Schwab RT SQL Recordkeeping Operations Library Katrina Emergency Tax Relief Act of 2005 (KETRA)

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1 Schwab RT SQL Recordkeeping Operations Library Katrina Emergency Tax Relief Act of 2005 (KETRA) Schwab Retirement Technologies Recordkeeping Operations Library

2 Schwab RT Recordkeeping Operations Library Katrina Emergency Tax Relief Act of 2005 January 4, 2006 Release 2.1 (patch) Copyright 2006 by Schwab Retirement Technologies, Inc., a wholly-owned subsidiary of The Charles Schwab Corporation and an affiliate of Charles Schwab & Co., Inc. Information in this document is subject to change without notice. No part of this document can be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose without the express written permission of Schwab Retirement Technologies, Inc. For further information, contact Schwab Retirement Technologies, Inc. at Ballantyne Corporate Place, Suite 300, Charlotte, NC 28277, USA, Tel: (800) , Web site: schwabrt.com. Schwab RT Administration Solutions is the property of Schwab Retirement Technologies, Inc., a wholly-owned subsidiary of The Charles Schwab Corporation and affiliate of Charles Schwab & Co., Inc. Katrina Emergency Tax Relief 01/2006 Schwab Retirement Technologies Page 2 of 11

3 Table of Contents The Recordkeeping Operations Library... 4 Katrina Emergency Tax Relief Act (KETRA)... 5 Disaster Relief Override Option... 7 C001/Plan Maintenance Investment Controls... 8 KETRA Guide for Plan Sponsors... 9 Page 3 of 11

4 The Recordkeeping Operations Library The Schwab RT SQL Recordkeeping Operations Library provides you with topicspecific documents available for recordkeeping system processes. Collectively, these documents comprise Schwab RT s Recordkeeping System Manual of modular individual topics that can be individually maintained with current information, for on-demand downloading and printing. Topic-specific documents coordinate with the Recordkeeping online Help system, and overcomes printing limitations with on-line html Help pages. Additional technical setup procedures and tips might be included in topic-specifics documentation that is not pertinent to the on-line Help. If you are new to Schwab RT you may also want to refer to our Recordkeeping Setup, Options, and Maintenance Reference Guide for overviews of many key SQL Recordkeeping concepts and setup options. Page 4 of 11

5 Katrina Emergency Tax Relief Act (KETRA) IRS Notice provides the following guidelines for the Katrina Emergency Tax Relief Act of 2005: Residence: An individual's principal place of residence is where the individual lives unless temporarily absent due to special circumstances. If an individual's principal place of residence was in the Hurricane Katrina disaster area immediately before August 28, 2005, and the individual evacuated because of Hurricane Katrina, the individual's principal place of residence will still be considered to be in the Hurricane Katrina disaster area on August 28, Plan Distribution Options: An employer is permitted to expand the distribution options under its plan to allow an amount attributable to an elective, qualified nonelective, or qualified matching contribution under a qualified cash or deferred arrangement to be distributed as a Katrina distribution even though the distribution is before an otherwise permitted distributable event, such as severance from employment, disability, or attainment of age 59½. However, KETRA does not change the requirements for when plan distributions are permitted to be made from employer retirement plans. Thus, for example, a qualified plan that is a pension plan (e.g. a money purchase plan) is not permitted to make in-service distributions merely because the distribution, if made, would qualify as a Katrina distribution. Also, a pension plan is not permitted to make a distribution under a distribution form that is not a qualified joint and survivor annuity without spousal consent merely because the distribution, if made, could be treated as a Katrina distribution. Rollovers: If a distribution is treated as a Katrina distribution by a retirement plan, the plan is not required to offer the qualified individual a direct rollover with respect to the distribution. In addition, the plan administrator does not have to provide a 402(f) notice. Administrator Provisions: An employer is permitted to choose whether to treat distributions under its plans as Katrina distributions. The employer or plan administrator is permitted to develop any reasonable procedures for identifying which distributions are treated as Katrina distributions under its retirement plans. A plan will not fail to satisfy any requirement under the Code merely because a qualified individual s total Katrina distributions exceed $100,000, taking into account distributions from IRAs or other eligible retirement plans maintained by unrelated employers. The IRS will issue further guidance relating to plan amendments for KETRA. For employer retirement plans other than a governmental plan, the date by which any plan amendment to reflect KETRA is required to be made will not be earlier than the last day of the first plan year beginning on or after January 1, SQL Recordkeeping Modifications As a supplement to RK-SQL 2.1 and RK-Pervasive 3.12, Schwab RT Recordkeeping systems have been modified to allow loans up to 100% of the vested account balance in amounts up to $100,000. A checkbox option to override the current statutory limits, Disaster Relief Override is available in C201/Loan Maintenance and C206/Loan Consolidation (next page). The following act provisions are accommodated: The 20% mandatory withholding can be waived at distribution for qualified participants Eligible participants taking a safe-harbor hardship withdrawal can be excluded from suspension Loan payment dates can be modified in Loan Consolidation by consolidating outstanding loans Note: The system continues to check maximum amounts available in the source level settings in the Plan Maintenance (Investment Controls window). When using the Disaster Relief Override option, you will also need to increase source level maximum limits to 100%. Page 5 of 11

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7 Disaster Relief Override Option The Disaster Relief Override checkbox is located on the Add Loans window in C201/Loan Maintenance and on the Establish Loans window in C206/Loan Consolidation, displayed below. Selecting this option waives regular restrictions, increasing a qualified participant s available loan amount to 100% of the balance up to $100,000 according to KETRA provisions. Participants can consolidate loans to increase their available distribution. If this checkbox is not selected, module functionality remains unchanged. The Loan Available amount displayed on the bottom right will increase when the Disaster Relief Overide option is selected (and decrease to the original amount if the option is again cleared.) Page 7 of 11

8 C001/Plan Maintenance Investment Controls The system continues to check source level settings in Plan Maintenance when a Disaster Relief option is selected. The source level settings for maximum liquidation percentage amounts available must be increased to 100% in the Investment Controls window of Plan Maintenance to allow the system to permit sales up to 100%. Note: The Plan Maintenance application did not require modifications for KETRA. Page 8 of 11

9 KETRA Guide for Plan Sponsors The following guidelines apply to all qualified participants (individuals who suffered an economic loss and had a principal place of abode on August 28, 2005 in a Hurricane Katrina disaster area (unless otherwise noted). Relief Description Timeframe Plan Amendment Required Penalty Free Withdrawals Repayment of Prior Distributions Any disaster-relief distributions (i.e. termination, hardship, in-service, etc.) made 8/25/2005 and 12/32/06 from all types of retirement plans (qualified plans and IRAs) are exempt from the 10% early distribution penalty under IRC 72(p). Exemption from 10% early distribution penalty only applies to the first $100,000 distributed. All or a portion of up to $100,000 of a disaster-relief distribution (i.e. termination, hardship, in-service, etc.) made to a participant from a qualified plan or IRA 8/25/2005 and 12/31/2006 may be repaid to a qualified plan or IRA (not necessarily the plan from which it was distributed) provided that if the amount is being repaid to a qualified plan, the plan allows for rollover contribution. The repayment must occur during a 3-year period beginning with the date the amount is distributed. Disaster-relief distributions made 8/25/2005 and 12/31/2006. No Income Averaging Election Change in Federal Tax Withholding Rules Recontribution of withdrawals for home purchases Increase in Loan Limit Delay in Loan Repayments To the extent that a participant repays these amounts, the participant will have to amend Form 1040 for the year of the original distribution to reflect the non-taxable amount. Any disaster-relief distribution (i.e. termination, hardship, in-service, etc.) made 8/25/2005 and 12/31/2006 up to $100,000 from a qualified plan or IRA will be includable in the taxpayer s gross income/taxable over a 3-year period at the election of the taxpayer. Any disaster-relief distribution (i.e. termination, hardship, in-service, etc.) made 8/25/2005 and 12/31/2006 up to $100,000 from a qualified plan or IRA is exempt from the 20% federal tax withholding. Instead, 10% federal tax withholding shall apply unless the participant elects otherwise. Applies to any individual who was to purchase or construct a principal residence in a Hurricane Katrina disaster area and whose principal residence was not purchased or constructed due to Hurricane Katrina. All or a portion of a hardship withdrawal from a 401(k) plan or 403(b) plan is used to purchase or construct a principal residence received by a qualified individual February 28, 2005 and August 29, 2005 may be repaid to a qualified plan or IRA (not necessarily the same plan from which it was distributed) by February 28, 2006, provide that if it is repaid to a qualified plan, the plan allows for rollover contributions. For a participant loan from a qualified plan for qualified individual that is taken September 23, 2005 and December 31, 2006, the maximum loan permitted is the lesser of $100,000 or 100% of an individual s account balance. Note: KETRA does not address the Department of Labor requirement that no more than 50% of the participant s account balance can be used as security for a participant loan. The 50% limit applies unless and until further guidance is issued. For a qualified individual with an outstanding loan on or after August 25, 2005 from a qualified plan and who has scheduled repayments August 25, 2005 and December 31, 2006, such repayments can be delayed at the election of the participant for one year, provided: 1) the repayments made after the one-year delay are adjusted/recalculated for accrued interest during the period of the delay, and 2) in determining the 5-year period of the loan, the one-year delay is disregarded. Hardship withdrawals received February 28, 2005 and August 29, 2005 Loans taken September 23, 2005 and December 31, 2006 Participants with scheduled loan repayments 8/25/2005 and 12/31/2006 Yes, by 12/31/2007 Page 9 of 11

10 Hurricane Katrina Reason Hardship Distributions Applies to: Individuals who had either: 1) principal residence; 2) place of employment; or 3) whose lineal ascendant or descendent, dependent or spouse had a principal residence or place of employment on 8/29/2005 in a Hurricane Katrina disaster area. A qualified plan already containing hardship provisions may make Hurricane Katrina Reason hardship distributions to eligible individuals 8/29/2005 and 3/31/2006 on account of hardship. Hardship distributions originating 3/31/2006 Yes, by 12/31/2006 The plan administrator may rely on representations by the employee or former employe as to the need for and amount of any Hurricane Katrina Reason hardship, unless the plan administrator has actual knowledge to the contrary. No 6-Month Suspension Addition of hardship or loan provisions Reason-free Loans Provisions) Applies to: Individuals who had either: 1) principal residence; 2) place of employment; or 3) whose lineal ascendant or descendent, dependent or spouse had a principal residence or place of employment on 8/29/2005 in a Hurricane Katrina disaster area. For plans that use the safe harbor method of determining hardship, if a Hurricane Katrina Reason hardship withdrawal is taken, there is no 6-month suspension from making contributions. Applies to: Individuals who had either: 1) principal residence; 2) place of employment; or 3) whose lineal ascendant or descendent, dependent or spouse had a principal residence or place of employment on 8/29/2005 in a Hurricane Katrina disaster area. For 401(k) plans that do not have hardship or loan provisions, a plan is permitted to issue loans and hardship distributions (including Hurricane Katrina Reason hardship distributions, during the period of 8/29/2005 through 3/31/2006 without immediately amending the plan for such loans or distributions, provided that the plan is later amended accordingly. Applies to: Individuals who had either: 1) principal residence; 2) place of employment; or 3) whose lineal ascendant or descendent, dependent or spouse had a principal residence or place of employment on 8/29/2005 in a Hurricane Katrina disaster area. Hurricane Katrina Reason Hardship distributions originating 3/31/2006 Loans or hardship distributions originating 3/31/2006 Loans originating 3/31/2006 Yes, by 12/31/2006 A qualified plan that provides for restricted loans (loans that meet hardship criteria) may make loans during the period from 3/31/2006 to Hurricane Katrina impacted participants only. The plan will have to be amended at a later point to indicate that during the period from 8/29/2005 through 3/31/2006, the plan allowed loans for affected individuals for any reason. Procedural Relief from certain plan provisions Applies to: Individuals who had either: 1) principal residence; 2) place of employment; or 3) whose lineal ascendant or descendent, dependent or spouse had a principal residence or place of employment on 8/29/2005 in a Hurricane Katrina disaster area. If a procedural requirement is imposed by the terms of the plan document (not a legal or regulatory requirement), then a plan may temporarily disregard such procedural requirements form 8/29/2005 through 3/31/2006. However, the plan administrator must make a reasonable attempt to obtain any forgone documentation. Procedural issues from 8/29/2005 through 3/31/2006 No Form 5500 Filing Relief Example: If spousal consent is required for a plan loan or distribution and the plan terms require production of a death certificate if the employee claims his or her spouse is deceased, the plan will not be disqualified for failure to operate in accordance with the terms of the plan if the plan sponsor makes reasonable attempts to obtain the death certificate later. Applies to Plan Administrators, employer and other entities located in Louisiana (64 parishes), Mississippi (83 counties), Alabama (22 counties) and Florida (11 counties) Filings that are required 1/3/2006 are granted an extension until 1/3/2006 to make such filings. Form 5500 s due 1/3/2006 N/A Part I, Box D should be marked on the Form 5500 and a statement should be attached to the filing. Also, the taxpayer should mark in red ink, Hurricane Katrina on the top of the first page of Form Page 10 of 11

11 Minimum Funding Contribution Relief Applies to Defined Benefit Plans impacted by Hurricane Katrina. Affected plans whose due date for making required funding contributions falls 10/31/2005 have until 10/31/2005 to make the plan contribution. Also, if the deadline for applying for a minimum funding waiver by an affected plan falls within this period, then the waiver deadline is extended to 10/31/2005. Minimum funding 10/31/2005 N/A Page 11 of 11