• IRS Announces Retirement Plan Limits (Oct 2011)
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• Date Extension for Fee Disclosure Regs (July 2011)
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• DOL Testimony: Proposed Fiduciary Definition (March 2011)
• Extension of 408(b)(2) Fee Disclosure Regs (Feb 2011)
• In-plan Roth Rollover Guidance ... (Nov 2010)

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In-plan Roth Rollover Guidance/Proposed QDIA ... (Nov 2010)

Instant Insights (Nov. 29, 2010)

In-plan Roth Rollover Guidance and Proposed Amendments to QDIA Rules and QDIA Rules for Target Date Funds
Both the Internal Revenue Service (IRS) and the Department of Labor (DOL) issued guidance following the Thanksgiving holiday. The IRS released a series of Q&As providing much-sought information on the in-plan Roth conversions that were authorized as part of the Small Business Jobs Act in Sept. of this year. The DOL issued its promised proposed revision to the 2007 qualified default investment regulations, as well as making corresponding amendments to the recently released final participant disclosure regulations.

In-plan Roth Rollover Guidance
On Friday, Nov. 26, 2010, the IRS issued Notice 2010-84 providing guidance on the in-plan Roth rollover provisions that were part of Small Business Jobs Act of 2010 (SBJA). The Notice answers a number of questions regarding the administrative procedures associated with plan sponsors adopting a Roth in-plan rollover option and plan participants electing to make an in-plan Roth rollover.

Key items include:

• Plan amendments – The Notice makes clear that:
  • A plan may be amended to allow distribution of amounts permitted to be distributed under the Internal Revenue Code, and make those distributions contingent on the participant electing an in-plan Roth rollover. 
  • Generally plans have until Dec. 31, 2011, to execute the amendment to allow in-plan Roth rollovers and add Roth contributions to the plan (if necessary).
  • A plan’s Roth contribution provision must be “in place” at the time of any in-plan Roth rollover. In order for a Roth contribution provision to be in place, participants must be able to elect to have current contributions made to the Roth account.
  • Distribution rights with respect to amounts distributed cannot be eliminated after the in-plan rollover (e.g., if an immediate distribution is available to an amount prior to the rollover, that right cannot be eliminated through an in-plan Roth direct rollover).
  • For non-terminated participants, rollovers of any pre-tax elective deferral contributions are only available if the participant has reached age 59½, has died or become disabled, or meets certain rules relating to qualified military reservists.
• Participant provisions – In-plan Roth rollovers may be elected by participants, spousal beneficiaries and alternate payees (but only if the alternate payee is a spouse or former spouse). The Notice clarifies that:
  • Amounts rolled over are not subject to spousal consent requirements.
  • Loans may be rolled over without being treated as a new loan (i.e., the existing repayment schedule is retained).
  • A rollover is not subject to the mandatory 20% withholding requirement.
  • Amounts rolled over may not later be “unwound” and recharacterized as is currently available for rollovers from traditional IRAs to Roth IRAs. Once a participant makes a rollover, they cannot undo the tax consequences.
  • The 10% early withdrawal tax does not apply to the distribution; however this tax may be “recaptured” if the amount subject to the in-plan rollover is distributed within the 5-year period beginning on Jan. 1 of the year of the rollover.
  • The 5-year holding period (including for any in-plan Roth rollover) begins on Jan. 1 of the year the participant first makes a Roth contribution to the plan (if the participant made a direct rollover of Roth monies from another plan to the current plan, the beginning of the holding period from the prior plan may be used).

The Notice also provides:

• Sample language to update the 402(f) distribution notice.
• A series of examples on the tax consequences of distributions and the ordering of distributions.

A copy of the Notice can be found on the IRS Web site*.

*This is a link to a third-party site. Note that the third party's privacy policy and security practices may differ from J.P. Morgan's standards. J.P. Morgan assumes no responsibility for nor does it control, endorse or guarantee any aspect of your use of the linked site.

Proposed Amendments to QDIA Rules and QDIA Rules for Target Date Funds
On Monday, Nov. 29, 2010, the DOL issued proposed regulations regarding additional disclosures for qualified default investment alternatives (QDIA) and specific disclosures related to target date funds (TDFs). The proposed regulations would amend both the QDIA rules and the new participant disclosure regulations.

• QDIA changes – The final QDIA regulations were published on Oct. 24, 2007, and included specific disclosure requirements related to QDIAs. The proposed regulation would modify those requirements in the following manner:
  • The proposed amendment clarifies that plan sponsors must provide disclosures consistent with the new participant disclosure regulations. The proposed regulation specifically references information that must be provided to participants subsequent to investing (e.g., description of voting rights, to the extent they are passed through) and information that must be available on request (e.g., prospectuses, financial statements and reports, share value and date of valuation, and a list of assets comprising the portfolio).
  • The proposed regulation also enumerates several new disclosures that would apply to any QDIA (not just TDFs). 
    • the name of the QDIA issuer
    • the investment objectives and goals
    • a description of the investment’s principal strategies (including a general description of types of assets held) and principal risks
    • the investment’s historical performance data (1 year, 5 year and 10 year returns), and any fixed return, annuity, guarantee, death benefit or other features of the investment
    • a statement that past performance is not necessarily an indication of how the investment will perform in the future
    • a description of any fees charged directly against amounts invested in the QDIA, including commissions, sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees and purchase fees
    • the investment’s annual operating expenses (expense ratio) and any ongoing expense in addition to the annual operating expense (e.g., mortality and expense fees)
    • an explanation of where participants may obtain additional information on the QDIA and other designated investments under the plan
• Target Date Fund disclosures – The proposed regulations also include new requirements that apply specifically to TDFs that apply age or target retirement-based asset allocations.
  • An explanation of the TDF’s asset allocation, how that allocation will change over time and when it will reach its most conservative allocation. The proposed regulations require a chart, graph or table illustrating the change in asset allocation over time.
  • If the TDF references a specific date in the fund name or fund description or a specific date is referenced or can be implied in the TDF’s objectives or strategies, the disclosure must include an explanation of what age group the investment is designed for, the relevance of the date and any assumptions regarding the participant’s contribution or withdrawal intentions on or after the date.
  • A general statement that the participant may lose money in the investment, including losses near or after retirement, and that there is no guarantee that the TDF will provide adequate retirement income.
  • The disclosure must also advise participants of their right to direct the investment of their account to any other available investment alternatives, and, if applicable, a statement that certain restrictions or fees may apply in connection with an investment transfer.  Under current regulations, the disclosure requires a description of any applicable restrictions or fees applicable to an investment transfer.

These new proposed TDF disclosures apply to both the 2007 final QDIA regulations and the final participant disclosure regulations that were issued on October 20, 2010.  The final participant disclosure regulations issued earlier this fall reserved a section of the regulation for the TDF specific disclosure.  This TDF specific disclosure requirement would apply under the participant disclosure regulations regardless of whether the TDF is a designated QDIA, and is mandatory for all plans utilizing TDFs that allow participants to direct investments.

As mentioned, these are proposed regulations and it is anticipated that they will be published in the Federal Register on Nov. 30, 2010. There is a 45-day comment period following date of publication, which would end on Jan. 14, 2011, if the proposed regulations are published on Nov. 30, 2010.

IRS Circular 230 Disclosure: This communication was written in connection with the potential promotion or marketing, to the extent permitted by applicable law, of the transaction(s) or matter(s) addressed herein by persons unaffiliated with JPMorgan Chase & Co. However, JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, to the extent this communication contains any discussion of tax matters, such communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties. Any recipient of this communication should seek advice from an independent tax advisor based on the recipient's particular circumstances.