Qualified Plans Tax Law Changes KANSAS CITY LIFE INSURANCE COMPANY

Transcription

1 Qualified Plans Tax Law Changes KANSAS CITY LIFE INSURANCE COMPANY

2

3 One of the best ways to save for retirement is with a qualified retirement savings plan. Some plans are employer-sponsored. With others, you are the only contributor. Whatever type of plan you re using to secure your future, find out how the new tax laws work. Use this guide to see how qualified plans are impacted by tax law changes. In most cases, the changes increase contribution limits to your savings and provide important catch-up opportunities as well. 1

4 traditional ira A traditional individual retirement account (IRA) is an ideal way to get an immediate tax deduction while saving for future retirement needs. Who can contribute to a traditional IRA? Anyone with earned income who has not yet attained age 70 1 /2 may make a non-deductible contribution to an IRA. However, you may receive a 100 percent deduction on your annual IRA contribution if: You are not an active participant in your employer s retirement plan, or You are an active participant and you earn no more than the applicable dollar limit for the current tax year. (See chart for joint or single filers.) For those who earn in excess of the applicable amount (and are an active participant in their employer s plan), a portion of your IRA contribution may still be deductible if it doesn t exceed the phase-out period. For joint filers, where both spouses are active participants or for the spouse who is an active participant* : Taxable Year Applicable Amount Phase-Out 2008 $85,000 $105, $89,000 $109, $90,000 $110, $92,000 $112,000 *A non-participant spouse, who is not covered under an employer s plan or who doesn t work outside the home, may make a fully deductible contribution if the AGI is $173,000 or less. The phase-out between $173,000 - $183,000 is: MC - (MC x ([AGI - 173,000)/$10,000]) For tax year 2011 and beyond, the phase-out calculation is: MC - (MC x ([AGI - $92,000)/$20,000])** ** MC is the maximum contribution for the tax year. (See the Maximum Contribution chart.) AGI is the adjusted gross income for the tax year. Assume David Martinez and his spouse, Marcy, are both active participants with their employers. For tax year 2012, they d both like to contribute the maximum deductible contribution to their IRAs. Their AGI is $101,000. The following calculation provides the deductible contribution. $5,000 - ($5,000 x ([$101,000 - $92,000]/20,000) = $2,750 Each may make the full IRA contribution of $5,000. However, only $2,750 for each is deductible. They must file Form 8606 to reflect the non-deductible portion of each contribution. To avoid filing Form 8606, each may contribute the $2,250 non-deductible portion to a Roth IRA. For single filers: Taxable Year Applicable Amount Phase-Out 2008 $53,000 $63, $55,000 $65, & 2011 $56,000 $66, $58,000 $68,000 The phase-out contribution is as follows: MC - (MC x ([AGI - Applicable amount)/10,000]) 2

5 TRADITIONAL ira What is the maximum amount that may be contributed to an IRA? Are there any catch-up provisions? The maximum contribution available depends on the taxpayer s AGI and is based on the limits established for a particular tax year. Yes, catch-up contributions are available for those ages 50 and older before the end of the calendar year for which the contribution was made. The following table outlines the maximum contribution (MC) limits as well as the catch-up provisions. Taxable Year Maximum Contribution* Catch-Up $4,000 $1, $5,000** $1,000 *Contributions may be made for the prior tax year up to the filing date of April 15th. **Future contributions may be indexed in increments of $500. Are distributions from an IRA taxable? Does the IRS impose any penalties on IRA distributions? May I roll other retirement assets into my IRA? Can IRA money be transferred to an HSA account? Can the beneficiary of a qualified plan roll the plan proceeds to an IRA? Yes, if only deductible contributions were made to the IRA. If you have made non-deductible contributions to your IRA and correctly filed Form 8606, you will have a non-taxable basis in your contract. To calculate the non-taxable portion of a distribution, complete Form Distributions from an IRA are subject to a self-imposed 10 percent premature distribution penalty unless one of the following exceptions apply: made on or after the attainment of age 59 1 /2 disability qualifying education expenses qualifying first-time home purchase $10,000 lifetime maximum death qualifying medical expenses unemployment (under certain conditions) made in substantially equal periodic payments over life expectancy Effective Jan. 1, 2002, there is greater flexibility and portability between qualified plans, 457 deferred compensation plans, and IRAs. Distributions from pension plans, 401(k), 501(c), 403(b), and 457 plans may be rolled into IRA plans or into each other. Yes, a one-time transfer from your IRA to an HSA not to exceed the annual HSA contribution is permitted. The transferred amount would reduce the regular contribution amount for that year. If during the year your HSA coverage changed from individual to family coverage, an additional transfer would be allowed so that the total transfer amount equals the higher annual contribution limit. Yes, the beneficiary of qualified plan assets who is not the spouse of the deceased may roll the funds into an inherited IRA via a direct rollover. A direct rollover consists of the direct transfer of funds from the plan (or financial institution) directly to the financial institution holding the inherited IRA. If the entire proceeds are received in cash by the nonspouse beneficiary, the funds cannot be rolled over and must be claimed as income in the year received. An inherited IRA is an IRA established to hold the funds resulting from the death of the original participant. These funds cannot be commingled with any regular self-contributed IRA funds held by the beneficiary. The inherited IRA should be titled accordingly. John Smith as beneficiary of Jane Smith would be an acceptable method and should be reflected on the annuity application in this manner. If you have any questions regarding your current IRA or are interested in establishing an IRA, please call the home office at , ext. 8050, or your local Kansas City Life agent or registered representative. 3

6 ROTH ira Who can contribute to a Roth IRA? Roth IRA contributions are not tax deductible; however, qualified distributions are tax free, including the earnings. If you are making tax-deductible contributions to an IRA and not investing your annual tax savings, your retirement spending dollars may well be less than if those same dollars were invested in a Roth IRA. Anyone with earned income, not in excess of certain limits, may contribute to a Roth IRA. Contributions may continue beyond age 70 1 /2. Remember, the total Roth IRA contribution when added to any traditional IRA contribution must not exceed the maximum contribution available for an IRA. Single filers with an adjusted gross income (AGI) not in excess of $110,000 and joint filers with an AGI not in excess of $173,000 may make the maximum contribution. The phase-out schedule for those with greater incomes is as follows: Phase ranges for single filers: $110,000 $125,000 Phase-out schedule for single filers: Maximum Contribution (MC) (MC x [AGI - $110,000)/15,000]) Phase-out ranges for joint filers: $173,000 $183,000 Phase-out schedule for joint filers: MC (MC x ([AGI - $173,000)/10,000]) May I. Savemore, a single taxpayer, has an AGI of $120,000. She d like to contribute the maximum amount to her Roth IRA for tax year The maximum contribution limit for 2012 is $5,000. $5,000 - ($5,000 x [120, ,000)/15,000]) $5,000 - ($5,000 x.6667) $5,000 - $3, = $1, The maximum contribution May can make to her Roth IRA for tax year 2012 is $1, What is the maximum amount that may be contributed to a Roth IRA? Are there any catch-up provisions? The maximum contribution available depends on the taxpayer s AGI and is based on the limits established for a particular tax year. Yes, catch-up contributions are allowed in the Roth IRA for those who are age 50 or older before the end of the calendar year for which the contribution was made. The following table outlines the maximum contribution limits as well as any catch-up provision. Tax Year Maximum Contribution* Catch-Up Contribution $5,000** $1,000 *Contributions may be made for the prior tax year up to the filing date of April 15th. **Future contributions may be indexed in increments of $500. Can a Traditional IRA be converted to a Roth IRA? Yes, a traditional IRA may be converted to a Roth IRA. Beginning in 2010, the $100,000 income restriction will be eliminated. Anyone regardless of income will be able to convert IRA funds to a Roth IRA. The converted amounts are treated as taxable income for the year in which the conversion is made. However, the converted amount is not subject to the 10-percent premature penalty if the taxpayer is under age 59½. 4

7 ROTH ira Can qualified plan funds be rolled over directly to a Roth IRA? Beginning in 2008, qualified plans (including Section 457) can be rolled over directly to a Roth IRA. As of 2010, everyone is able to take advantage of the direct qualified plan rollover due to the elimination of the income restriction. Are distributions from a Roth IRA taxable? Qualified distributions from a Roth IRA are never taxable. Nonqualified distributions may or may not be taxable but only to the extent of the earnings received as part of the distribution. Qualified distributions from a Roth IRA are tax-free after the Roth IRA has been in-force five years and taken after age 59½, death, disability or first-time home purchase with a $10,000 lifetime maximum. If the Roth IRA contains traditional IRA converted amounts, the five-year period begins with the taxable year for which the conversion applies. Non-qualified distributions are all other distribution types not identified as a qualified distribution. Nonqualified distributions are not taxable as long as the amount being withdrawn does not exceed the investment in the contract. Assume Harriet Nichols, age 40, has had a Roth IRA since 2001, and each year she has contributed $2,500. In 2012, her account has a value of $42,000 and her total investment is $30,000. Harriet has decided to take her dream vacation and needs to take a withdrawal of $12,000 from her Roth IRA. Even though this is a nonqualified distribution, it remains a tax-free distribution because the $12,000 she s taken is less than her investment of $30,000 in the contract. If Harriet were to take a $32,000 withdrawal for the same reason from her Roth IRA, than $2,000 would be taxable and subject to the premature distribution penalty because she is under age 59½. For more information regarding the Roth IRA or any of the other retirement accounts offered by Kansas City Life Insurance Company, please call , ext

8 TSA Who may qualify for a TSA? Is a plan document required? How do I establish a TSA? Who owns my TSA? How much may I contribute to my TSA? Kansas City Life s Tax-Sheltered Annuity (TSA) provides a systematic, tax-deferred method of saving. The dollars that otherwise would be lost through taxation provide additional security for retirement. A 403(b) plan enables an eligible employee to set aside funds for retirement on a tax-favored basis from current income. The contribution is excluded from current reportable income, thereby reducing the participant s current income tax. This can mean considerable tax savings. Employees who are employed by certain non-profit charitable, educational, religious, and scientific organizations as defined in Section 501(c)(3) of the Internal Revenue Code qualify. Employees of public school systems are also included. Non-profit organizations include: medical schools parochial schools religious organizations United Way organizations trade schools humane societies colleges/universities social welfare organizations charitable institutions symphony orchestras adult education schools college book stores Cooperative Hospital Services Yes. Employers are required to have a formal plan document. The document must describe all important terms and conditions for eligibility, benefits, limitations, optional features and distributions. You enter into an agreement with your employer to deduct from your salary the amount you wish to contribute. You arrange for a tax-sheltered 403(b) annuity through a Kansas City Life agent for the salary reduction amount. You, as the employee, own all rights to the contract at all times. You may defer/contribute up to 100 percent of your compensation not to exceed the maximum contribution limit for the current tax year. The following table outlines the maximum regular contribution deferral limit for all TSA eligible employees. Tax Year Maximum Regular Contribution 2007 & 2008 $15, $16, $17,000* *Contributions may be indexed in increments of $500 thereafter. 6

9 TSA Are there catch-up provisions? TSAs have several catch-up provisions, as described in the Internal Revenue Code Sec. 415, depending on the total of all previous contributions. To accurately determine these amounts, the Maximum Exclusion Allowance (MEA) must be calculated. There are two simpler catch-up provisions: If you ve been employed for at least 15 years with the same employer, you may contribute an additional $15,000. This $15,000 is spread over a five-year period not to exceed $3,000 each year. Eligible employees, age 50 and over, before the end of the taxable year, may also make additional contributions as follows. Tax Year Catch-Up Contribution 2007 & 2008 $5, and 2012 $5,500* *Indexed beginning in Ima Learning, who will be age 52 in 2012, has taught in the same school district for 16 years and earns $41,500 annually. She wants to contribute the maximum to her Kansas City Life TSA for Ima may contribute a total of $25,500 to her TSA for $17,000 maximum regular contribution $5,500 catch-up contribution over age 50 $3,000 catch-up contribution based on years of service $25,500 total contribution for tax year 2012 Ken Goodfellow, age 50, earns $18,000 annually. He s worked for the same non-profit agency for 20 years. He d like to contribute the maximum to his Kansas City Life TSA in Based on Ken s years of service and age he could qualify for a contribution of $25,500, as Ima Learning did, but the maximum amount that may be deferred is 100 percent of compensation. Thus, Ken is limited to the $18,000. Who remits the deposits? May I change the amount of contribution at any time? What if I want to discontinue my contributions? Your employer must agree to your salary reduction and remit deposits to Kansas City Life Insurance Company. Yes, you are permitted to make changes to your contribution amounts as often as your employer permits. You may discontinue your contributions at any time during the taxable year by notifying your employer you wish to do so. 7

10 TSA May I withdraw funds prior to retirement? Withdrawals are subject to a qualifying event as established by your employer in the plan documents. Withdrawals must be approved and authorized by your employer. The only exception would be premiums paid prior to Dec. 31, 1988 and the accumulated interest earned on those premium payments as of Dec. 31, A qualifying event may be one of the following. attainment of age 59 1 /2 separation of service with the employer disability financial hardship (no earnings may be withdrawn with this exception) These withdrawals are included in income for tax purposes, plus a 10-percent IRS premature distribution penalty unless the distribution is: made after age 59 1 /2 made as a result of death attributable to disability part of a series of substantially equal periodic payments based on your life expectancy made on account of separation from service after age 55 properly made to an alternate payee under a Qualified Domestic Relations Order made for medical care expenses based on IRS regulations Kansas City Life does not assess a surrender charge as long as no more than 10 percent of the accumulated value is withdrawn. This is limited to one withdrawal request per policy year. Withdrawal proceeds may be paid on a monthly, quarterly, semi-annual, or annual basis as long as each payment is at least $100. Distributions may be subject to a 20-percent mandatory withholding unless they meet one of the following exceptions: periodic distributions with a payout of at least 10 years distributions based on life expectancy, including required minimum distributions and substantially equal periodic payments based on IRC. Sec. 72(t) hardship withdrawals May I borrow my funds prior to retirement? How are benefits taxed at retirement? Each employer will determine if loans are permitted under their plan. If permitted, company policy and Internal Revenue Code rules restrict the amount of the loan. A qualified loan is not subject to income tax unless the loan is not repaid. If payments are not made and the loan is in default, the entire loan, plus accrued interest becomes taxable. Please contact your Kansas City Life representative or the Home Office for loan program details. When benefits are received, they are taxed as ordinary income. Benefit distributions may be delayed to the later of April 1 of the year following your retirement or the attainment of age 70 1 /2. 8

11 TSA What options do I have to receive the benefits at retirement? Does a TSA affect my other retirement plans? May I also establish an IRA or Roth IRA? Many settlement options are available. They include the following: Lump sum Life income options, life only, period certain and life, installment refunds, special retirement settlement option (SRSO), joint and survivor, period certain, and life Required minimum distributions No. Your contributions to other retirement plans, including Social Security, are not affected, nor are the benefits you receive from other plans. Yes. In addition to your tax-sheltered annuity, you may have an IRA and take a full deduction annually if you and your spouse s joint adjusted gross income is less than the applicable limit for the current tax year. A partial deduction may be available, if your adjusted gross income does not exceed the phase-out schedule. See the section on IRAs or contact your Kansas City Life representative or our home office. You may also establish a Roth IRA if your adjusted gross income does not exceed the applicable dollar limit. For more information, see the Roth IRA section or contact your Kansas City Life representative or our home office. Can I transfer other retirement assets into my TSA? May I transfer my 403(b) plan assets to a Roth IRA? Yes, plan permitting. You may transfer pension plan, 401(k), IRA, SEP IRA, Simple IRA, 457 Governmental Plan or TSA assets into your TSA contract. Consult your plan provider. The receiving plan is not required to retain all of the distribution options that were available under the original plan. Effective Jan. 1, 2008, you may transfer/rollover and immediately convert your eligible 403(b) funds directly to a Roth IRA. These amounts are included in your taxable income in the year of distribution. For more information regarding the TSA, please call , ext

12 SEP Must my employer contribute to my IRA under the SEP? How much may my employer contribute to my SEP-IRA in any year? How do I treat my employer s SEP contributions for my taxes? May I also contribute to an IRA or Roth IRA if my employer has a SEP? Are there any restrictions on the IRA I select to deposit my SEP contributions in? What if I don t want a SEP-IRA? Can I move funds from my SEP-IRA to another tax-sheltered IRA? A Simplified Employee Pension (SEP) is a retirement income arrangement under which your employer may contribute into your own IRA. Your employer provides you with a copy of the plan containing participation requirements and a description of the basis upon which employer contributions may be made to your IRA. All amounts contributed to your IRA by your employer belong to you, even after you separate from service with that employer. Whether or not your employer makes a contribution to the SEP is determined by the plan document. If a contribution is made under the SEP, it must be allocated to eligible employees according to the SEP plan document. Special rules may apply to a top-heavy SEP. Under the plan your employer has adopted, your employer determines the amount of contribution to be made to your IRA each year. However, the contribution for any year is limited to 25 percent of your compensation up to a maximum of $50,000 for The maximum compensation that may be taken into consideration is $250,000 for 2012, with possible COLA increases in increments of $5,000. The compensation used to determine this limit does not include any amount which is contributed by your employer to your IRA under the SEP. Depending on the plan provisions, it is possible that for some years no employer contribution will be made to your SEP. The amount your employer contributes is excluded from your gross income reported on Form W-2. Therefore, you would pay no taxes on your employer s SEP contributions. Yes, you may contribute an amount up to your normal IRA limitation. Participation in the SEP plan could affect the deductibility of your IRA contributions in some cases. You may also be able to make Roth IRA contributions. Ask your representative for details or contact us at the Home Office. Yes, your employer is allowed to limit the IRA vehicles to which you may elect to have your SEP contributions made. Your employer may require you to become a participant in such an arrangement as a condition of employment. However, if any employer does not require all eligible employees to become participants and an eligible employee elects not to participate, all other employees of the same employer are prohibited from entering into a SEP-IRA arrangement with that employer. If one or more eligible employees does not participate and the employer attempts to establish a SEP-IRA agreement with the remaining employees, the resulting arrangement will not result in any tax advantage and may in fact result in adverse tax consequences to the participating employees. Yes, it is permissible to withdraw funds from your SEP-IRA and, no more than 60 days later, place such funds in another IRA. This is called a rollover and may not be done without penalty more frequently than at one-year intervals. 10

13 SEP What happens if I withdraw my employer s contribution from my IRA? May I participate in a SEP even though I m covered by another plan? What happens if too much is contributed to my SEP-IRA in one year? What if I work for two or more employers who maintain SEPs? Do I need to file any additional tax forms? Is my employer required to provide me with information about SEP-IRAs and the SEP plan? If you don t want to leave the employer s contribution in your IRA, you may withdraw it at any time, but any amount withdrawn may be included in your income. Also, if withdrawals occur before attainment of age 59 1 /2, and not on account of death, disability, first time home purchase (limited to $10,000 lifetime), or qualified higher education expenses, you may be subject to a penalty tax equal to 10 percent of the amount distributed to you. An employer may not adopt this SEP plan if the employer maintains another qualified retirement plan or has ever maintained a qualified defined benefit plan. However, if you work for more than one employer, you may be covered by a SEP of one employer and a qualified retirement plan of another employer. Any contribution by you or by your employer that is more than the yearly contribution limitations may be withdrawn without IRS penalty by the due date (including extensions) for filing your tax return. Excess contributions left in your SEP-IRA account after that time, are subject to an IRS 6-percent excise tax. If you are employed by two or more employers who maintain SEPs, the amount that may be contributed depends upon the compensation you receive in a year from each employer. For example, if employer A maintains a SEP and your compensation from employer A is $20,000, the maximum amount that may be contributed on your behalf is $5,000 (25 percent x $20,000) for contributions under employer A s SEP. If employer B maintains a SEP and your compensation from employer B is $10,000, the maximum amount that may be contributed on your behalf is $2,500 (25 percent x $10,000) for contributions under employer B s SEP. Therefore the total SEP contribution for you would be no greater than $7,500. No. Yes, your employer must provide you with a copy of the executed SEP plan document and provide a statement each year showing any contribution to your SEP-IRA. These contributions are reflected on your annual W-2 form. Is the financial institution where I establish my IRA also required to provide me with information? Can I roll other retirement assets into my SEP-IRA? Yes, it must provide you with a disclosure statement at issue and annual financial statements. Yes, you may roll over assets from a pension plan, 401K, 457 Governmental Plan, IRA or SEP-IRA assets into your SEP-IRA contract. For more information regarding the SEP plan, please call , ext

14 SIMPLE IRA PLANS Savings Incentive Match Plan for Employees or Simple IRA plans allow employees to save for retirement while lowering their current taxable income. This Simple IRA plan is designed especially for small businesses those with fewer than 101 employees. The plan allows small businesses to reward and retain loyal employees as well as attract new employees. Are there any costs to the employer to start a Simple IRA plan? Are annual IRS filings required by employer? Kansas City Life charges a one-time, $30 start-up fee to establish a Simple IRA plan. There are no additional plan administration fees charged to the employer. As a result, Simple IRA plans are far less expensive than other qualified plans to establish and maintain. No, there are no annual IRS filing requirements or complicated administration rules. It is not necessary to employ the services of a third party administrator (TPA) or an actuary. What employees are eligible to participate? All employees who earn $5,000 or more in any two of the preceding calendar years and are reasonably expected to earn $5,000 in the current year must be allowed to participate. This is the maximum service requirement. As the employer, you may always make the service requirements less restrictive. Let s say you started your business in January 2009 and you are the only employee. To establish your Simple IRA plan, your service requirements would be $0 earnings for any preceding years. This would enable you to make the maximum contribution as an employee in the first year. The following year, you hire two employees. You may amend your service requirements to require earnings of $5,000 in one preceding year. This allows you to continue contributions for yourself and exclude the new employees. In 2011, to continue to exclude your new hires (hired in 2010), your plan must amend the service requirements to the maximum of $5,000 in any two of the preceding years. In 2012, the employees hired in 2010 must be allowed to participate assuming they ve earned at least $5,000 in 2010 and 2011, and it s reasonable to expect they will earn at least $5,000 in the current year. Are employer contributions required? The employer is required to make contributions one of two ways. An employer may make non-elective contributions of 2 percent. This contribution type requires employer contributions of 2 percent of salary for every participant who is eligible to participate regardless of whether or not they actually do. In our first example, two new employees were hired in Assume both meet the service requirements in 2012 and only one chooses to participate in the Simple IRA plan. If the employer chooses to make non-elective contributions, Simple IRAs must be established for both employees. The participating employee s Simple IRA account contains his salary reduction contributions and the employer s 2 percent non-elective contribution. The non-participating employee s account contains only the employer s 2 percent contribution. The other employer contribution method is the elective contribution. These contributions are made only for those who actually participate. The employer may make elective contributions ranging from 1 to 3 percent of employee salary. Employer contributions must average at least 2 percent in the five-year look-back period. Assume the same facts as in our first example. The employer establishes the plan in 2009, makes the maximum employer elective contribution of 3 percent for himself in 2009, 2010, and In 2012, when the two employees are eligible to participate, the employer may reduce the elective contribution to 1 percent for 2012 and The five-year average is 2.2 percent, exceeding the 2 percent requirement. 12

15 SIMPLE IRA PLANS An employer who s been in business for many years (or just starting out) with several employees may establish a Simple IRA plan and make the minimum elective contribution of 1 percent for the first two years. When a plan is first established, the IRS assumes the maximum contribution has been made during the preceding years. For non-elective contributions, the salary is capped at $250,000 in The 2 percent non-elective contribution applies only to the first $250,000 in earnings for 2012 and results in a maximum contribution of $5,000. How often must an employee be allowed to make contributions or change his election? The employer need only allow participants to make one election during the enrollment period. The enrollment period is 60 days prior to the start of the next plan year, typically January 1. These changes become effective with the start of the next plan year. The employer may be less restrictive, allowing employees to change their contribution percentage monthly, quarterly, etc. Employees must always be allowed to stop contributions at any time. However, the employer may limit how often employees may be allowed to resume contributions, but not less frequently than annually during the election period. The employer indicates on Form 5304-Simple, provided to all eligible employees annually, whether contributions may be restarted or changed during the year. Are there annual filings or notifications due? How frequently must contributions be made? When may a plan be established? Can an employer maintain another qualified plan in addition to a Simple IRA? Yes, Kansas City Life provides the employer with copies of Form 5304-Simple. This form must be provided to each eligible employee. The IRS also requires an annual statement of account values and Form Kansas City Life provides these forms directly to all participating and previously participating employees. The employee s salary reduction contributions should be made as soon as administratively possible and must be made to the employee s Simple IRA within 30 days after the end of the month for which the contribution was withheld. The employer s elective or non-elective contribution must be made by the business tax return date, plus extensions. For current year contributions, the Simple IRA plan must be established prior to October 1. Plans established after October 1 have an effective date of January 1 of the following year and do not begin salary reduction until that time. All plans are maintained on a calendar year basis. No. An employer cannot maintain, during any part of the calendar year, another qualified plan with respect to which contributions are made, or benefits are accrued, for service in the calendar year. Please contact your agent/registered rep or the home office at , ext. 8050, with questions regarding Simple IRA plans. 13

16 SIMPLE IRA PLANS The employer sponsoring this plan is also committed to making a contribution on your behalf to your Simple IRA as long as you participate in the plan. Who is eligible to participate? How much may an employee contribute to a Simple IRA? Are there catch-up provisions for older workers? You are eligible to participate if: You ve worked for the sponsoring employer for at least two years (employment need not be consecutive), and You earned at least $5,000 each year, and You are expected to earn at least $5,000 this year. Your employer may have less restrictive service requirements. Please see Form 5304-Simple for your employers actual service requirements. An eligible employee may contribute up to 100 percent of his or her compensation, not to exceed the maximum contribution amount (shown below). Yes, catch-up contributions are allowed for participating employees age 50 or older during the current year. These catch-up provisions are based on age, so even if this is the first year you ve been eligible to participate you may take advantage of the catch-up provisions if you meet the age requirements. See below for the amount of the additional catch-up contributions allowed. Tax Year Maximum Contribution Catch-Up Contribution 2008 $10,500 $2, $11,500 $2,500 May be indexed in increments of $500 starting in 2007 and thereafter. Take a look at how contributing just 12.5 percent of your gross income to a Simple IRA can reduce the tax you pay while providing a valuable retirement benefit. Tax Benefits of a No Simple IRA Plan Simple IRA Plan Gross Salary $70,000 $70,000 Simple Contribution 0 $8,750 Income Taxes* $19,600 $17,150 Social Security Tax $5,355 $5,355 Take-Home Pay $45,045 $38,745 *Assuming a 28-percent tax bracket. Your $8,750 contribution to your Simple IRA, combined with an assumed 3 percent employer match of $2,100, gives you an impressive $10,850 start to your retirement account. Your take-home pay was reduced by $6,300, however, you paid $2,450 less in taxes for a tax-deferred account of $10,850, which starts working for you immediately. 14

17 SIMPLE IRA PLANS Can I stop, start or change my contribution amount? Will my employer make a contribution to my account? Are annual taxes due on the growth in the Simple IRA? Are there restrictions on my account? Vesting schedules? You may always stop making contributions to your Simple IRA. Once contributions are stopped, your employer must allow you to resume contributions the following year. This election will be made during the election period. However, your employer may have established less restrictive rules. The same holds true for changing your contribution amount. Your employer must allow you to make changes to the contribution amount at least annually, during the election period. Changes are effective with the start of the new plan year, January 1. Again your employer may allow changes more frequently than annually. Please refer to your copy of the SIMPLE IRA document for exceptions made by your employer. If you are participating in your employer-sponsored Simple IRA plan, your employer always makes a contribution to your account. The amount of the contribution ranges from 1 to 3 percent of your income. Employers are allowed to make either elective or non-elective contributions. Elective contributions are made only for those who actually participate. The employer elective contribution may range from 1 to 3 percent. An employer may choose to make non-elective contributions. A contribution of 2 percent of salary would be made to each employee eligible to participate regardless of whether they actually participate. Your copy of the SIMPLE IRA document will outline your employer s contribution method. You should receive a copy of this form each year you are eligible to participate in the plan. No, the Simple IRA is a tax-sheltered account and the earnings grow on a tax-deferred basis. No income tax is due until you actually take distributions from your account. Both the employer and employee contributions are fully vested. You always have immediate access to your funds. Please keep in mind there may be IRS penalties and/or penalties associated with the annuity itself. Distributions from a Simple IRA are subject to the 10 percent IRS premature distribution penalty, which is increased to 25 percent if the distribution is taken within the first two years, unless one of the following exceptions apply: made on or after the attainment of age 59 1 /2 disability qualifying education expenses unemployment (under certain conditions) made in substantially equal periodic payments over life expectancy death qualifying medical expenses qualifying first time home purchase $10,000 lifetime maximum This penalty is self-imposed when filing your taxes. You may want to contact your tax advisor with questions. The Kansas City Life annuity used as the investment vehicle for the Simple IRA permits one withdrawal of up to 10 percent annually with no company-imposed charges. Distributions taken in excess of the 10 percent during the surrender charge period are subject to surrender charges. Can I roll other retirement assets into my Simple IRA? No, the only assets that may be placed in a Simple IRA are the regular Simple IRA contributions or the assets from another Simple IRA. There is no commingling of IRA, TSA, or 401(k) assets within the Simple IRA. Please contact your agent/registered rep or the home office at , ext. 8050, with questions regarding Simple IRA plans. 15

18 PROFIT SHARING PLAN When can a profit sharing plan be established? Is a plan document required? A profit sharing plan is a qualified retirement plan meeting a host of requirements of the Internal Revenue Code. The contribution is made by the employer. A Profit Sharing Plan is the simplest of the qualified plans and has the greatest flexibility in contribution. A profit sharing plan can be sponsored by a C-corporation, S-corporation, partnership, sole proprietor, and a limited liability corporation. A profit sharing plan can be established at any time; however, the plan document must be signed and dated by the last day of the fiscal year if the employer wants to make a contribution for that fiscal year. The employer has until the due date of his tax return to make the contribution to the plan. There must be a written, IRS-approved plan document that outlines all the provisions of the plan. There are various different types of plan documents; the most common types are prototype, volume submit and individually drafted. Must the employees receive any information regarding the plan? There must be a written Summary Plan Description that is given to each eligible participant. The Summary Plan Description is an easy to read, brief form of the plan document giving the basics of the plan. The Summary Plan Description is required to be given initially to all eligible participants when a plan is first established and thereafter as the IRS dictates. The most current Summary Plan Description must be given to each participant when they first become eligible for the plan. Are employer contributions required? What is the maximum allocation for an individual participant in a profit sharing plan? Is there a limit on compensation used to calculate contribution? There is no required contribution amount, the employer can decide each year how much he will contribute to the plan; however contributions must be substantial and recurring according to the IRS to be a qualified profit sharing plan. The maximum deduction limit for the business is 25 percent of eligible compensation, therefore an employer s contribution amount can be anywhere from zero to 25 percent of the compensation of the eligible employees for the year. The maximum allocation (415 limit) for an individual is 100 percent of compensation with a maximum of $50,000 for There is the potential that the IRS will adjust this amount for cost of living increases in $1,000 increment. This increase is announced each year by IRS. Therefore for 2012, the maximum allocation any participant can receive is 100 percent of compensation with a cap of $50,000. This $50,000 includes employer profit sharing contribution and any forfeitures allocated for The maximum compensation that may be taken into account for plan purposes is $250,000 for Again, there is potential for cost of living adjustments (COLA) increases in $5,000 increments. This amount is announced each year by the IRS. 16

19 PROFIT SHARING PLAN Which employees are eligible to participate? The plan document will state the eligibility requirements. The employer may set any service and age requirement as long as the service and age does not exceed the following: Employees who have attained age 21 Employees with one year of service Employees with two years of service if 100 percent immediate vesting is used Employees must work more than 1,000 hours in their first employment year to meet the one year of service, (the period then shifts to the plan year to see if employees had worked 1,000 hours in the plan year for eligibility purposes) Certain union employees Certain nonresident alien employees Service requirement and entry dates can, of course, always be more lenient than the maximum allowed by IRS. What is an entry date? What is a year of service? The plan will set the date or dates an employee will actually enter the plan after completing the eligibility requirement. If the plan uses the one year service requirement then the entry must be either 1) dual entry the first day of the plan year and the first day of the seventh month, or 2) first day of the plan year nearest the completion of the eligibility requirement. The law states that an employee cannot be kept out of the plan any longer than 18 months. If the plan has a one year service requirement for eligibility, the year of service is normally defined to be 1,000 hours of service. The 1,000 hours must be performed in the employee s first employment year. If a service requirement of less than one year is used, there is no hour requirement on that period of time. For example, if a plan uses six months of service for eligibility, the employee will have met the service requirement as soon as the employee has been employed for six months, even if the employee only worked 20 hours a month. There is no hours-worked requirement when the service requirement is less than a year of service. This is typical in most plan documents. A year of service for vesting purposes is defined to be a plan year in which the participant performs 1,000 hours of service. What is a vesting schedule? When is a plan top-heavy? If a plan is top-heavy, does that change anything in the way the plan operates? IRS regulations state that the plan vesting schedule has to be at least as liberal as a six-year graded. Here are examples of common vesting schedules: 6-Year Graded 0-2 years 0% 2 years 20% 3 years 40% 4 years 60% 5 years 80% 6 years 100% 3-Year Cliff 0-3 years 0% 3 years 100% A plan is top-heavy when 60 percent or more of the total assets are for the benefit of the key employees. The IRS defines key employees as employees who are: 1. A 5 percent owner or 2. A 1 percent owner with annual compensation in excess of $165,000, or 3. An officer with annual compensation in excess of $165,000 for The $165,000 is subject to the IRS s cost of living adjustments. If the plan is top-heavy, the only requirement is that if a contribution is made to the plan and if the key employees are receiving 3 percent of compensation then all non-key employees must receive at least 3 percent of compensation. 17

20 PROFIT SHARING PLAN How is the employer contribution allocated? Are there any annual notices that must be given to the participants? There are many different ways that the employer contribution can be allocated. The options depend upon the type of plan document that is used and what it allows. Listed below are four ways in which employer contributions can be allocated. 1. Straight salary ratio contribution is allocated based on a percentage of the participant s compensation. 2. Integrated with Social Security is a means of giving a greater share of the contribution to participants who make over the current Social Security Wage Base. 3. Age-weighted allocation contribution is based on compensation and age. Contribution is allocated on the present value of 1 percent of compensation and if the age of the owner is greater than the age of the employees, a much greater share of the contribution can be given to the owner. 4. Cross-tested allocation employees are grouped in at least two rate groups (could be more) and a different percent of contribution can be given to each rate group. There has to be a basis for why employees are put into the groups. A very common way to group employees is shareholders and non-shareholders. There are some additional tests that the allocation formula has to pass to be considered nondiscriminatory. Again, this allocation formula works best when the owner is older than most of the employees. Yes, each eligible participant must be given a Summary Annual Report each plan year. The report contains some of the information that is filed with IRS on the Form Are annual IRS filings required by the employer? Yes, the employer must file an annual report (Form 5500 and all required attachments) each year. It is advisable to employ the services of a third party administrator. May I roll/transfer other retirement assets into my profit sharing plan? May a participant rollover employee after-tax contributions? May a beneficiary rollover his or her distribution from a deceased participant? May a participant do a direct rollover from a qualified plan to a Roth IRA? Yes, plan permitting. You may roll assets from a pension plan, 401K, TSA, 457 Governmental Plan, SEP IRA, Simple IRA, IRA or other profit sharing plan to your profit sharing plan. The receiving plan is not required to retain all the distribution options available in the original plan. Consult your plan provider. Effective Jan. 1, 2007, participants may rollover employee after-tax assets between qualified plans and 403(b) plans as long as the receiving plan separately accounts for the after-tax amounts. Prior to 2007, only a surviving spouse could rollover a distribution from a deceased spouse s qualified plan to his or her own IRA. Beginning in 2007, beneficiaries other than a surviving spouse may rollover benefits received from a qualified retirement plan to an inherited IRA. Prior to 2008, participants could only do a direct rollover to: an IRA a qualified plan under IRS Sec. 401(a) (e.g. 401 [k], profit sharing plan) a qualified annuity plan under IRC Sec. 403(a) a tax-sheltered annuity 403(b) plan, and a governmental 457(b) plan Beginning in 2008, distributions from qualified retirement plans may also be rolled directly into a Roth IRA (with the taxable portion of the rollover amount taxed at the time of the rollover). 18 For more information, contact the home office at , ext

21 401(k) PROFIT SHARING PLAN A 401(k) plan is a qualified profit sharing plan that contains a cash or deferred arrangement. A 401(k) plan may be a stand-alone plan permitting only employee salary deferral (referred to as elective contributions) or it may also permit other types of employer contributions (non-elective contributions). If the plan allows for an employer profit sharing contribution, the plan has all the same features and options as a profit sharing plan. A 401(k) profit sharing plan can be sponsored by a C-corporation, S-corporation, partnership, sole proprietor, a limited liability corporation, and a tax-exempt employer (501(c)(3). When can a 401(k) profit sharing plan be established? Is a plan document required? Must the employees receive any information regarding the plan? How much may an employee defer in a 401(k) plan? A 401(k) profit sharing plan can be established at any time; however the plan document must be signed before any salary deferral can be made to the plan. The employer has until the due date of his tax return to make any employer contribution to the plan. There must be a written, IRS-approved plan document that outlines all the provisions of the plan. There are various different types of plan documents; the most common types are prototype, volume submit, and individually drafted. The plan document must be signed and dated prior to any 401(k) contributions being made to the plan. There must be a written Summary Plan Description that is given to each eligible participant. The Summary Plan Description is an easy to read, brief form of the plan document giving the basics of the plan. The Summary Plan Description is required to be given initially to all eligible participants when a plan is first established and thereafter as the IRS dictates. The most current Summary Plan Description must be given to each participant when he or she first become eligible for the plan. The employee may defer any percentage or dollar amount up to 100 percent of his or her compensation with a maximum deferral limit (402(g) limit) by year as follows: $16, $17,000 After 2012, the $17,000 limitation may be adjusted for inflation in $500 increments in the same manner as other COLA adjustments made by the IRS. Is there any additional testing involved in a 401(k) plan? Yes, the employee deferral contribution is subject to an Annual Deferral Percentage test and, if the company does a matching contribution, it is subject to an Annual Contribution Percentage test. These tests are commonly referred to as the ADP and ACP tests. The tests limit the amount of deferral and match contribution that the highly compensated employees can receive in relationship to the amount of deferral and match contribution of the non-highly compensated employees. A general rule of thumb to have a passing test is if the average rate of deferral or match for the highly compensated is no more than 2 percent higher than the average rate of deferral or match for the non-highly compensated. 19

22 401(k) PROFIT SHARING PLAN Are employer contributions required? There is no required contribution amount by the employer unless the plan is topheavy. If the plan is top-heavy and the key employees are receiving 3 percent or more of their compensation through salary deferral, then the employer must make a 3 percent contribution to all non-key employees. There are two types of employer contributions that can be made to a 401(k) profit sharing plan. The employer may make a discretionary profit sharing contribution and/or an employer match contribution which is based on the deferral contribution made by the participant. If the employer wishes to make a matching contribution, it can be a fixed formula in the plan document or it can be discretionary in the plan document (the employer can decide each year how much he will contribute as a match contribution). The maximum deduction limit for the business is 25 percent of eligible compensation, therefore an employer s contribution amount can be anywhere from zero to 25 percent of the compensation of the eligible employees for the year. This 25 percent maximum includes the employer match contribution and the employer profit sharing contribution. The deferral contribution is no longer a part of the maximum deduction. What is the maximum allocation in a 401(k) profit sharing plan? The maximum allocation (415 limit) for an individual is 100 percent of compensation with a maximum of $50,000 for There is the potential that IRS will adjust this amount for COLA increases in $1,000 increments. This increase is announced each year by IRS. Therefore, for 2012, the maximum allocation any participant can receive is 100 percent of compensation with a cap of $50,000. This $50,000 includes the salary deferral contribution made by the employee, plus any employer match contribution, plus any employer profit sharing contribution, and any forfeitures allocated for Is there a limit on compensation used to calculate contribution? The maximum compensation that may be taken into account for plan purposes is $250,000 for Again, there is potential for COLA increases in $5,000 increments. This amount is announced each year by the IRS. Which employees are eligible to participate? The plan document will state the eligibility requirements. The employer may set any service and age requirement as long as the service and age does not exceed the following: Employees who have attained age 21 Employees with one year of service Employees must work more than 1,000 hours in their first employment year to meet the one year of service, (the period then shifts to the plan year to see if employees had worked 1,000 hours in the plan year for eligibility purposes) Certain union employees Certain nonresident alien employees Service requirement and entry dates can, of course, always be more lenient than the maximum allowed by IRS. What is an entry date? The plan will set the date or dates an employee will actually enter the plan after completing the eligibility requirement. If the plan uses a one year service requirement then the entry must be either 1) dual entry the first day of the plan year and the first day of the seventh month, or 2) first day of the plan year nearest the completion of the eligibility requirement. The law states that an employee cannot be kept out of the plan any longer than 18 months. 20

23 401(k) PROFIT SHARING PLAN What is a year of service? If the plan has a one-year service requirement for eligibility, the year of service is normally defined to be 1,000 hours of service. The 1,000 hours must be performed in the employee s first employment year. If a service requirement less than one year is used, there is no hour requirement on that period of time. For example, if a plan uses six months of service for eligibility, the employee will have met the service requirement as soon as the employee has been employed for six months, even if the employee only worked 20 hours a month. There is no hours-worked requirement when the service requirement is less than a year of service. This is typical in most plan documents. A year of service for vesting purposes is defined to be a plan year in which the participant performs 1,000 hours of service. Does vesting apply to a 401(k) profit sharing plan? When is a plan top-heavy? If a plan is top-heavy, does that change anything in the way the plan operates? Can participants do a catch-up contribution? The employee deferral contribution is 100 percent vested. IRS regulations state that the plan vesting schedule has to be at least as liberal as a six-year graded. The employee deferral contribution is 100 percent vested. Employer matching contribution and employer profit sharing contribution may be subject to a vesting schedule. Here are some examples of common vesting schedules: 6-Year Graded 0-2 years 0% 2 years 20% 3 years 40% 4 years 60% 5 years 80% 6 years 100% 3-Year Cliff 0-3 years 0% 3 years 100% A plan is top-heavy when 60 percent or more of the total assets are for the benefit of the key employees. The IRS defines key employees as employees who are: 1. A 5 percent owner, or 2. A 1 percent owner with annual compensation in excess of $165,000, or 3. An officer with annual compensation in excess of $165,000 for The $165,000 is subject to the IRS s cost of living adjustments. If the plan is top-heavy, the only requirement is that if a contribution is made to the plan and if the key employees are receiving 3 percent of compensation in any form of contribution (even salary deferral) then all non-key employees must receive at least 3 percent of compensation. If the employer makes a match contribution, it can be used toward satisfying the top-heavy contribution. If a participant is not receiving at least a 3 percent match or the participant is not deferring, an additional contribution will have to be made to give those participants 3 percent. Yes, if a participant has attained age 50 by the end of the year he or she can defer an additional amount as follows: For taxable years beginning in The applicable dollar amount 2007 & 2008 $5, $5,500 After 2012, the $5,500 limitation may be adjusted for inflation in $500 increments in the same manner as other COLA adjustments made by the IRS. Catch-up contributions are not included in the maximum allocation (415 limit) of $50,000 for

24 401(k) PROFIT SHARING PLAN Are there any annual notices that must be given to the participants? Yes, each eligible participant must be given a Summary Annual Report each plan year. The report contains some of the information that is filed with IRS on the Form Are annual IRS filings required by the employer? Yes, the employer must file an annual report (Form 5500 and all required attachments) each year. It is advisable to employ the services of a third party administrator. May I roll/transfer other retirement assets into my 401(k) plan? May a participant rollover employee after-tax contributions? May a beneficiary rollover his or her distribution from a deceased participant? May a participant directly rollover from a qualified plan to a Roth IRA? Yes, plan permitting. You may roll assets from a pension plan, profit sharing plan, TSA, 457 Governmental Plan, SEP IRA, Simple IRA, IRA or other 401(k) assets to your 401(k) plan. The receiving plan is not required to retain all the distribution options available in the original plan. Consult your plan provider. Effective Jan. 1, 2007, participants may rollover employee after-tax assets between qualified plans and 403(b) plans as long as the receiving plan separately accounts for the after-tax amounts. Prior to 2007, only a surviving spouse could rollover a distribution from a deceased spouse s qualified plan to his or her own IRA. Beginning in 2007, beneficiaries other than a surviving spouse may rollover benefits received from a qualified retirement plan to an inherited IRA. Prior to 2008, participants could only do a direct rollover to: an IRA a qualified plan under IRS Sec. 401(a) (e.g. 401 [k], profit sharing plan) a qualified annuity plan under IRC Sec. 403(a) a tax-sheltered annuity 403(b) plan a governmental 457(b) plan Beginning in 2008, distributions from qualified retirement plans may also be rolled directly into a Roth IRA (with the taxable portion of the rollover amount taxed at the time of the rollover). For more information, contact the home office at , ext

25 SAFE HARBOR 401(k) PLAN The safe harbor 401(k) profit sharing plan is a type of 401(k) plan that is exempt from the Annual Deferral Percentage (ADP) test and the Annual Contribution Percentage (ACP) test while improving its ability to achieve disparity in contributions allocated to highly compensated employees versus the non-highly compensated employees. This has appeal to the small business owner, since compliance with the safe harbor allows eligible, highly-compensated employees to defer the full Code 402(g) amount (for 2012 $17,000) without regard to deferrals by the non-highly compensated employees. A safe harbor 401(k) profit sharing plan can be sponsored by a C-corporation, S-corporation, partnership, sole proprietor, limited liability corporation, and a tax-exempt employer [501(c)(3)]. When can a safe harbor 401(k) profit sharing plan be established? Is a plan document required? Must the employees receive any information regarding the plan? How much may an employee defer in a Safe Harbor 401(k) plan? If an employer has never had a qualified plan he can set up a safe harbor 401(k) plan with the first plan year being at least three months. For a calendar year plan, that means the plan would have to be effective by October 1. If adding safe harbor 401(k) to an existing profit sharing plan, the period for the safe harbor plan must be at least three months. If adding safe harbor to an existing 401(k) plan, generally it has to add the safe harbor feature as of the first day of the plan year. The plan document must be signed and dated before any 401(k) contribution can be made to the plan. The employer has until the due date of his tax return to make any employer contribution to the plan. Yes, there must be a written, IRS approved plan document that outlines all the provisions of the plan. There are various different types of plan documents, the most common types are prototype, volume submit, and individually drafted. The plan document must be signed and dated prior to any 401(k) contribution being made to the plan. For a safe harbor 401(k) plan, this document must specify the provisions (either the safe harbor three percent elective contribution or the safe harbor match contribution) the plan will use to satisfy the safe harbor requirements. There must be a written Summary Plan Description that is given to each eligible participant. The Summary Plan Description is an easy to read, brief form of the plan document giving the basics of the plan. The Summary Plan Description is required to be given initially to all eligible participants when a plan is first established and thereafter as the IRS dictates. The most current Summary Plan Description must be given to each participant when he or she first becomes eligible for the plan. The employee may defer any percentage or dollar amount up to 100 percent of his or her compensation with a maximum deferral limit [402(g) limit] by year as follows: $16, $17,000 After 2012, the $17,000 limitation may be adjusted for inflation in $500 increments in the same manner as other COLA adjustments made by the IRS. Is there any additional testing involved in a 401(k) plan? A regular 401(k) plan is subject to an ADP test and, if the company does a matching contribution, it is subject to an ACP test. There is no ADP/ACP test as long as the only match contribution that is made is a safe harbor match contribution. This means that the highly compensated can defer up to the maximum amount allowed by law and it does not matter how much the non-highly compensated are deferring. If the employer does a match contribution that does not meet the safe harbor guidelines, then the plan would be subject to the ADP/ACP test. 23

26 SAFE HARBOR 401(k) PLAN Are employer contributions required? The employer can choose either the non-elective option or the basic match option to meet the safe harbor requirement. The non-elective contribution option is a required 3 percent contribution to all eligible non-highly compensated employees eligible for the plan, regardless whether the employee actually defers. The basic match option requires a match contribution equal to 100 percent of the employee s first 3 percent of salary deferral plus 50 percent of the employee s elective deferrals in excess of 3 percent of compensation but not exceeding five percent of compensation. Can an additional employer contribution be made? A safe harbor 401(k) plan may provide for an employer contribution that is in addition to the required safe harbor contribution. An employer seeking both maximum disparity and at least some individual contribution flexibility should consider a combination 401(k) and either integrated, age-weighted, or cross-tested profit sharing plan design. The maximum deduction limit for the business is 25 percent of eligible compensation, therefore an employer s contribution amount can be anywhere from zero to 25 percent of the compensation of the eligible employees for the year. This 25 percent maximum includes the employer match contribution, employer nonelective contribution, and the employer profit sharing contribution. The deferral contribution is no longer a part of the maximum deduction. What is the maximum allocation in a safe harbor 401(k) profit sharing plan? Is there a limit on compensation used to calculate contribution? Which employees are eligible to participate? The maximum allocation (415 limit) for an individual is 100 percent of compensation with a maximum of $50,000 for There is the potential that the IRS will adjust this amount for COLA increases in $1,000 increments. This increase is announced each year by the IRS. Therefore, for 2012, the maximum allocation any participant can receive is 100 percent of compensation with a cap of $50,000. This $50,000 includes the salary deferral contribution made by the employee, plus any employer match contribution (if used), plus the employer non-elective contribution (if used), plus any employer profit sharing contribution and any forfeitures allocated for The maximum compensation that may be taken into account for plan purposes is $250,000 for Again, there is potential for COLA increases in $5,000 increments. This amount is announced each year by the IRS. The plan document will state the eligibility requirements. The employer may set any service and age requirement as long as the service and age does not exceed the following: Employees who have attained age 21 Employees with one year of service Employees must work more than 1,000 hours in their first employment year to meet the one year of service, (the period then shifts to the plan year to see if employees worked 1,000 hours in the plan year for eligibility purposes) Certain union employees Certain non-resident alien employees Service requirement and entry dates can, of course, always be more lenient than the maximum allowed by the IRS. 24

27 SAFE HARBOR 401(k) PLAN What is an entry date? What is a year of service? What type of vesting schedule can a safe harbor 401(k) plan have? Are there any special requirements to have a safe-harbor plan? When is a plan top-heavy? If a plan is top-heavy, does that change anything in the way the plan operates? The plan will set the date or dates an employee will actually enter the plan after completing the eligibility requirement. If the plan uses a one-year service requirement, then the entry must be either 1) dual entry the first day of the plan year and the first day of the seventh month, or 2) the first day of the plan year nearest the completion of the eligibility requirement. The law states that an employee cannot be kept out of the plan any longer than 18 months. If the plan has a one-year service requirement for eligibility, the year of service is normally defined to be 1,000 hours of service. 1,000 hours must be performed in the employee s first employment year. If a service requirement less than one year is used, there is no hour requirement on that period of time. For example, if a plan uses six months of service for eligibility, the employee will have met the service requirement as soon as the employee has been employed for six months, even if the employee only worked 20 hours a month. There is no hours-worked requirement when the service requirement is less than a year of service. This is typical in most plan documents. A year of service for vesting purposes is defined to be a plan year in which the participant performs 1,000 hours of service. The employee deferral contribution is 100 percent vested. IRS regulations state that the plan vesting schedule has to be at least as liberal as a six-year graded. The employee deferral contribution is 100 percent vested. Both the basic match contribution and the non-elective contribution must be 100 percent vested at all times. If a profit sharing contribution is made, it can be subject to a vesting schedule. Here are some examples of common vesting schedules: 6-Year Graded 0-2 years 0% 2 years 20% 3 years 40% 4 years 60% 5 years 80% 6 years 100% 3-Year Cliff 0-3 years 0% 3 years 100% The employer must provide timely written notice to eligible employees before each plan year. The notice must specify certain items and must be understandable by the average plan participant. The employer must provide the safe harbor notice within a reasonable period of time before the beginning of the plan year. A plan is deemed to comply if it provides the notice not less than 30 days or more than 90 days prior to the beginning of each plan year. There are some exceptions to the minimum 30-day notice for new plans and new entrants to existing plans. A plan is top-heavy when 60 percent or more of the total assets are for the benefit of the key employees. The IRS defines key employees as employees who are: 1. A five percent owner or 2. A one percent owner with annual compensation in excess of $165,000, or 3. An officer with annual compensation in excess of $165,000. The $165,000 is subject to cost of living adjustments made by the IRS. If the plan is top-heavy, the only requirement is that if a contribution is made to the plan and if the key employees are receiving 3 percent of compensation then all non-key employees must receive at least 3 percent of compensation. If the plan is top heavy, the 3 percent non-elective contribution satisfies both the top heavy required contribution plus the safe harbor contribution requirement. If the plan uses the match contribution for safe harbor, the match can be used toward the top-heavy contribution. If a participant is not receiving at least a 3 percent match or the participant is not deferring, an additional contribution will have to be made to give those participants 3 percent. 25

28 SAFE HARBOR 401(k) PLAN Can participants make a catch-up contribution? Yes, if a participant has attained age 50 by the end of the year he or she can defer an additional amount as follows: For taxable years beginning in The applicable dollar amount 2007 and 2008 $5, $5,500 After 2012, the $5,500 limitation will be adjusted for inflation in $500 increments in the same manner as other COLA adjustments made by the IRS. Catch-up contributions are not included in the maximum allocation (415 limit) of $50,000 for Are there any annual notices that must be given to the participants? Yes, each eligible participant must be given a Summary Annual Report each plan year. The report contains some of the information that is filed with IRS on the Form Are annual IRS filings required by the employer? May I roll/transfer other retirement assets into my 401(k) plan? May a participant rollover employee after-tax contributions? May a beneficiary rollover his or her distribution from a deceased participant? May a participant do a direct rollover from a qualified plan to a Roth IRA? Yes, the employer must file an annual report (Form 5500 and all required attachments) each year. It is advisable to employ the services of a third party administrator. Yes, plan permitting. You may roll assets from a pension plan, profit sharing plan, TSA, 457 Governmental Plan, SEP IRA, Simple IRA, IRA or other 401(k) assets to your safe harbor 401(k) plan. The receiving plan is not required to retain all the distribution options available in the original plan. Consult your plan provider. Effective Jan. 1, 2007, participants may rollover employee after-tax assets between qualified plans and 403(b) plans as long as the receiving plan separately accounts for the after-tax amounts. Prior to 2007, only a surviving spouse could rollover a distribution from a deceased spouse s qualified plan to his or her own IRA. Beginning in 2007, beneficiaries other than a surviving spouse may rollover benefits received from a qualified retirement plan to an inherited IRA. Prior to 2008, participants could only do a direct rollover to: an IRA a qualified plan under IRS Sec. 401(a) (e.g. 401 [k], profit sharing plan) a qualified annuity plan under IRC Sec. 403(a) a tax-sheltered annuity 403(b) plan a governmental 457(b) plan Beginning in 2008, distributions from qualified retirement plans may also be rolled directly into a Roth IRA (with the taxable portion of the rollover amount taxed at the time of the rollover). For more information, contact the home office at , ext

29 INDIVIDUAL (k) PLAN An Individual (k) plan is a 401(k) profit sharing plan for the business that employs only owners and spouses with no common law employees (unless they can be excluded by IRS regulations). Since this is a type of 401(k) profit sharing plan, the plan has all the same features and options as a 401(k) profit sharing plan. An Individual (k) plan can be sponsored by a C-corporation, S-corporation, partnership, sole proprietor, and a limited liability corporation. When can an Individual (k) plan be established? Is a plan document required? Must the employees receive any information regarding the plan? How much may an employee defer in an Individual (k) plan? An individual (k) plan can be established at any time; however, the plan document must be signed before any salary deferral can be made to the plan. The employer has until the due date of his or her tax return to make any employer contribution to the plan. Yes, it has the same plan document requirement as a 401(k) profit sharing plan. There must be a written, IRS-approved plan document that outlines all the provisions of the plan. There are various different types of plan documents; the most common types are prototype, volume submit, and individually drafted. The plan document must be signed and dated prior to any 401(k) contributions being made to the plan. No, since there are no common law employees eligible for the plan there is no requirement to have a Summary Plan Description. The employee may defer any percentage or dollar amount up to 100 percent of his or her compensation with a maximum deferral limit [402(g) limit] by year as follows: $16, $17,000 After 2012, the $17,000 limitation may be adjusted for inflation in $500 increments in the same manner as other COLA adjustments made by IRS. Is there any additional testing involved in a Individual (k) plan? Are employer contributions required? No, the ADP/ACP test is not required since the only participant or participants are the owner and the spouse. There is no required contribution amount by the employer even though the plan will be top-heavy. No top-heavy contribution is required, since there are no non-key participants. The maximum deduction limit for the business is 25 percent of eligible compensation. Therefore an employer s contribution amount can be anywhere from zero to 25 percent of the compensation of the eligible employees for the year. The deferral contribution is no longer a part of the maximum deduction. 27

30 INDIVIDUAL (k) PLAN What is the maximum allocation in an Individual (k) plan? The maximum allocation (415 limit) for an individual is 100 percent of compensation with a maximum of $50,000 for There is the potential that the IRS will adjust this amount for COLA increases in $1,000 increments. This increase is announced each year by the IRS. Therefore, for 2012, the maximum allocation any participant can receive is 100 percent of compensation with a cap of $50,000. This $50,000 includes the salary deferral contribution made by the employee, plus any employer profit sharing contribution for Is there a limit on compensation used to calculate contribution? The maximum compensation that may be taken into account for plan purposes is $250,000 for Again, there is potential for COLA increases in $5,000 increments. This amount is announced each year by the IRS. Is the eligibility requirement any different for an Individual (k) plan than a 401(k) profit sharing plan? No, however if there are no common-law employees, it may seem like there is no need to have an eligibility requirement. An eligibility requirement should probably be used if there is a chance there could be common-law employees in the future. The following common-law employees can be excluded: Employees under age 21 Employees with less than one year of service Employees who work less than 1,000 hours per year Certain union employees Certain nonresident alien employees Service requirement and entry dates can, of course, always be more lenient than the maximum allowed by the IRS. What is an entry date? What is a year of service? The plan will set the date or dates an employee will actually enter the plan after completing the eligibility requirement. If the plan uses a one-year service requirement then the entry must be either 1) dual entry the first day of the plan year and the first day of the seventh month or 2) first day of the plan year nearest the completion of the eligibility requirement. The law states that an employee cannot be kept out of the plan any longer than 18 months. If the plan has a one-year service requirement for eligibility, the year of service is normally defined to be 1,000 hours of service. 1,000 hours must be performed in the employee s first employment year. If a service requirement less than one year is used, there is no hour requirement on that period of time. For example, if a plan uses six months of service for eligibility, the employee will have met the service requirement as soon as the employee has been employed for six months, even if the employee only worked 20 hours a month. There is no hours-worked requirement when the service requirement is less than a year of service. This is typical in most plan documents. A year of service for vesting purposes is defined to be a plan year in which the participant performs 1,000 hours of service. Does vesting apply to an Individual (k) Plan? The employee deferral contribution is 100 percent vested. Employer profit sharing contribution may be subject to a vesting schedule. The following is the maximum vesting schedules that can be used: 6-Year Graded 0-2 years 0% 2 years 20% 3 years 40% 4 years 60% 5 years 80% 6 years 100% 3-Year Cliff 0-3 years 0% 3 years 100% 28

31 INDIVIDUAL (k) PLAN When is a plan top-heavy? Can participants in a Individual (k) Plan do a catch-up contribution? A plan is top-heavy when 60 percent or more of the total assets are for the benefit of the key employees. The IRS defines key employees as employees who are: 1. a 5 percent owner, or 2. a 1 percent owner with annual compensation in excess of $165,000, or 3. an officer with annual compensation in excess of $165,000. The $165,000 is subject to cost of living adjustments made by the IRS. These plans will always be top-heavy, since only key employees are in the plan. Yes, if a participant has attained age 50 by the end of the year they can defer an additional amount as follows: For taxable years beginning in The applicable dollar amount 2007 and 2008 $5, $5,500 After 2012, the $5,500 limitation may be adjusted for inflation in $500 increments in the same manner as other COLAs made by the IRS. Are there any annual notices that must be given to the participants? Are annual IRS filings required by an Individual (k) Plan? May I roll/transfer other retirement assets into my Individual (k) plan? May a participant rollover employee after-tax contributions? May a beneficiary rollover his or her distribution from a deceased participant? May a participant do a direct rollover from a qualified plan to a Roth IRA? No annual notice is required since the plan is eligible to file the Form 5500-EZ. This notice requirement only applies to plans that have common law participants and are required to file the Form Yes, the plan would have to file the 5500-EZ each year once the total assets of the plan reach $250,000. There is no filing requirement until the plan assets equal $250,000. It is advisable to employ the services of a third party administrator. Yes, plan permitting. You may roll assets from a pension plan, 401(k) TSA, 457 Governmental Plan, SEP IRA, Simple IRA, IRA or other profit sharing plan to your Individual (k) plan. The receiving plan is not required to retain all the distribution options available in the original plan. Consult your plan provider. Effective Jan. 1, 2007, participants may rollover employee after-tax assets between qualified plans and 403(b) plans as long as the receiving plan separately accounts for the after-tax amounts. Prior to 2007, only a surviving spouse could rollover a distribution from a deceased spouse s qualified plan to his or her own IRA. Beginning in 2007, beneficiaries other than a surviving spouse may rollover benefits received from a qualified retirement plan to an inherited IRA. Prior to 2008, participants could only do a direct rollover to: an IRA a qualified plan under IRS Sec. 401(a) (e.g. 401 [k], profit sharing plan) a qualified annuity plan under IRC Sec. 403(a) a tax-sheltered annuity 403(b) plan a governmental 457(b) plan Beginning in 2008, distributions from qualified retirement plans may also be rolled directly into a Roth IRA (with the taxable portion of the roll-over amount taxed at the time of the rollover). For more information, contact the home office at , ext

32 ROTH 401(k) What is a Roth 401(k) plan? Who may contribute to a Roth 401(k) plan? How much may an employee contribute to a Roth 401(k) plan? Are catch-up contributions allowed? May a plan permit only Roth 401(k) contributions? If my 401(k) plan has automatic enrollment can any part of my contribution be designated as a Roth 401(k) contribution? May a plan make matching contributions to a Roth 401(k) plan? May forfeitures be allocated to my Roth 401(k) account? Are distributions from a Roth 401(k) tax-free? A Roth 401(k) plan maintains a separate account comprised of elective contributions under a cash or deferred arrangement. Contributions are includible in income and subject to wage withholding requirements. To allow Roth 401(k) contributions, a plan must also offer pretax elective contributions. As long as the 401(k) plan allows for Roth 401(k) contributions, anyone who is eligible to participate in the 401(k) plan may make Roth 401(k) contributions. There is no income limitation as there is with a Roth IRA account. However, Roth 401(k) contributions are subject to the actual deferral percentage (ADP) test and may be subject to actual contribution percentage (ACP) testing if the employer makes a matching contribution to the plan. For 2012, the maximum Roth 401(k) contribution is $17,000 ($22,500 if age 50 or over), just as for a regular 401(k). That is, the combined total of elective contributions for a 401(k) and a Roth 401(k) cannot exceed this limit. For example, Agnes Holloway, age 51, has worked for the Bugs-B-Gone exterminator company for six years. She makes $42,000 annually and participates in the company s 401(k) plan. Effective Jan. 1, 2006, the plan permits Roth 401(k) contributions. Agnes elects to contribute $8,400 as a pretax 401(k) contribution. She d like to contribute the balance as a Roth 401(k) contribution. Because she is permitted to contribute a maximum of $22,500 in 2012 ($17,000 + $5,500 catch-up), she may make a Roth 401(k) contribution of $14,100. No. For a plan to offer Roth 401(k) elections, it must also allow pretax elections. Yes. In the event you do not make any affirmative election to either participate or decline participation, the plan states the default election. This election may consist of both pretax contributions and Roth 401(k) contributions in any percentage or may be wholly pretax or wholly Roth 401(K). This election is deemed irrevocable and monies cannot be transferred between the separate accounts. Yes. Although the matching contributions are not treated as includible in income when contributed, they must be maintained in a separate account and are fully taxable when distributed. Generally, the matching contributions plus earnings are maintained in the same account as regular pretax 401(k) contributions. No. The only amounts permitted in a Roth 401(k) account are designated Roth 401(k) contributions, Roth rollover contributions and the earnings thereon. Not all distributions from a Roth 401(k) plan are tax-free. Qualified distributions are tax-free. Qualified distributions are generally distributions made after a five-year participation period and made on or after the employee s attainment of age 591 2, death or disability. The first-time home buyer s exception that is permitted under a Roth IRA is not permitted under a Roth 401(k). Nonqualified distributions are includible in income to the extent allocable to income on the contract. The taxable portion of a withdrawal would be proportionate to the income in the contract at the time of the distribution. For example, Steve Jenkins has contributed a total of $5,000 a year for the last three years to his Roth 401(k) plan. In 2012, his account is valued at $18,500 of which $15,000 is the total of his regular Roth 401(k) contributions. His plan permits an in-service withdrawal and he takes out $10,800 to cover unexpected medical expenses. The taxable portion associated with this withdrawal would be $2, (earnings divided by contract value) times withdrawal amount. $3,500/$18,500 = % x $10,800 = $2,

33 Roth 401(k) Can I rollover my Roth 401(k)? Yes, you can but it s important to understand the differences between a direct rollover and a regular rollover and the rules pertaining to each. A direct rollover is the transfer of assets from one trustee (institution) directly to another trustee (institution). The only way to roll all of the assets of a Roth 401(k) to another Roth 401(k) or Roth 403(b) is by doing a direct rollover. If the proceeds are received in cash by the participant they can only roll the taxable portion to another Roth 401(k) or Roth 403(b) plan. When the Roth 401(k) assets are directly rolled to another Roth 401(k) or Roth 403(b) plan, the transferring plans five-year holding period, or portion thereof, is also transferred to the new receiving plan. This is beneficial for older workers. For example, assume Joshua Fischer, age 58, has been participating in his employer-sponsored Roth 401(k) plan since In 2011, Joshua begins working for a new employer. The new employer permits 401(k) rollovers, offers a Roth 401(k) plan and permits rollovers* of these assets as well. Joshua completes a direct rollover into his new employer s Roth 401(k) plan. The five-year holding period, used to determine the soonest a qualified distribution is permitted, for Joshua in the new plan, will be completed at year-end 2012, even though he will have only been with his current employer for two years. *The receiving plan must agree to separately account for the nontaxable portion (basis) and the earnings. Had the distribution from his former employer been considered a qualified distribution, the entire direct rollover amount would have been considered basis in the receiving plan. The 60-day rollover rules apply to Roth 401(k) distributions received directly by the participant with modifications. The entire distribution can be rolled to a Roth IRA. If only a portion of the distribution is rolled and any part of the distribution would have been included in income (nonqualified distribution) then the taxable portion is considered rolled over first. The five-year period used to determine when a qualified distribution is available from the Roth IRA would be based on when the Roth IRA is established. The previous participation years in the Roth 401(k) does not transfer to the receiving Roth IRA. Assume Joshua Fischer in our previous example decides not to do a direct rollover to his new employer s plan but decides to take a nonqualified distribution in cash and roll some of it to a Roth IRA within the 60-day time limit. Joshua contributed a total of $7,000 a year to his Roth 401(k) account from 2008 thru At the time of his nonqualified distribution the account value was $24,050, $21,000 of which was his investment. Joshua establishes a Roth IRA in February 2011 and rolls $15,000 to the account. The $3,050 taxable portion is considered rolled first so this distribution does not result in any additional reportable income for Joshua and the $9,050 he kept is not taxable. However, because he just established his Roth IRA in 2011 he is not eligible for a qualified Roth IRA distribution until the completion of five years. Any distributions prior to the completion of the five-year holding period may be taxable, subject to special tax reporting rules and the filing of IRS Form Assume Joshua s distribution from the Roth 401(k) was a qualified distribution, taken after the five-year holding period and age 59 1 /2. Joshua still kept the $9,050 and rolled within 60 days the $15,000 to a Roth IRA. When a qualified distribution is rolled, the full rolled amount is considered investment (basis) in the Roth IRA. Even though Joshua just established the Roth IRA to receive the rollover proceeds and will not be eligible for a qualified distribution from the Roth IRA for five years, all is not lost. The monies in a Roth IRA are subject to distribution ordering rules, and the investment or basis in a Roth IRA is always distributed first. So Joshua could take a withdrawal (nonqualified distribution) of up to $15,000 from the Roth IRA anytime before the completion of the Roth IRA five-year holding period without incurring any additional taxation. Can I take withdrawals from my Roth 401(k) whenever I want? Are Roth 401(k) accounts subject to minimum distribution requirements? No, the 401(k) plan restrictions that apply to your pretax elective contributions also apply to your Roth 401(k) contributions. If your 401(k) plan permits in-service withdrawals (hardship distributions), you may elect to receive the withdrawal from your Roth account. Remember, a portion of your withdrawal may be taxable if it doesn t meet the requirements for a qualified distribution. Yes, currently these accounts are subject to the same distribution rules as pretax 401(k) accounts. However, this may change. In the meantime, rolling the Roth 401(k) assets to a Roth IRA prior to age 70 1 /2 exempts the funds from this requirement. 31

34 Roth 403(b) What is a Roth 403(b)? How much can be contributed to a Roth 403(b)? Do the same income restrictions that apply to Roth IRAs apply to Roth 403(b) contributions? Designated Roth 403(b) contributions are a new type of contribution that can be accepted by a new or existing 403(b) plan. If a plan adopts this feature, employees can designate some or all of their elective contributions as designated Roth contributions, (which are included in gross income) rather than traditional, pretax elective contributions. Beginning in 2006, elective contributions come in two types: traditional pre-tax elective contributions and designated Roth contributions. The amount contributed in any one year is limited to $17,000 for 2012 plus an additional $5,500 in catch-up contributions if age 50 or older. This amount includes any other traditional pre-tax elective deferral for the employee. No, there are no limits on income in determining if designated Roth contributions can be made. There only has to be salary present from which to make the 403(b) deferrals. Can Roth 403(b) contributions be recharacterized to have them treated as pretax elective contributions at a later time? No, the election to make Roth 403(b) contributions is irrevocable. Once they are designated Roth 403(b) contributions, they cannot be changed to traditional pretax elective contributions. If Roth 403(b) contributions are offered to one employee under a 403(b) TSA plan, must they be offered to all participants under the TSA plan? May a 403(b) plan permit only Roth 403(b) contributions? Must a separate annuity be set up for the Roth 403(b) contributions? What are the employer responsibilities if Roth 403(b) contributions are permitted? Yes. If any employee is given the opportunity to designate 403(b) elective deferrals as Roth contributions, then all employees must be given that same right. No. The plan must also offer traditional pretax deferrals. Yes, a separate Roth 403(b) annuity must be established initially and maintained from the time the first contribution is made until the entire account is distributed. The employer or plan administrator is responsible for maintaining separate accounting of designated Roth contributions from pretax elective deferrals. Separate billings for the Roth 403(b) contributions are needed. Contributions to the Roth 403(b) must be separately reported on the employees Form W-2. 32

35 Roth 403(b) What is the tax treatment of Roth 403(b) distributions? The special Roth IRA ordering rules for distributions do not apply to designated Roth annuities in 403(b) plans. Distributions from a Roth 403(b) annuity, whether qualified or nonqualified, consist of a prorata portion of basis and earnings. A qualified distribution is generally a distribution that is made after a five taxable year period of participation (which begins Jan. 1 of the year contributions start and ends after five taxable years have passed) and that either: 1. is made on or after the date the employee attains age 59 1 / 2, 2. is made after the employee s death, or 3. is attributable to the employee s being disabled. A qualified distribution is tax-free. Participation in a Roth IRA does not count in determining the five year period for the Roth 403(b). A nonqualified distribution is included in the employee s gross income to the extent allocable to income on the contract and excluded from gross income to the extent allocable to investment in the contract (basis). The amount of a distribution allocated to investment in the contract is determined by applying to the distribution the ratio of the investment in the contract to the designated Roth annuity balance. For example, if a nonqualified distribution of $5,000 is made from a Roth 403(b) annuity when the annuity consists of $9,400 of Roth 403(b) contributions and $600 of earnings, the distribution consists of $4,700 of designated Roth contributions (that are not includible in the employee s gross income) and $300 of earnings (that are includible in the employee s gross income). Can Roth 403(b) withdrawals be made at any time without restriction? Are Roth 403(b) accounts subject to minimum distribution requirements? Can Roth 403(b) assets be rolled over to another Roth 403(b) or Roth 401(k)? Can Roth 403(b) assets be rolled over to a Roth IRA? No. Plan restrictions on withdrawals that apply to pretax elective contributions also apply to designated Roth contributions. If a hardship distribution is permitted from the 403(b) plan, the distribution from the Roth annuity will consist of a prorata share of earnings and basis and the earnings will be included in gross income unless the Roth 403(b) has been in effect for five years and the employee is either disabled or over age 59 1 /2. Yes, currently these accounts are subject to the same distribution rules as pretax 403(b) accounts. However, this may change. In the meantime, rolling the Roth 403(b) balance to a Roth IRA prior to age 70 1 /2 will exempt the funds from this requirement. Yes, but it is important to know the difference between a direct rollover between plans and a 60-day rollover of a Roth 403(b) distribution initiated by the employee. The only way to roll all of the assets of a Roth 403(b) to another Roth 403(b) or Roth 401(k) is to do a direct, plan-to-plan rollover. When the Roth 403(b) assets are directly rolled to another Roth 403(b) or Roth 401(k) plan, the transferring plans five-year holding period or portion thereof, is also transferred to the new receiving plan. The receiving plan must agree to separately account for the nontaxable portion (basis) and the earnings. If the proceeds are received in cash by the employee, they can only roll the taxable portion to another 403(b) or 401(k) plan. Employees may roll over Roth 403(b) assets to a Roth IRA regardless of their income. If a nonqualified distribution is rolled over by the employee from a Roth 403(b) to a Roth IRA, the nontaxable and taxable amounts are still tracked, but the Roth IRA five-year holding period applies. If a distribution is only partially rolled over, the taxable portion is considered rolled over first. If a qualified distribution from a Roth 403(b) is rolled over, the entire amount of the rollover is considered basis in the Roth IRA, regardless of whether the employee has met the Roth IRA five-year holding period. Once the rollover funds are in the Roth IRA, the Roth IRA ordering rules for distributions apply. Roth IRA rollovers to a Roth 403(b) or Roth 401(k) are prohibited. 33

36 Roth 403(b) What reporting and record-keeping requirements are needed for a Roth 403(b) Plan? A separate IRS form 1099R is required for any Roth 403(b) distributions. Kansas City Life will prepare those forms. Quarterly annuity statements are also provided. The plan administrator is responsible for keeping track of the five-year holding period of each employee and the amount of Roth 403(b) contributions made on behalf of each employee. The plan administrator directly rolling over a distribution would be required to provide the plan administrator of the recipient plan (the plan accepting the rollover) with a statement indicating either the first year of the five-year holding period for the employee and the portion of the distribution attributable to basis or that the distribution is a qualified distribution. Kansas City Life assists the administrator, if needed, by providing any information available. If the rollover is not a direct rollover to a designated Roth 403(b) or Roth 401(k), the plan administrator must provide to the employee, upon request, the portion of such distribution attributable to basis or that the distribution is a qualified distribution. The receiving Roth administrator of the recipient plan would be permitted to rely on these statements. The employee has no reporting obligation with respect to Roth 403(b) contributions in the 403(b) plan. However, if the employee rolls over his or her Roth 403(b) to a Roth IRA, an IRS form 8606 will need to be completed with the rollover amount and included with his or her Form 1040 for the year of the rollover. 34

37 PLAN COMPATIBILITY Deductible IRA* Non-Deductible IRA* Roth IRA TSA Roth TSA SIMPLE IRA Profit Sharing 401(k) / Individual 401(k) Roth 401(k) Max 2012 Deductible IRA* Non-Deductible IRA* Roth IRA TSA Roth TSA SIMPLE IRA Profit Sharing 401(k) / Individual 401(k) Roth 401(k) Y 1 Y 1 Y 2 Y 2 Y 2 Y 2 Y 2 Y 2 Y 1 Y 1 Y Y Y Y Y Y Y 1 Y 1 Y 2 Y 2 Y 2 Y 2 Y 2 Y 2 Y 2 Y Y 2 Y 3 N 4 N 4 Y 5 Y 5 Y 2 Y Y 2 Y 3 N 4 N 4 Y 5 Y 5 Y 2 Y Y 2 N 4 N 4 N 4 N 4 N 4 Y 2 Y Y 2 N 4 N 4 N 4 Y 6 Y 6 Y 2 Y Y 2 Y 5 Y 5 N 4 Y 6 Y 5 Y 2 Y Y 2 Y 5 Y 5 N 4 Y 6 Y 5 $5,000 + catch-up $5,000 + catch-up $5,000 + catch-up $17,000 + catch-up $17,000 + catch-up $11,500 + catch-up $50,000 $17,000 + catch-up $50,000 total $17,000 + catch-up $50,000 total 1. Total to all cannot exceed the maximum contribution limit ($5,000 + $1,000 catch-up if age 50 or older in 2012). 2. Subject to adjusted gross income (AGI) limits. 3. Total to both cannot exceed the maximum contribution limit ($17,000 + $5,500 if age 50 or older in 2012). Additional catch-up of $15,000 spread over five years not to exceed $3,000 a year if employed by same employer for at least 15 years. 4. However, participation in both is possible if there are multiple employers. 5. Total salary reduction cannot exceed the maximum contribution limit (if age 50 or older in 2012). Total of all contributions cannot exceed overall 415 limits ($50,000 for 2012). 6. Total cannot exceed 415 limits ($50,000 for 2012). *Must have earned income and age less than 70 1 /2 for contribution year. 35

38 Securities and investments offered through Sunset Financial Services, Inc., 3520 Broadway, Kansas City, MO 64111, , (Home Office), Member FINRA/SIPC. Sunset Financial Services, Inc. is a wholly-owned subsidiary of Kansas City Life Insurance Company.