violating any restriction on the distribution of elective deferrals. There is no 10% penalty on the distribution, and employer matching contributions made because of the erroneous automatic contribution(s) may be forfeited.
More time to correct ADP/ACP failures without penalty in EACA - As another inducement for employers to sponsor EACAs, the PPA expands the timeframe in which corrective distributions for failed ADP and ACP tests can be made from EACAs. For plan years beginning after 2007, EACA plans will have six months in which to make corrective distributions to cure failed ADP and/or ACP tests without the employer incurring a 10% penalty on the amount of the corrective distribution.
Tax year of inclusion of ADP/ACP corrective distributions - For all plans subject to retirement plan nondiscrimination testing, for plan years beginning after 2007, any corrective distribution of a failed ADP/ACP test will be taxable to the employee in the year of distribution. Currently corrective distributions of failed ADP/ACP tests made within 2½ months of the end of the plan year for which the test is performed are taxable for the year of the excess (the prior tax year).
No gap-period income on ADP/ACP corrective distributions - Beginning with corrective distributions of failed ADP/ACP tests for the 2008 plan year (to be made in 2009), gap-period income, the income between the end of the plan year being tested and the time of the distributions, will no longer have to be included in the corrective distribution. This provision applies to all plans, not just EACA plans.
Rollovers from 403(b) and 401(k) plans to Roth IRA - Beginning in 2008, plan participants who take distributions from 403(b) or 401(k) plans will be able to roll those distributions directly from those plans into a Roth IRA. These direct rollovers are only available to participants whose adjusted gross income is $100,000 or less. The taxable amount of the distribution from the 403(b) or 401(k) plan must be included in income, but the 10% penalty on early distributions does not apply.
Items impacting only plans subject to ERISA*
Changes to deduction limits - The PPA modified the deduction permitted for defined benefit pension plans and modified the way the combined deduction limit is calculated when an employer maintains a defined benefit plan and a defined contribution plan. The IRS recently released Notice 2007-28 which explains the changes made by PPA, including:
- For 2006 and 2007 only, increasing the Code section 404(a)(1) maximum deductible contribution limit to 150 percent of current liability for single-employer defined benefit plans.
- Repealing the special rule permitting plan sponsors of defined benefit plans to use the long-term corporate bond rate to calculate current liability for minimum funding and to use the 30-year Treasury rate to calculate maximum deductible contributions.
- Modifying the way the combined deduction limit is calculated so only contributions to a defined contribution plan that exceeds 6% are considered.
- Providing rules for determining deductions when plan years and the employer’s taxable year are not the same.
Plan sponsors with defined benefit plans may want to review Notice 2007-28 for more information.
Effective in 2007
Faster vesting for employer non-elective (employer non-matching) contributions - Effective after 2006, for plans subject to ERISA, employer non-elective contributions will be subject to the same vesting schedule requirements as matching contributions. In other words, vesting schedules for non-elective contributions must either provide for a cliff vesting schedule of 100% vesting after three (3) years of service, or for incremental vesting, under a schedule at least as rapidly as that shown in the following table:
| Years of service |
Percentage |
| 2 |
20% |
| 3 |
40% |
| 4 |
60% |
| 5 |
80% |
| 6 or more |
100% |
*While church plans are exempt from this requirement, church plans subject to retirement plan nondiscrimination testing may want to implement these shortened schedules since these schedules are deemed to comply with the nondiscrimination requirements for vesting.
Periodic benefit statement requirement - Beginning in 2007, plans subject to ERISA that allow the participant to direct the investment of their accounts will be required to provide quarterly benefit statements. Under the PPA, there are specific requirements regarding information that must be included on the statements. For instance, benefit statements must direct the participant to the DOL Web site for information on investing and diversification.
More information on the benefit statement requirements was included in the last edition of this publication. The 2007 benefit statements generated by GuideStone have been updated to meet the requirements of the PPA.
Effective in 2008
Publish 5500 on employer intranet - Regulations have not yet been issued, but beginning with the 5500 for the 2008 plan year, the 5500 will have to be posted on the employer’s intranet site for viewing by employees.
The general information in this publication is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties.