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NATIONAL CONFERENCE ON PUBLIC EMPLOYEE RETIREMENT SYSTEMS 2007 ANNUAL LEGISLATIVE CONFERENCE WASHINGTON, DC Terry A.M. Mumford February 6, 2007 Pension Protection Act of 2006 Summary of Provisions Affecting Governmental Plans and IRS Guidance

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NATIONAL CONFERENCE ON PUBLIC

EMPLOYEE RETIREMENT SYSTEMS

2007 ANNUAL LEGISLATIVE CONFERENCE

WASHINGTON, DC

Terry A.M. Mumford

February 6, 2007


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Pension Protection Act of 2006

Summary of Provisions Affecting

Governmental Plans and IRS

Guidance


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DB & DC PlansIRC § 401(a)(9) – Minimum Distribution Rules

  • Clarification for Governmental Plans – Good faith, reasonable interpretation

  • Retrospective

  • Self-Effectuating


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DB & DC PlansIRC § 401(a)(36) – Working in Retirement

  • Distributions allowed

  • "Bright Line" At Age 62 Even Though The Employee Has Not Separated From Service

  • Does Not Apply To 457(b) or 403(b) Plans


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DB & DC PlansIRC § § 402, 408A, & 3304(a) – Rollovers

  • Designated Non-Spouse Beneficiaries can make Rollovers (Direct Trustee-to-Trustee) - will be treated as an inherited IRA within the meaning of § 408(d)(3)(C)

  • DB and 403(b) Plans can accept Rollovers of After-tax amounts (Service Credit)

    • Separate Accounting

  • Direct Rollovers from Retirement Plans to Roth IRAs (2008)

  • No Reduction in Unemployment Compensation


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DB & DC Plans IRC § 402 – HELPS

  • Deductions for health and long-term care insurer from distributions from governmental retirement plans

  • "Eligible Retired Public Safety Officers" - - Under 42 U.S.C. 3796b(9)(A) – otherwise known as the Public Safety Officers Benefit Act ("PSOBA"). The PSOBA Regulations establish five kinds of public safety officers:

    • an individual involved in crime and juvenile delinquency control or reduction, or enforcement of the criminal laws (including juvenile delinquency), including, but not limited to police, corrections, probation, parole, and judicial officers;


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DB & DC Plans IRC § 402 – HELPS (Cont'd)

  • professional firefighters;

  • officially recognized or designated public employee members of a rescue squad or ambulance crew;

  • officially recognized or designated members of a legally organized volunteer fire department; and

  • officially recognized or designated chaplains of volunteer fire departments, fire departments, and police departments


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DB & DC Plans IRC § 402 – HELPS (Cont'd)

  • IRC Notice 2007-7

    • Separated From Service By Reason Of Disability Or Attainment Of Normal Retirement Age

    • One $3,000 Exclusion Per Year from all Plans

    • Self-Insured and Health Reimbursement Accounts are not covered

    • Medical Reimbursement Accounts and Other Retiree Health Accounts (e.g., VEBA Accounts) may not be covered either

    • Only Employee and Spouse and Dependents covered and only while employee is living


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DB & DC Plans IRC § 402 – HELPS (Cont'd)

  • NCPERS Response:

    • Multi-year lobbying effort to continue pre-tax deductions for retiree health care premiums

    • Achieved their goal with the passage of the HELPS program in Section 845 of the PPA


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DB & DC Plans IRC § 402 – HELPS (Cont'd)

  • The IRS in Notice 2007-7 (1/10/07) appears to have greatly limited the impact of the HELPS program, because the IRS has said that the direct deductions must go to an accident or health plan that is "providing insurance issued by an insurance company regulated by a State (including a managed care organization that is treated as issuing insurance)"

  • The IRS should change course on this point and follow what is accepted law in the area of health care programs – they are to be treated the same whether they are insured by a private insurance company or self-insured


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DB & DC Plans IRC § 402 – HELPS (Cont'd)

  • Existing guidance on health plan definitions does not differentiate between insured and self-insured plans

  • Costly to governmental employers and public safety members to have to use private insurance rather than self-insurance in order to have pre-tax health insurance premiums

  • Pre-tax treatment for premiums for active employees is available for both privately insured and self-insured plans


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DB & DC PlansIRC § 415(n) – Permissive Service Credit

  • Allows for Airtime Credit, subject to Nonqualified Service Limits

  • Participants As Opposed To Current Employees

  • Limits On Nonqualified Service Credit Purchases Do Not Apply To Trustee-To-Trustee Transfers From A Section 457(b) Plan Or A Section 403(b) Plan


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DB & DC PlansIRC § 415(n) – Permissive Service Credit (Cont'd)

  • If DB Plan Is The Recipient Plan, Then DB Plan Distribution Rules Are Applicable To The Transferred Amounts And To The Benefits Attributable To These Amounts

  • Retroactive To 1998 For Contributions And To 2002 For Trustee-To-Trustee Transfers

  • Not Mandatory


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DB & DC PlansEmployee Plans Compliance Resolution System

  • Encouraged by Congress

  • Self Correction Should be Expanded


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DB & DC PlansNotice and Consent Period Regarding Distributions

  • Under Notice 2007-7, new rules relating to the content of the notices apply only to notices issued for plan years beginning after December 31, 2006 without regard to the annuity starting date for the distributions

  • 180-day period for distributing notices applies to notices distributed in a plan year that begins after December 31, 2006


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DB & DC Plans – Plan Amendments

  • Amendments must be made by the last day of the first plan year beginning on or after January 1, 2011 for governmental plans


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DB Plans – IRC § 72(t) –Waiver of 10 Percent Early Withdrawal Penalty

  • Certain Distributions of Pension Plans

  • Public Safety Employees

  • "Qualified Public Safety Employee"

  • Separates From Service After Age 50 (Rather Than Age 55)

  • Can Impact 2006 Form 1099‑Rs For Distributions Made After August 17, 2006


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DB Plans – IRC § 72(t) –Waiver of 10 Percent Early Withdrawal Penalty(Cont'd)

  • Plans may have to make corrections retrospectively by first searching its records for any employee who took a distribution from a System in a lump sum or a 10-year certain and who was at least age 50 but less than age 55 in the year of last termination

  • Plans have to identify qualified public employees and may use a certification by the employee that they will be treated as qualified public safety employees, subject to appropriate verification procedures


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DB Plans – IRC § 72(t) –Waiver of 10 Percent Early Withdrawal Penalty(Cont'd)

  • Under Notice 2007-7, "qualified public safety employee" means an employee of a State or of a political subdivision of a State (such as a county or city) whose principal duties include services requiring specialized training in the area of police protection, firefighting services, or emergency medical services for any area within the jurisdiction of the State or the political subdivision of the State


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DB Plans – IRC § 72(t) –Waiver of 10 Percent Early Withdrawal Penalty(Cont'd)

  • Rollovers to IRA and DC plans not covered, per notice

  • A Plan is permitted to use distribution code 2 (early distribution, exception applies) in box 7 of Form 1099-R. However, a payer is also permitted to use distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R, if the payer does not know whether the exception under § 72(t)(10) applies


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DB Plans – Age Discrimination under ADEA § 4(i)

  • Benefit Accrual Standards

  • Hybrid Plan Provisions in ADEA will apply to Governmental Plans

  • IRS says "Market Rate of Return" applies to Governmental Plans

  • Very Important Issue For Certain Governmental Plans With Cash Balance Component such as annuity savings accounts and DROPs.


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DC Plans – IRC § 72(t) –Penalty Free Withdrawals

  • IRA, 401(k) and 403(b)

  • Individuals Called to Active Duty

  • At Least 179 Days

  • Retroactive to September 12, 2001

  • Can Claim Credit For Penalty Taxes Already Paid

  • Distribution May Be Contributed To An IRA Outside The Maximum Contribution Limits Within Two Years After The Active Duty Ends (August 17, 2008 if later )


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DC Plans – IRC § 72(t) –Penalty Free Withdrawals (Cont'd)

  • Does Not Cover Defined Benefit Plans, Either As Distributors Or Recipients


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DC Plans – IRC § 457, IRC § 403(b), & IRC § 401(k) – Hardships and Unforeseen Financial Emergencies

  • Modifies Rules

  • Now Spouse Or Dependent - Expanded To Any Beneficiary, Such As Same-Sex Spouses Or Domestic Partners

  • Notice 2007-7 confirms that plans that permit hardship distributions of elective contributions may, beginning August 17, 2006, permit hardship distributions for a primary beneficiary under the plan


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DC Plans – IRC § 457, IRC § 403(b), & IRC § 401(k) – Hardships and Unforeseen Financial Emergencies (Cont'd)

  • "Primary beneficiary under the plan" is named a beneficiary with an unconditional right to all or a portion of the participant's account balance upon the death of the participant

  • Plan must still satisfy all the other requirements applicable to hardship distributions

  • Notice 2007-7 is consistent with earlier Treasury statements that the PPA was "self-effectuating" so that the revised hardship provisions were effective upon the passage of the PPA


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Terry A.M. Mumford, Esq. Hardships and Unforeseen Financial Emergencies

ICE MILLER LLP

One American Square, Suite 3100

Indianapolis, IN 46282

(317) 236-2110 (Telephone)

(317) 236-2219 (Facsimile)

[email protected]

Thank You


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