IRS issues proposed regulations on purchase of longevity annuity contracts by plans

The IRS has issued proposed regulations relating to the purchase of longevity annuity contracts under defined contribution plans, 403(b) plans, IRAs, and eligible governmental section 457 plans. The proposed regulations are designed to open up the 401(k) and IRA market to longevity annuities by providing special relief from the minimum distribution requirements.

CCH Note: A longevity annuity (sometimes referred to as “longevity insurance” or a “deeply deferred annuity”) is an income stream that begins at an advanced age, such as age 85, and continues as long as the individual lives. Purchasing such annuities can help participants hedge the risk of drawing down their benefits too quickly and thereby outliving their retirement savings. However, the required minimum distribution (RMD) rules can be an impediment to the utilization of such annuities. Under current rules, prior to annuitization, the value of the annuity must be included in the account balance that is used to determine RMDs. If the remainder of the account has been depleted, the participant might have to begin distributions from the annuity earlier than anticipated in order to satisfy RMD requirements.

Qualifying longevity annuity contracts

The proposed regulations would modify the RMD rules in order to facilitate the purchase of deferred annuities that begin at an advanced age. Prior to annuitization, the value of these contracts, referred to as “qualifying longevity annuity contracts” (QLAC) would be excluded from the account balance used to determine RMDs.

The proposed regulations would apply to contracts that met certain requirements, including the requirement that distributions begin not later than age 85. In addition, the premiums paid for the QLAC could not exceed the lesser of $100,000 or 25% of the participant’s account balance on the date of the payment. The only permissible benefit payable after the participant’s death would be a life annuity, payable to a designated beneficiary. Thus, a contract that provided for distribution for a certain period, or that provided for a refund of premiums after the participant’s death, would not qualify as a QLAC. The proposed regulations provide that if the sole beneficiary of an employee under the contract is the employee’s surviving spouse, the only benefit permitted to be paid after the employee’s death is a life annuity payable to the spouse that does not exceed 100% of the annuity payable to the employee. If the employee’s surviving spouse is not the sole beneficiary, the only benefit permitted to be paid after the employee’s death is a life annuity payable to a designated beneficiary, the amount of which is not to exceed certain limits.

The definition of QLAC would also exclude certain other types of arrangements, such as a variable contract under Code Sec. 817, an equity-indexed contract, or a similar contract. The contract would not be allowed to provide any commutation benefit, cash surrender value, or other similar feature.

Specific rules would apply to QLACs purchased under IRAs, 403(b) plans, and 457(b) plans. Disclosure and annual reporting requirements would also apply to all QLACs.

Proposed effective date

The proposed regulations regarding reporting and disclosure requirements would be effective when the regulations are finalized. Otherwise, the regulations are proposed to be effective for contracts purchase on or after the date that final regulations are adopted and for determining RMDs for distribution calendar years beginning on or after January 1, 2013. The IRS advises that, until final rules are issued, taxpayers may rely on the proposed regulations and the existing rules under Code Sec. 401(a)(9) continue to apply.

Comments and hearings

Written or electronic comments on the proposed regulations are due by May 3, 2012. A public hearing has been scheduled for June 1, 2012.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

Source:  CCH® PENSION — 02/16/12

Proposed Guidance on “Lifetime Income” Options for 401(k)s

The Treasury Department issued on Thursday, February 2^nd proposed guidance on “lifetime income” options for employers on how best to integrate lifetime income products into 401(k)s and other employer-sponsored retirement plans.

Treasury guidance builds on comments received in response to Treasury and DOL’s joint request for information on the desirability and availability of lifetime income alternatives in retirement plans. The guidance, Treasury says, will help Americans meet their need for income during retirement by:

1. Encouraging Partial Annuity Options. Retirement plan participants are often confronted with a “cash or annuity” decision upon retirement. Given an all-or-nothing choice, many opt for a lump sum and decline the lifetime income stream because they are unaware they have the option to combine approaches. The proposed regulation changes a regulatory requirement to make it simpler for defined benefit pension plans to offer combinations of lifetime income and a single-sum cash payment. This is designed to encourage more retirees to consider partial annuities, which allow for retirees to receive a steady stream of income for the duration of their lifetimes while also keeping a portion of their savings invested in assets with the flexibility to respond to liquidity needs.
2. Removing a Key Obstacle to “Longevity” Annuities. Another proposed regulation expands on the combination approach by removing a regulatory impediment to purchasing a deferred “longevity” annuity. This change would make it easier for retirees to use a limited portion of their savings to purchase guaranteed income for life starting at an advanced age, such as average life expectancy. Annuities of this type would provide an efficient way for 65- or 70-year-olds (or even younger savers) to address the risk of outliving their assets by purchasing a predictable income stream starting at age 80 or 85. Once that risk is addressed, a retiree’s task of generating income from the remaining assets is more manageable because it is limited to a fixed period of time.
3. Clarifying Rules for Plan Rollovers to Purchase Annuities and Spousal Protection Rules for 401(k) Deferred Annuities. Two revenue rulings issued Thursday clarify how rules protecting employees and spouses apply when plan sponsors offer lifetime income options under their plans. The first ruling clarifies how the rules apply when employees are given the option to use a single-sum 401(k) payout to obtain a low-cost annuity from their employer’s defined benefit pension plan. The second ruling clarifies that employers can offer their employees the option to use 401(k) savings to purchase deferred annuities and still satisfy spousal protection rules with minimal administrative burdens. Both of these rulings would facilitate the availability of flexible options for employees so that they can better use their 401(k) savings to achieve financial security in retirement.

Additional information on these proposals is available in a fact sheet posted at http://www.treasury.gov. The proposed regulations announced today are also available at http://www.regulations.gov for public comment.

Source:  U.S. Department of Labor     Council of Economic Advisers

DOL Delays 401(k) Fee Disclosure

The U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (ESBA) issued a final rule that will provide employers sponsoring pension and 401(k) plans with information about the administrative and investment costs associated with providing such plans to their workers. The department also announced a 3-month extension in the effective date of this rule, meaning service providers must be in compliance by July 1, 2012, for new and existing contracts or arrangements between Employee Retirement Income Security Act (ERISA)-covered plans and service providers.

A fact sheet on this 408(b)2  regulation is available on EBSA’s website at http://www.dol.gov/ebsa/newsroom/fs408b2finalreg.html.

Additional information about how the final rule announced today differs from the previously published interim final rule can be seen by visiting http://www.dol.gov/ebsa/408b2changes.html.

Sources:  U.S. Department of Labor     Council of Economic Advisers

Email Hack Attack? Be Sure to Notify Brokerage Firms and Other Financial Institutions

I am unable to accept trade instructions by voicemail or email.  I need to receive written instructions or talk to you directly.  Here’s a reason why…..

Anyone who has experienced an email account intrusion or “hacking” knows how frustrating it can be to deal with the aftermath—from telling friends in milder cases that you didn’t send the flurry of bogus emails they received to regaining access to a blocked account. In the most serious cases, a compromised email account can lead not only to identity theft, but also to theft of your money. That’s why one of the most important first steps you should take if your email account has been hacked is to notify your brokerage firm and other financial institutions.

FINRA has received an increasing number of reports involving investor funds being stolen by fraudsters who first gain access to the investor’s email account and then email instructions to the firm to transfer money out of the brokerage account. In addition to issuing a Regulatory Notice to firms, FINRA is issuing this Alert to warn investors about the potential financial consequences of a compromised email account and to provide tips for safeguarding your assets.

Source:  FINRA Investor Alert

IRS Reminds Parents of Ten Tax Benefits

Your kids can be helpful at tax time. That doesn’t mean they’ll sort your tax receipts or refill your coffee, but those charming children may help you qualify for some valuable tax benefits. Here are 10 things the IRS wants parents to consider when filing their taxes this year.

1. Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

2. Child Tax Credit You may be able to take this credit for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. For more information see IRS Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit You may be able to claim this credit if you pay someone to care for your child or children under age 13 so that you can work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

4. Earned Income Tax Credit The EITC is a tax benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. IRS Publication 596, Earned Income Credit, has more details.

5. Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. If you claim the adoption credit, you must file a paper tax return with required adoption-related documents.  For details, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

6. Children with earned income If your child has income earned from working, they may be required to file a tax return. For more information, see IRS Publication 501.

7. Children with investment income Under certain circumstances a child’s investment income may be taxed at their parent’s tax rate. For more information, see IRS Publication 929, Tax Rules for Children and Dependents.

8. Higher education credits Education tax credits can help offset the costs of higher education. The American Opportunity and the Lifetime Learning Credits are education credits that can reduce your federal income tax dollar-for-dollar. See IRS Publication 970, Tax Benefits for Education, for details.

9. Student loan interest You may be able to deduct interest paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970.

10. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage for any child of yours who was under age 27 at the end of the year, even if the child was not your dependent. For more information, see the IRS website.

Forms and publications on these topics are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Source:  IRS Tax Tip 2012-15

dineLA Restaurant Week

What is dineLA Restaurant Week?

dineLA Restaurant Week is a two-week dining event established to introduce diners to the vast array of restaurants in neighborhoods throughout LA County. Local foodies and visitors to LA will have the opportunity to enjoy a selection of specially priced three-course meals from some of LA’s best restaurants during this dining event.

When is dineLA Restaurant Week?

dineLA Restaurant Week takes place over two consecutive weeks, excluding the Saturday between: January 22–27 and January 29–February 3, 2012.

What are restaurants offering during dineLA Restaurant Week?

Participating restaurants will opt into one of three dining categories and present a specially priced three-course meal for lunch and/or dinner. Diners will be able to choose from three choices for each course including appetizer, entrée and dessert. These dineLA Restaurant Week menus will be viewable online at dineLARestaurantWeek.com. Prices and meal periods vary by restaurant and exclude beverages, tax and gratuity.

Lunches

Deluxe Dining: $16*
Premier Dining: $22*
Fine Dining: $28*

Dinners

Deluxe Dining: $26*
Premier Dining: $34*
Fine Dining: $44*

*Prices and meal periods vary by restaurant and exclude beverages, tax and gratuity

How the Financially Disorganized Can Budget and Save

While financial experts often recommend tracking expenses to rein in unbridled spending, it is possible to build a nest egg without detailing every penny spent.

“Most wealth accumulators do not budget, me included, at least in the traditional sense,” says Kahler Financial Group President Rick Kahler. “Here is what they do: Out of every dollar, they take out their taxes, then they take out 10 to 20 percent for investing, then 10 to 20 percent for emergency savings, and finally 5 to 10 percent [to give away] and they live on the rest.”

“You can see that most successful wealth builders learn to live on one-third to one-half of what they make, but they don’t have a ‘budget.’ Doing this type of ‘budgeting’ you get to spend everything in the checkbook. There are no envelopes or categorical constraints, as everything that’s important was taken off the top,” adds Kahler.

The simple strategy, he says, is to remove everything of importance — taxes, insurance, car and house payments, vacation and emergency savings, retirement funds — from the paycheck before it hits the bank.

One way to accomplish this is to have the paycheck deposited into a master account where all payments are automatically debited. One of those payments can be a “what’s left” amount that goes into a second checking account for lifestyle expenses, Kahler says.

Source:  Dinah Wisenberg Brin, Special to CNBC.com

Offshore Voluntary Disclosure Program Reopens

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will be open for an indefinite period until otherwise announced.

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply.  However, the terms of the program could change at any time going forward.  For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations.  This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax.  The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.

Source: IR-2012-5, Jan. 9, 2012

6 Tips for the Infrequent Flyer

1. Most Checked-Bags are No Longer Free

Believe it or not, some people still don’t know that most checked-bags aren’t free. In fact, for families, these fees – which can cost as much as $70 round-trip for a second checked-bag – can be staggering.

What to do: Two airlines still offer this service at no charge – JetBlue gives you one free checked-bag, while Southwest gives you two. Another important note: Spirit Airlines not only charges for checked-bags – it is also the only airline to charge you for a carry-on bag.

See the U.S. Airline Fee Chart

2. The Best Seats on a Plane May Cost You

More and more airlines are setting aside their “best seats” for elite miles members or for those who pay to sit in these best locations (and this can sometimes include aisle and window seats).

What to do: If you’re not a miles member, sign up! And if you cannot choose your seat when you book your flight – sometimes you can, sometimes you can’t – be sure to do so at the earliest time you are allowed to check-in which is typically 24 hours before departure.

How to Get More Legroom on Your Next Flight

3. Refunds are Rare

Most of the cheapest airline tickets are non-refundable, and that means if you decide to skip your trip or make changes to your itinerary, you will pay a hefty change fee – as much as $150 per ticket – as well as any difference in airfare. In most cases, you will not get your money back simply because you decide not to fly.

What to do: You can pay more for a refundable ticket, or investigate the cost of travel insurance but make sure it covers what you need it to cover. If there’s a serious emergency that precludes you from flying, contact the airline directly and see if they can work with you.

4. Bad Weather Delays/Cancelations and Hotels/Food

This will surprise some travelers but when flights are canceled due to bad weather, the airlines typically will not give you a voucher for free food and a free hotel room. Bad weather is considered a force majeure event and therefore not the airlines’ fault, so you’re on your own.

What to Do When Bad Weather Cancels or Delays Your Flight

What to do: Be polite and try to work with the gate agent. Sometimes they have hotel vouchers for problems that are their fault and you might be lucky to snag one, but don’t count on it. Check with local hotels and see if they can offer any discounts.

5. Leave Time for Connecting Flights (Especially International Destinations)

Airlines typically list suggested airport arrival times on their websites, and for international flights this can be up to three hours. Sometimes they even require your presence at the gate for a certain period of time before departure, and this is important because planes can and do leave early. If you’re not at the gate by the specific time, your plane may leave without you.

What to do: Find out when you must be at the gate, and be there. If planning a flight that will take you to one airport where you will then fly to an international destination – say, from Kansas City to JFK then on to London – give yourself several hours to make that international flight connection. I like to give myself a full day in my international departure city in case of delays.

6. No More Free Meals in Coach

You probably already know that if you want a sandwich in coach, you’ll have to pay for it. I hope you also know to bring a credit card, because no U.S. airline accepts cash anymore.

What to do: Pack your own lunch. It’ll be tastier than anything the airlines sell you, and cheaper.

Source:  Rick Seaney, FareCompare

Payroll Tax Cut Temporarily Extended into 2012

WASHINGTON — Nearly 160 million workers will benefit from the extension of the reduced payroll tax rate that has been in effect for 2011. The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.

Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.

Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year  amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions.  The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.

The IRS will issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision.  For most employers, the quarterly employment tax return for the quarter ending March 31, 2012 is due April 30, 2012.

Source:  IRS IR-2011-124