UPDATE
Financial Institution
Tax-Favored Savings Accounts
QUALIFIED RETIREMENT PLANS ■ INDIVIDUAL RETIREMENT ACCOUNTS ■ 403(b) PLANS ■ 457 PLANS
529 PLANS ■ COVERDELL EDUCATION SAVINGS ACCOUNTS ■ ARCHER MEDICAL SAVINGS ACCOUNTS
FEBRUARY 2003
Companion Alert Discusses Tax-Favored
Savings Account Proposals
President Bush has proposed a dramatic restructuring—
and potential simplification—of the tax-favored savings
account landscape. Generally, the Bush proposal would
replace individual retirement accounts with newly
conceived Lifetime Savings Accounts and Retirement
Savings Accounts. In addition, the proposal would
consolidate all employer-sponsored retirement savings
plans, such as 401(k) plans, 403(b) plans, SIMPLE 401(k)
plans and government-sponsored 457 plans, into a
single type of plan designated as Employer Retirement
Savings Accounts. The proposal also contains a
number of significant changes that apply to all defined
contribution plans.
Given the sometimes long and uncertain path from bill
to law, we do not usually devote significant attention
in our Updates to legislative proposals affecting taxfavored savings accounts. However, the changes
proposed by the Bush Administration are so significant
that we believe they merit detailed discussion even at
this early stage in the legislative process. Accordingly,
we have prepared and are distributing with this Update
an Alert that describes the Bush Administration’s
proposal. If you have received this Update without the
accompanying Alert, please visit our website at
http://www.kl.com/practices/
newsstand.asp?id=000002071003 to obtain a copy
of the Alert.
Contents
Companion Alert Discusses Tax-Favored
Savings Account Proposals ...................................................... 1
Contribution and Other Dollar Limitations
for 2002 and 2003 .................................................................. 1
IRS Issues Guidance on Hardship Waiver of
60-Day Rollover Deadline (Including Automatic
Waiver for Financial Institution Error) ................................... 2
Department of Labor Publishes Final
Blackout Period Notice Regulations ...................................... 2
IRS Finalizes Qualified Retirement
Plan Loan Regulations ............................................................ 3
IRS Issues Qualified Retirement Plan
Deemed IRA Model Amendments ......................................... 4
2002 and 2003 Tax-Favored Savings Accounts
Dollar Limitations Chart ......................................................... 5
Contribution and Other
Dollar Limitations for 2002
and 2003
Tax-favored savings accounts are subject to a number
of income, deduction and contribution dollar limitations.
Many of these limitations change on an annual basis
either because they are indexed to the cost-of-living or
because the limitations are scheduled to increase by
legislative directive. Many other limitations do not
change. The chart attached to this Update lists some
of the more significant dollar limitations applicable to
tax-favored savings accounts for 2003. Because the
rules for certain accounts permit certain contributions
to be designated as prior year contributions, the chart
also lists the corresponding dollar limitation for 2002.
Kirkpatrick & Lockhart LLP
IRS Issues Guidance on Hardship Waiver of 60-Day Rollover
Deadline (Including Automatic Waiver for Financial
Institution Error)
In Revenue Procedure 2003-16 (previously numbered
2003-7), the Internal Revenue Service published
guidance on hardship waivers of the 60-day deadline
for tax-deferred rollovers of certain distributions from
eligible retirement plans and individual retirement
accounts. The Revenue Procedure became effective
on January 27, 2003, and applies to distributions after
December 31, 2001.
Generally, any amount distributed to an individual from
an eligible retirement plan or individual retirement
account must be transferred to another eligible
retirement plan or individual retirement account no later
than the 60th day following the date of receipt in order
to avoid inclusion in the individual’s gross income.
The Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA) provided for a waiver of the 60day rollover deadline upon application to the Internal
Revenue Service “where the failure to waive such
requirement would be against equity or good
conscience, including casualty, disaster or other events
beyond the reasonable control of the individual subject
to such treatment.” According to EGTRRA’s legislative
history, examples of situations that may justify waiver
of the 60-day rollover deadline include: distribution in
the form of a check that is not cashed; errors committed
by a financial institution; or cases of inability to complete
a rollover due to death, disability, hospitalization,
incarceration, restrictions imposed by a foreign country
or postal error.
Revenue Procedure 2003-16 implements EGTRRA’s
hardship waiver provisions by establishing a hardship
application procedure and an automatic waiver
standard. A taxpayer who applies for a hardship waiver
must do so by using the procedure for letter ruling
applications outlined in Revenue Procedure 2003-4, and
by paying a $90 user fee. In determining whether to
grant a waiver, the Internal Revenue Service will
consider all relevant facts and circumstances.
An automatic waiver is available where: the financial
institution maintaining the account into which the
rollover funds are deposited receives the rollover funds
before the end of the 60-day rollover deadline; the
taxpayer follows the financial institution’s procedure
for completing a rollover into an eligible retirement plan
or individual retirement account within the 60-day period
(including giving instructions to deposit the funds into
an eligible retirement plan or individual retirement
account); and, due to an error on the part of the financial
institution, the funds are not deposited into an eligible
retirement plan or individual retirement account within
the 60-day rollover period. In addition, automatic
approval is granted only where: (i) the funds are
deposited into an eligible retirement plan or individual
retirement account within one year from the date of
distribution, and (ii) the original rollover attempt would
have been valid had the financial institution deposited
the funds as instructed.
Department of Labor Publishes Final Blackout
Period Notice Regulations
The November 2002 edition of the Kirkpatrick &
Lockhart LLP Financial Institutions Tax-Favored
Savings Accounts Update described interim final rules
published by the Department of Labor (DOL) on
October 21, 2002, with respect to the blackout period
advance notice requirement of the Sarbanes-Oxley Act
of 2002. (To obtain a copy of the November 2002
Update, please visit our website at
http://www.kl.com/files/tbl_s48News/
PDFUpload307/8130/fiu-1102.pdf)
2
On January 23, 2003, the DOL issued final regulations
that replace the October 2002 interim final regulations.
The January 2003 regulations are generally consistent
with the October 2002 regulations. However, the
January 2003 regulations do contain a few important
changes:
■
The advance notice of the blackout period need not
state precise expected beginning and ending dates
for the blackout period. Rather, the final regulations
permit the advance notice to specify the calendar
weeks in which the blackout period is expected to
begin and end, provided that during those weeks,
information as to whether the blackout period has
begun or ended is readily available, without charge,
to affected participants and beneficiaries, such as via a
toll-free number or access to a specific website, and
the notice describes how to access the information.
■
■
The advance notice of the blackout period need not
identify a specific individual responsible for addressing questions regarding the blackout period from
plan participants and beneficiaries. Rather, the notice need only identify a contact, which may be the
plan administrator or, for example, a department.
Advance notice will be deemed delivered on the date
of mailing if it is accomplished by first-class mail, certi-
fied mail, or express mail or on the date of delivery to a
designated private delivery service. (Under the October 2002 regulations, this rule extended only to
first-class mail.) In addition, notices delivered electronically will be deemed delivered on the date of
transmission.
The January 2003 regulations contain a revised model
notice that reflects these and other changes included
in the January 2003 regulations.
Like the October 2002 regulations, the January 2003
regulations apply to blackout periods that commence on
or after January 26, 2003. However, for blackout periods
beginning between January 26, 2003 and February 25,
2003, the requirement to provide notice at least 30 days in
advance of the blackout period is waived in favor of a rule
requiring notice as soon as reasonably possible.
IRS Finalizes Qualified Retirement Plan Loan Regulations
The Internal Revenue Service has published final
regulations regarding qualified retirement plan loans
to participants. The final regulations became effective
December 3, 2003, but only apply to loans made on or
after January 1, 2004.
■
There is no limitation on the number of loans to a
participant that may be outstanding at any time. The
proposed regulations prohibited the extension of more
than two loans per year. The Internal Revenue Service
acknowledges in the preamble to the final regulations
that, as a result of the lifting of the limitation on the
number of outstanding loans, credit card loans that
otherwise meet the loan requirements will be
permissible.
■
A plan may condition a loan on a participant’s disclosure of prior loans and require the participant to
certify that any prior loans are not in default. The
concern in this regard is that if a participant has
defaulted on a prior loan, a new loan may be made to
the participant only if the participant and the plan agree
that repayments will be made by payroll withholding
or adequate security for the new loan (in addition to
the participant’s accrued benefit) is obtained. Some
plans, particularly 403(b) plans, where participants often
hold annuity contracts with more than one issuer, may
not otherwise be in a position to know whether a
participant has defaulted on a prior loan. The Internal
Revenue Service asserts that plans must inquire about
other loans to ensure compliance with the post-default/
new loan rules. The disclosure and certification
process sanctioned by the Internal Revenue Service is
intended to assist plans in that inquiry.
The final regulations generally adopt the regulations
proposed in July 31, 2000. However, the final
regulations do make a few changes to the proposed
regulations and clarify a number of other issues:
■
The Soldiers’ and Sailors’ Civil Relief Act Amendments
of 1942 may limit the maximum interest rate that may be
imposed during a period of military leave to 6%.
■
A refinancing of a loan (other than a home loan)
with a term of less than five years that results in a
loan with a term that is less than five years from the
date of the original loan will not be treated as resulting
in a new loan. Under the proposed regulations, the
refinancing created a new loan and the new and old
loans were both considered outstanding on the date
of the refinancing, which, under some circumstances,
complicated efforts to comply with the requirement
that the total amount of outstanding loans not exceed
the maximum loan amount. Under the final regulations,
this rule will still apply to refinancings that extend the
term of the prior loan to a date that is more than five
years beyond the date of the original loan.
Kirkpatrick & Lockhart LLP
3
IRS Issues Qualified Retirement Plan Deemed
IRA Model Amendments
Individuals on the mailing list for the Kirkpatrick &
Lockhart LLP Tax-Favored Savings Accounts Update
received an Alert in December 2002 that discussed
Deemed Individual Retirement Accounts (Deemed
IRAs), which became available January 1, 2003. (To
obtain a copy of the Alert, please visit our website at
http://www.kl.com/files/tbl_s48News/
PDFUpload307/8163/fia-1202.pdf.) Deemed IRAs,
which were authorized in the Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRRA), are
separate accounts (or annuities) established by an
employer on behalf of employees under its qualified
retirement plan that are treated as individual retirement
accounts rather than qualified plan accounts.
Following the publication of our Alert, the Internal
Revenue Service published Revenue Procedure 200313, which provides a sample amendment that qualified
retirement plan sponsors may use to amend their plans
to include Deemed IRAs. Sponsors are not required to
use the sample language, but use of the sample
language will satisfy the obligation of a sponsor to
adopt “good faith” amendments with respect to
EGTRRA-inspired plan design changes.
Our Financial Institution Tax-Favored Savings Accounts practice is part of our
Employee Benefit Plans/ERISA practice. If you would like more information
about our Employee Benefit Plans/ERISA practice, please contact one of the
attorneys listed below:
Boston
Stephen E. Moore
617.951.9191
smoore@kl.com
Los Angeles
William P. Wade
310.552.5071
wwade@kl.com
New York
David E. Morse
212.536.3998
dmorse@kl.com
Pittsburgh
William T. Cullen
J. Richard Lauver
Charles R. Smith
Richard E. Wood
Linda B. Beckman
Douglas J. Ellis
Michael A. Hart
412.355.8600
412.355.6454
412.355.6536
412.355.8676
412.355.6528
412.355.8375
412.355.6211
wcullen@kl.com
rlauver@kl.com
csmith@kl.com
rwood@kl.com
lbeckman@kl.com
dellis@kl.com
mhart@kl.com
San Francisco Laurence A. Goldberg 415.249.1043
Kathleen M. Meagher 415.249.1045
Katherine L. Aizawa 415.249.1044
lgoldberg@kl.com
kmeagher@kl.com
kaizawa@kl.com
Washington
william.schmidt@kl.com
cbardsley@kl.com
eberger@kl.com
William A. Schmidt 202.778.9373
Catherine S. Bardsley 202.778.9289
Eric Berger
202.778.9473
Notably, the sample language only authorizes the
establishment of Deemed IRAs within a qualified plan.
The sample language does not contain any provisions
necessary for the Deemed IRAs to satisfy the individual
retirement account requirements of Sections 408 or 408A
of the Internal Revenue Code. Sponsors will need to
ensure that Deemed IRA plan amendments include such
provisions.
The Internal Revenue Service publishes “Listings of
Required Modifications” for individual retirement
accounts that list the provisions necessary for an
individual retirement account to satisfy the requirements
of Sections 408 or 408A of the Internal Revenue Code.
Revenue Procedure 2003-13 indicates that a plan
amendment that addresses every applicable point in
the Listing of Required Modifications will satisfy the
plan sponsor’s EGTRRA good faith amendment
obligation. The Internal Revenue Service also
publishes model custodial agreements for Traditional
and Roth IRAs (Forms 5305, 5305-A, 5305-R and 5305RA). Although the Internal Revenue Service has not
said so expressly, we believe that a qualified retirement
plan amendment that uses the language in the model
custodial agreements also should be sufficient to meet
the plan sponsor’s good faith amendment obligation.
Revenue Procedure 2003-13 also provides guidance and
relief regarding the deadline for adopting Deemed IRA
good faith EGTRRA amendments. The general rule is
that Deemed IRA amendments must be adopted before
Deemed IRA contributions are accepted from employees.
However, a plan sponsor that implements Deemed IRAs
for a plan year beginning before January 1, 2004 is not
required to amend its plan until the end of the first plan
year in which the plan permits Deemed IRA contributions.
■ ■ ■
FOR MORE INFORMATION regarding the items described in this
update, or other issues concerning financial institution tax-favored savings
accounts, please contact Michael Hart or Catherine Bardsley at the email
address or telephone number listed below. If you wish to be included on
the mailing list for this publication, please send your email address to
Joanne Cowden at jcowden@kl.com.
MICHAEL A. HART
412.355.6211
mhart@kl.com
4
CATHERINE S. BARDSLEY
202.778.9289
cbardsley@kl.com
2002 and 2003 Tax-Favored Savings Accounts
Dollar Limitations Chart
TRADITIONAL AND ROTH IRA S
LIMITATION
2002
2003
Maximum contribution for individual under age 50 by end of year
$3,000
$3,000
Maximum contribution for individual age 50 or older by end of year
$3,500
$3,500
Deductible Traditional IRA contribution modified adjusted gross
income phase-out range for active retirement plan participants:
■
Single (including married individual filing separately who does
not live with spouse)
$34,001 - $43,999
$54,001 - $63,999
■
Married, filing jointly
$54,001 - $63,999
$60,001 - $69,999
■
Married, filing separately, live with spouse
$0 - $9,999
$0 - $9,999
$150,001 - $159,999
$150,001 - $159,999
Deductible Traditional IRA contribution modified adjusted gross
income phase-out range for married individual who is not an
active retirement plan participant, but whose spouse is
Roth IRA contribution modified adjusted gross income
phase-out range:
■
Single (including married individual filing separately who
does not live with spouse)
$95,001 - $109,999
$95,001 - $109,999
■
Married, filing jointly
$150,001 - $159,999
$150,001 - $159,999
■
Married, filing separately, live with spouse
$0 - $9,999
$0 - $9,999
2002
2003
Maximum elective deferral contribution for individual
under age 50 by end of year
$7,000
$8,000
Maximum elective deferral contribution for individual
age 50 or older by end of year
$7,500
$9,000
$200,000
$200,000
$5,000
$5,000
SIMPLE IRA S
LIMITATION
Maximum compensation for nonelective employer contribution
Elibility compensation threshold
Kirkpatrick & Lockhart LLP
5
QUALIFIED PLANS, 403(
b ) PLANS, 457 PLANS AND SEP IRA S
403(b
LIMITATION
2002
2003
Maximum elective deferral contribution for individuals
under age 50 by end of year
$11,000
$12,000
Maximum elective deferral contribution for individuals
age 50 or older by end of year
$12,000
$14,000
Maximum annual addition
(Internal Revenue Code Section 415 dollar limit)
$40,000
$40,000
Maximum annual compensation
$200,000
$200,000
Highly compensated employee
(Internal Revenue Code Section 414(q) dollar threshold)
$90,000
$90,000
$450
$450
2002
2003
$2,000
$2,000
SEP IRA eligibility compensation threshold
COVERDELL EDUCATION SAVINGS ACCOUNTS
LIMITATION
Maximum contribution
Modified adjusted gross income phase-out range:
■
Married or single individual filing separate return
$95,001 - $109,999
$95,001 - $109,999
■
Married individual filing joint return
$190,001 - $219,999
$190,001 - $219,999
2002
2003
ARCHER MEDICAL SAVINGS ACCOUNTS
LIMITATION
Health plan annual deductible range:
■
Self-only coverage
$1,650 - $2,500
$1,700 - $2,500
■
Family coverage
$3,300 - $4,950
$3,350 - $5,050
Health plan annual out-of-pocket expenses:
■
Self-only coverage
$3,300
$3,350
■
Family coverage
$6,050
$6,150
Annual contribution limit:
■
Self-only coverage (65% of health plan deductible)
$1,072.50 - $1,625
$1,105 - $1,625
■
Family coverage (75% of health plan deductible)
$2,475 - $3,712.50
$2,512.50 - $3,788
®
Kirkpatrick & Lockhart LLP
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This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein
should not be used or relied upon in regard to any particular facts or circumstances without first consulting with a lawyer.
© 2003 KIRKPATRICK & LOCKHART LLP.
ALL RIGHTS RESERVED.