ALI-ABA Course of Study Retirement, Deferred Compensation & Welfare Plans. September 10-12, 2009 Excerpt From:

ALI-ABA Course of Study Retirement, Deferred Compensation & Welfare Plans September 10-12, 2009 Excerpt From: Selected Regulatory Developments: Governmental Plans By Terry A.M. Mumford Mary Beth Braitman Ice Miller LLP Indianapolis, Indiana With the assistance of Gregory D. Wolf, Paralegal This article is reproduced from the ALI-ABA Course of Study Materials, Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers, held September 4-6, 2008, in Washington, D.C.. For the archived online course: http://www.ali-aba.org/

82 TABLE OF CONTENTS Page A. Employee Benefit Plans (General)...1 B. 414(d) Governmental Plans...6 C. 457(b) Governmental Plans (General)...6 D. 403(b) Plans (General)...6 E. Governmental Instrumentality Rulings...7 F. IRAs (Roth; Deemed IRAs; Nonbank Trustees)...7 G. IRC 415 Limits...10 H. Non-Qualified Plans (457(f), 409A)...10 I. Distribution Rules Including IRC 72, 104, 402, and 401(a)(9)...11 J. Line of Duty Disability and Death Benefits 104(a)(1)...15 K. Procedural Rules...15 L. Form 1099-R, Form W-2 Filings, and Form W-4's...17 M. Health Care (including Retiree Health) and Other Benefits...18 N. Listed Transactions...24 ADDENDUM I Department of Labor Guidance...I-1 ADDENDUM II Cumulative List...II-1 - i -

83 Selected Regulatory Developments: Governmental Plans July 1, 2007 through July 17, 2008 by Terry A.M. Mumford and Mary Beth Braitman Ice Miller LLP with the assistance of Gregory D. Wolf, Paralegal The purpose of this outline is to summarize selected regulatory developments that may be of interest to practitioners who work with governmental employers and governmental retirement and certain benefit plans. The period covered in this outline is July 1, 2007 through July 17, 2008. These materials also include Addendum I that deals with Department of Labor guidance and Addendum II that contains the 2007 Cumulative List of Changes in Plan Qualification Requirements for Cycle C. The summaries are provided in reverse chronological order by topic. The Employee Plans News, which can be found at http://www.irs.gov/retirement/article/0,,id=96731,00.html, is a periodic newsletter from Employee Plans (Tax Exempt and Governmental Entities at the Internal Revenue Service), which provides retirement plan information for retirement plan practitioners. The IRS introduced a governmental plan webpage, which can be found at http://www.irs.gov/retirement/article/0,,id=181779,00.html. IRS webpage on Recent Guidance That May Require Interim or Discretionary Amendments can be found at http://www.irs.gov/retirement/article/0,,id=180548,00.html. IRS webpage on 2007 Interim and Discretionary Amendments can be found at http://www.irs.gov/retirement/article/0,,id=173372,00.html. A. Employee Benefit Plans (General) IRS Proposed Rules on Postponement of Certain Tax-Related Deadlines by Reason of Presidentially Declared Disaster or Terroristic or Military Actions [REG-142680-06] (73 FR 40471), July 15, 2008. This document contains a proposed regulation that proposes to amend existing regulations issued under Code Sec. 7508A. The purpose of the proposed regulation is to clarify rules relating to the postponement of certain tax-related acts by reason of a Presidentially declared disaster or terroristic or military action. The proposed regulation clarifies the scope of relief under Code Sec. 7508A and specifies that interest may be suspended during the postponement period. These changes are necessary to reflect changes in the law made by the Victims of Terrorism Tax Relief Act and current IRS practice. PLR 200828037, July 11, 2008. Person worked for employer and was an active participant in its pension plan from 1977 to 2007. From 1977 through 1988, person was a nonresident alien. During that time, person's employee contributions to Y were tax deferred under the laws of Country N. Person moved to the United States and eventually became a US resident. From 1989 through. 2007 person made contributions. These contributions were subject to US income tax and included in income for those years. The contributions held by Y were transferred from Y to X in an exchange transferring the obligation to pay your pension annuity. In addition to the employee contributions person made to the plan, person's employer made contributions, none of which was includible in person's gross income while he was employed. Person's pension payments from X

84 originate as a fixed amount computed in Euros. Accordingly, person's gross income for 2007 excludes $' received as an annuity, and the rest of person's pension is includible in gross income. For future years in which person receives 12 payments, $ will be excludable from gross income. This dollar amount excludable will remain fixed even though the gross amount payable will fluctuate due to changes in values between Euros and US dollars. If person's spouse survives him, she will exclude from gross income the same dollar amounts that would have been excludable from person's income. These amounts are excludable each year until the total amount so excluded under the contract equals the investment in the contract of $. Thereafter all amounts received under the contract are includible in gross income. If both person and his spouse should die before the total amount excluded equals the investment in the contract, a miscellaneous deduction for the remaining balance of the investment in the contract may be taken by the last annuitant for his or her last taxable year. IRS Rev. Proc. 2008-41, 2008-29 IRB, June 30, 2008. This Rev. Proc. provides a procedure by which an issuer of a variable contract may remedy an inadvertent failure of a variable contract to satisfy the diversification requirements of Code Sec. 817(h). Rev. Rul. 91-17, 1991-1 C.B. 190, is amplified; Rev. Proc. 92-25, 1992-1 C.B. 741, is superseded; Notice 2000-9, 2000-1 C.B. 449, is obsolete. IRS Rev. Proc. 2008-38, 2008-29 IRB, June 30, 2008. This Rev. Proc. provides a procedure by which an issuer of a life insurance contract may remedy a failure to account for charges for qualified additional benefits under the expense charge rule of Code Sec. 7702(c)(3)(B)(ii). Rev. Rul. 2005-6, 2005-1 C.B. 471, is amplified. IRS Proposed Rules on Accrual Rules for Defined Benefit Plans [REG-100464-08] (73 FR 34665), June 18, 2008. This document contains proposed regulations providing guidance on the application of the accrual rule for defined benefit plans under Code Sec. 411(b)(1)(B) in cases where plan benefits are determined on the basis of the greatest of two or more separate formulas. This document also provides a notice of a public hearing on these proposed regulations. IRS Rev. Rul. 2008-29, 2008-24 IRB 1149, June 12, 2008. This Rev. Rul. provides guidance with respect to income tax withholding in nine different situations involving the payment of supplemental wages. Rev. Rul. 66-294 and 67-131 are obsoleted. IRS News Release 2008-75, May 29, 2008. The Advisory Committee on TE/GE will hold a public meeting on June 11, 2008 to present to the IRS recommendations on ways to improve operations regarding employee retirement plans, tax-exempt organizations, tax-exempt bonds and federal, state, local and Indian tribal governments. IRS Notice 2008-47, 2008-18 IRB, April 17, 2008. The Department of Treasury and IRS invite public comment on recommendations for items that should be included on the 2008-2009 Guidance Priority List. See also News Release-2008-62, April 18, 2008. Notice 2008-43, 2008-15 IRB 748, March 26, 2008. This Notice provides guidance to practitioners concerning contingent fees under Circular 230. Specifically, this Notice - 2 -

85 provides interim guidance clarifying when a practitioner may charge a contingent fee under section 10.27(b)(2) of Circular 230 for services rendered in connection with any matter before the IRS. The Treasury Department and the IRS intend to revise section 10.27 to reflect the clarifications described in this Notice. The IRS will follow the interim rules in this Notice for purposes of enforcing section 10.27 until further guidance is provided. Notice 2008-38, 2008-13 IRB, March 11, 2008. This notice invites public comments regarding guidance to be provided to Government entities, Federal, State and local, required to withhold on payments made by the Government entities or their paying agents for services and property. See Code Sec. 3401(d) and 3402(t)(3). The new withholding is required by Code Sec. 3402(t), which was added by section 511 of the Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No. 109-222 (TIPRA). Section 511 of TIPRA is effective for payments made after December 31, 2010. The Department of the Treasury and IRS propose to issue guidance on compliance with the withholding requirements of Code Sec. 3402(t). The Treasury and Service are requesting comments from all affected entities. The information collected will assist the Treasury and Service in drafting guidance under Code Sec. 3402(t). IRS Final Regulations on Diversification Requirements for Variable Annuity, Endowment, and Life Insurance Contracts [TD 9385] (73 FR 12263), March 7, 2008. This document contains final regulations concerning the diversification requirements of Code Sec. 817(h). The regulations expand the list of holders whose beneficial interests in an investment company, partnership, or trust do not prevent a segregated asset account from looking through to the assets of the investment company, partnership, or trust, to satisfy the requirements of Code Sec. 817(h). IRS Rev. Rul. 2008-13, 2008-10 IRB 518, February 21, 2008. Issue: Is compensation payable by a publicly held corporation to a covered employee (within the meaning of Code Sec. 162(m)(3)) considered "remuneration payable solely on account of attainment of one or more performance goals" under Code Sec. 162(m)(4)(C) if the plan or agreement under which the covered employee is paid provides that the compensation will be paid upon attainment of a performance goal and also provides that the compensation will be paid without regard to whether the performance goal is attained in either of the following situations: (i) the covered employee's employment is involuntarily terminated by the corporation without cause or the covered employee terminates his or her employment for good reason, or (ii) the covered employee retires. Holding: for both situation, the Award is not qualified performance-based compensation under Code Sec. 162(m)(4)(C) and 1.162-27(e)(2). IRS Rev. Rul. 2008-7, 2008-7 IRB 419, February 1, 2008. Issue: Does the defined benefit plan described that was converted from a traditional benefit formula to a lump sum-based benefit formula satisfy the accrual rules of Code Sec. 411(b)(1)(A), (B), and (C) for the 2002 plan year? Holding: Plan A satisfies the 133 1/3% rule of Code Sec. 411(b)(1)(B) for 2002 for all participants except the grandfathered participants who are at least age 50, but not yet age 55, on January 1, 2002. Under the facts, the class of grandfathered participants who are at least age 50, but not yet age 55, on January 1, 2002, - 3 -

86 is not a classification that is structured to evade the accrued benefit requirements of Code Sec. 411(b)(1)(A), (B), and (C) and 1.411(b)-1 so that the fractional rule may be used for these participants. With respect to the grandfathered participants who are at least age 50, but not yet age 55, on January 1, 2002, if the accrued benefits of these participants satisfy the fractional rule of Code Sec. 411(b)(1)(C) as set forth in this Rev. Rul., Plan A satisfies the accrual rules of Code Sec. 411(b)(1)(A), (B), and (C) for 2002. Satisfaction of Accrual Rules in Future Years: The analysis and holding in this Rev. Rul. only address the 2002 plan year. It is possible for a plan described in the facts of this Rev. Rul. to fail to satisfy the accrual rules of Code Sec. 411(b)(1)(A), (B), and (C) for a subsequent year, either due to changes in relevant factors that are treated as constant for any given year or due to changes in facts relating to plan participants. IRS Rev. Rul. 2008-8, 2008-5 IRB 340, January 15, 2008. Issues: Under the facts described, do the arrangements entered into between X and Cell X, and between the subsidiaries of Y and Cell Y, of Protected Cell Company constitute insurance for federal income tax purposes? If so, are amounts paid by X to Cell X, and by the subsidiaries of Y to Cell Y deductible as "insurance premiums" under Code Sec. 162? Holdings: In Situation 1, the annual arrangement between Cell X and X does not constitute insurance for federal income tax purposes. In Situation 2, the arrangements between Cell Y and each subsidiary of Y do constitute insurance for federal income tax purposes; amounts paid pursuant to those arrangements are deductible as insurance premiums under Code Sec. 162 if the requirements for deduction are otherwise satisfied. Additional Guidance: The IRS and the Treasury Department are aware that further guidance may be needed in this area. Notice 2008-19, 2008-5 IRB 366, January 15, 2008 requests comments on further guidance that addresses when a cell of a Protected Cell Company is treated as an insurance company for federal income tax purposes. IRS Proposed Rules on Diversification Requirements for Certain Defined Contribution Plans [REG-136701-07] (73 FR 421), January 3, 2008. This document contains proposed regulations under Code Sec. 401(a)(35) relating to diversification requirements for certain defined contribution plans and to publicly traded employer securities. IRS Proposed Rules on Hybrid Retirement Plans [REG-104946-07] (72 FR 73680), December 28, 2007. These proposed regulations provide guidance relating to Code Sec. 411(a)(13) and 411(b)(5) concerning certain hybrid DB plans. These regulations provide guidance on changes made by PPA '06. See 73 FR 20367, April 15, 2008 and 73 FR 22300, April 25, 2008 for corrections, and 73 FR 24186, May 2, 2008 and IRS Announcement 2008-47, 2008-20 IRB 983, May 16, 2008 for notice of public hearing to be held June 6, 2008. Notice 2008-7, 2008-3 IRB 276, December 19, 2007. This notice extends the transitional guidance and transitional relief provided to certain defined contribution plans holding publicly traded employer securities under Notice 2006-107, 2006-51 I.R.B. 1114, until the regulations being issued under 401(a)(35) of the Internal Revenue Code become effective. - 4 -

87 IRS Notice 2007-92, 2007-47 IRB 1036, November 16, 2007. The Social Security contribution and benefit base for remuneration paid in 2008, and self-employment income earned in tax years beginning in 2008 is $102,000. IRS Proposed Rules on Automatic Contribution Arrangements [REG-133300-07] (72 FR 63144), November 8, 2007. This document contains proposed regulations under Code Sec. 401(k), 401(m), 402(c), 411(a), 414(w), and 4979(f) relating to automatic contribution arrangements. IRS Announcement 2008-34 and 73 FR 16610, March 28, 2008 provide for notice of public hearing on these regulations scheduled for May 19, 2008. IRS Notice 2007-87, 2007-45 IRB 966, November 2, 2007. This Notice provides costof-living adjustments applicable to dollar limitations for pension plans and other items for tax year 2008. IR-2007-171, October 18, 2007 IRS announces pension plan limitations for 2008. IR-2007-172, October 18, 2007 IRS provides the 2008 inflation adjustments. Rev. Proc. 2007-66, 2007-45 IRB 970, October 18, 2007 provides for inflation adjusted items for 2008. IRS Final Regulations on Regulations Governing Practice Before the Internal Revenue Service [TD 9359] (72 FR 54540), September 26, 2007. This document contains final regulations revising the regulations governing practice before the IRS (Circular 230). See also Proposed Rules on Regulations Governing Practice Before the Internal Revenue Service [REG 138637 07] (72 FR 54621), September 26, 2007. IRS Rev. Rul. 2007-61, 2007-42 IRB 799, September 25, 2007. Rev. Rul. 2007-54, 2007-38 I.R.B. 1, August 16, 2007, addresses the determination of life insurance reserves under Code Sec. 807 for a variable contract where some or all of the reserves are accounted for as part of a life insurance company's separate account reserves. IRS Rev. Rul. 2007-58, 2007-37 IRB 562, August 21, 2007. This Rev. Rul. supplements Rev. Rul. 94-62, 1994-2 C.B. 164, by listing additional arrangements that each qualify as a "qualified pension or retirement plan" for purposes of 1.817-5(f)(3)(iii) of the Income Tax Regulations. IRS Notice 2007-69, 2007-35 IRB 468, August 10, 2007. This Notice: (i) provides temporary relief, until the first day of the first plan year that begins after June 30, 2008, for certain pension plans under which the definition of normal retirement age ("NRA") may be required to be changed to comply with the regulations relating to a plan's normal retirement age that were recently issued under Code Sec. 401(a); (ii) identifies potential violations of the vesting and accrued benefit requirements for DB plans under Code Sec. 411 that may arise from a definition of NRA based on a minimum period of service; and (iii) requests comments from sponsors of governmental plans as defined in Code Sec. 414(d)) and other plans not subject to the requirements of Code Sec. 411 on whether such a plan may define NRA based on years of service. PLR 200730004 and PLR 200730005, July 27, 2007. Taxpayer is a life insurance company under Code Sec. 816 which provides life insurance and annuity contracts for - 5 -

88 Funds to serve as investment media for variable contracts. Funds are held by a large number of investors that are qualified pension or retirement plans, as well as other regulated investment companies that qualify for look-through treatment. The IRS ruled that satisfaction of Treas. Reg. 1.817-5(f)(2)(i) (look-through rule) by the Funds shall not be prevented by reason of beneficial interests in the Funds that are held by qualified pension or retirement plans, subject to certain terms and conditions. Under PLR 200811013 and PLR 200811014, March 14, 2008 the IRS granted Taxpayer the requested extension. Paragraph B of the Prior Ruling Letter was modified to read as follows: "[a] Fund must satisfy these terms and conditions with respect to any Plan or regulated investment company currently holding a beneficial interest in a Fund. The Fund has 270 days from the date of this ruling letter to comply." B. 414(d) Governmental Plans IRS Notice 2007-67, 2007-35 IRB 467, August 9, 2007. The purpose of this Notice is to extend the transitional relief provided to plans of Indian tribal governments and certain related entities under Notice 2006-89 to the date that is six months after guidance is issued under Code Sec. 414(d), as amended by section 906 of the PPA '06, on the determination of whether a retirement plan maintained by an Indian tribal government is a governmental plan with the meaning of Code Sec. 414(d). C. 457(b) Governmental Plans (General) PLR 200750002, December 14, 2007. Plan, a nonqualified deferred compensation plan established by Agency (part of a Local Government that is a political subdivision of State and an eligible employer within the meaning of Code Sec. 457(e)(1)(A)), is an eligible deferred compensation plan under Code Sec. 457(b) and the regulations. PLR 200748003, November 30, 2007. Plan was adopted by an eligible local governmental employer in State as described in Code Sec. 457(e)(1)(A). The proposed amended and restated Plan constitutes an eligible deferred compensation plan under Code Sec. 457(b), as amended under EGTRRA. Under Code Sec. 3121(v)(2), amounts deferred under Plan are required to be taken into account for purposes of FICA taxes when the participant's services giving rise to the legal right to deferred compensation are performed. PLR 200727005, July 6, 2007. Plan, adopted by a political subdivision of State M, constitutes an eligible deferred compensation plan as defined in Code Sec. 457(b), as amended by EGTRRA. D. 403(b) Plans (General) IRS Rev. Proc. 2007-71, 2007-51 IRB 1184, November 27, 2007. This Rev. Proc. provides model plan language that may be used by public schools either to adopt a written plan to reflect the requirements of Code Sec. 403(b) and the regulations thereunder or to amend its Code Sec. 403(b) plan to reflect the requirements of Code Sec. 403(b) and the regulations thereunder. - 6 -

89 Final Regulations on Payments Made by Reason of a Salary Reduction Agreement [TD 9367] (72 FR 64939), November 19, 2007. This document promulgates a final regulation that defines the term salary reduction agreement for purposes of Code Sec. 3121(a)(5)(D). The final regulation provides guidance to employers (public educational institutions and section 501(c)(3) organizations) purchasing annuity contracts described in section 403(b) on behalf of their employees. IRS Final Regulations for Code Section 403(b), [TD 9340] (72 FR 41128), July 26, 2007. This document promulgates final regulations under Code Sec. 403(b) and under related provisions of Code Sec. 402(b), 402(g), 402A, and 414(c). The regulations provide updated guidance on Code Sec. 403(b) contracts of public schools and tax-exempt organizations described in Code Sec. 501(c)(3). For the most part, the final regulations are consistent with the IRS' proposed rules and the IRS' attempt to make 403(b) arrangements and the rules governing them more closely resemble other salary reduction arrangements such as 401(k) plans and 457(b) governmental plans. The effective date of the regulations is January 1, 2009. See 72 FR 54350, September 25, 2007, 72 FR 54351, September 25, 2007 and IRS Announcement 2007-102, 2007-44 IRB 922, October 26, 2007 for corrections. E. Governmental Instrumentality Rulings See Section M "Health Care (including Retiree Health) and Other Benefits." F. IRAs (Roth; Deemed IRAs; Nonbank Trustees) PLR 200826040, June 27, 2008. Although Taxpayer was ineligible to convert his IRA X to Roth IRA Y in 2005, he was unaware of this until the year 2006. Upon realizing his mistake, Taxpayer, in a timely manner, directed Broker M to correct the error and to recharacterize his Roth IRA Y rollover contribution. However, Broker failed to act as directed. Taxpayer, believing that the recharacterization of Roth IRA Y had been completed, did not learn of the failure of Broker until 2007 when Taxpayer received notice from the Service that he was not eligible to convert IRA X to Roth IRA Y. Taxpayer subsequently submitted this request for relief under section 301.9100 to the Service. Under the set of circumstances described above, the IRS believe Taxpayer meets the requirements of clauses (ii) and (v) of section 301.9100-3(b)(1) of the regulations. Therefore, Taxpayer is granted an extension of 60 days as measured from the date of issuance of this ruling letter to recharacterize his calendar year 2005 contribution to Roth IRA Y to a traditional IRA. PLR 200826039, June 27, 2008. The distribution(s) by the administrator of Plans X and Y directly into an IRA set up and maintained in the name of Spouse of /z of Decedent's interests in said Plans, which 'h represents Spouse's ownership interests therein, will qualify as "eligible rollover distributions." The administrator of Plans X and Y may transfer, by means of direct rollovers, the 1/2 of Decedent's interests in said Plans referenced in the first ruling request into an IRA set up and maintained in Spouse's name. Furthermore, if the administrator of said Plans X and Y does so, no portion of the amount(s) directly rolled into the IRA will be included in the gross income of either Trust - 7 -

90 T or Spouse in the year in which directly rolled over. An IRA described in Code Sec. 408(a) set up and maintained in the name of Spouse is an "eligible retirement plan", as defined in Code Sec. 401(a)(31)(E), and, as such, is eligible to receive as rollover contributions the amounts distributed from Plans X and Y referenced in your first two ruling requests. IRS Notice and Request for Comments on Proposed Collection; Comment Request for Notice 2002-27 (73 FR 31193), May 30, 2008. The IRS is soliciting comments concerning Notice 2002-27, IRA Required Minimum Distribution Reporting. PLR 200819020, May 9, 2008. Taxpayer has not demonstrated that his inability to complete a timely rollover of Amount was caused by any of the factors cited in Rev. Proc. 2003-16. Taxpayer asserts that Provider's failure to advise him that the distribution would be taxable or that he had rollover options, rises to the level of financial institution error. However, the Code imposes no such obligation on IRA custodians. Absent actions on the part of a financial institution or financial advisor undertaking such an obligation, (e.g. where a taxpayer has erroneously been advised that the rollover period is 90 days), the IRS will not recognize this failure as financial institution error. PLR 200817059, April 25, 2008. The information presented and documentation submitted on behalf of Taxpayer indicated that he had no intent to roll over either Amount at the time he received either distribution. Therefore, pursuant to Code Sec. 402(c)(3)(B) and 403(b)(8)(B), the Service declined to waive the 60-day rollover requirement with respect to the distribution of Amount D and Amount E from Tax Deferred Annuity B and Qualified Plan C, respectively. PLR 200809042, February 29, 2008. IRA of Individual A (deceased father) may be subdivided, by a trustee-to-trustee transfer, so that a separate IRA may be created in the name of Individual A for the benefit of Individual B (son) and the creation of the separate IRA will not result in a taxable distribution to Individual B. Individual B, as a beneficiary of 25% of the Trust A Survivor's Trust which includes the assets of Individual A's IRA, may use the life expectancy of the eldest beneficiary of the Trust A Survivor's Trust, Individual D, computed using the Single Life Expectancy Table provided at section 1.401(a)(9)-9, Q&A-1 of the regulations, for computing the required distribution with respect to his interest in Individual A's IRA with respect to specified calendar year. Said life expectancy is reduced by one for each calendar year that elapses after specified year. IRS also provides general information concerning the use of Individual B's taxpayer identification number for Form 5498 reporting. PLR 200807026, February 15, 2008. Taxpayer (surviving spouse) is to be treated as the payee and beneficiary of IRAs for purposes of Code Sec. 408(d)(1) and 408(d)(3). Neither of the IRAs will be treated as an inherited IRA, as defined in Code Sec. 408(d)(3)(C), with respect to Taxpayer. Taxpayer will be treated, for purposes of Code Sec. 408(d)(3) as the payee or distributee of amounts distributed from Decedent's IRAs. Pursuant to Code Sec. 408(d)(3)(A)(i), Taxpayer will be eligible to roll over the proceeds from the IRAs into one or more IRAs described in Code Sec. 408 set up and maintained in her own name as long as said rollover(s) occur no later than the 60 days from the - 8 -

91 date(s) said proceeds are received by Taxpayer in her capacity as trustee of Trust. Taxpayer will not be required to include in her gross income for federal income tax purposes proceeds which are distributed from either of the IRAs to Trust, subsequently distributed to Taxpayer as trust beneficiary, and finally transferred into one or more IRAs maintained in her name within 60 days as measured from the date(s) received by the trustee of Trust, in either the calendar year such assets are distributed or the calendar year in which they are received by Taxpayer. PLR 200807025, February 15, 2008. That portion of Individual A's IRA which will be transferred, by means of a trustee-to-trustee transfer, into a separate IRA entitled IRA X, will not be treated as an inherited IRA within the meaning of Code Sec.408(d) with respect to Individual A's surviving spouse, Individual B. Individual B will not be required to include in her gross income for federal tax purposes the undistributed assets of IRA X, that will be created by means of a trustee-to-trustee transfer from Individual A's IRA to IRA X. Individual B will be entitled to elect to receive a total distribution from IRA X and roll over this distribution into her own IRA, as long as the rollover is accomplished not later than the 60th day after the date on which Individual B receives the distribution. In accordance with Code Sec. 408(d)(3)(E), this ruling does not authorize the rollover of amounts that were required to be distributed by Code Sec. 401(a)(9), made applicable to an IRA pursuant to Code Sec. 408(a)(6) (if any). PLR 200750019, December 14, 2007. The beneficiary IRA created by means of trusteeto-trustee transfers, which will be titled "Individual A (deceased) fbo Individual B", constitute inherited IRAs as defined in Code Sec. 408(d)(3)(C). PLR 200742026, October 19, 2007. No living person was named, as either primary or contingent beneficiary, on the IRA owner's death. Taxpayer B may not be treated as the "designated beneficiary", under Code Sec. 401(a)(9)(C), of IRA X. As a result, Code Sec. 401(a)(9) minimum required distributions for calendar year 2006 and all subsequent calendar years may not be calculated based on Taxpayer B's remaining life expectancy. Instead, Code Sec. 401(a)(9) minimum required distributions must be calculated based on the remaining life expectancy of Taxpayer A (as provided in section 1.401(a)(9)-5 of the Regulations, Q&A-5(c)(3)). PLR 200740018, October 5, 2007. For purposes of Code Sec. 401(a)(9), Trust T is a "see-through" trust as that term is defined in section 1.401(a)(9)-4 of the "Final" Income Tax Regulations, Q&A-5. IRA Y may be subdivided, by means of trustee-to-trustee transfers, into two-sub IRAs one of which will be created in the name of Taxpayer A (Deceased) for the benefit of Individual B, a beneficiary of Trust T. Minimum required distributions within the meaning of Code Sec. 401(a)(9), made applicable to an IRA pursuant to Code Sec. 408(a)(6), from the sub-ira to be created to benefit Individual B made be made with reference to the life expectancy of Individual B (the eldest beneficiary). PLR 200738025, September 21, 2007. Amounts received by Taxpayers from Company pursuant to an arm's-length settlement of a good faith claim of liability was a restorative payment eligible to be placed into IRA, an IRA set up and maintained in the name of - 9 -

92 Taxpayer, and such contribution which occurred on or about Date 6, 2005, constituted a valid transaction without regard to the limitations on IRA contributions found in Code Sec. 219 and 408. G. IRC 415 Limits PLR 200805026, February 1, 2008. After-tax employee contributions made to Plan (a governmental defined benefit plan for members) prior to December 31, 1997, by a member of Plan who is also a member of the grandfathered group described in section 1526(c)(2) of TRA 97 to purchase service credit under Section L of State Code (which contributions were not repayment of a "cash out" as described in Code Sec. 415(k)(3)) are treated under the transitional rule of section 1526(c)(2) as "permissive service credit" contributions within the meaning of Code Sec.415(n)(1) even though these employee contributions by the grandfathered group were made to Plan before the general effective date of TRA 97. If the Code Sec. 415(n)(1)(B) test is used to determine Code Sec. 415 compliance of the permissive service credit, the Code Sec. 415(n)(1)(A) test is not used to test Code Sec. 415 compliance as to the accrued benefit derived from contributions made to purchase permissive service credits since Code Sec. 415(n)(1)(A) is an alternative test. The accrued benefit derived from mandatory employee contributions, employer contributions and the accrued benefit attributable to the permissive service credit purchased by the member, less the accrued benefit that is actuarial equivalent to the voluntary employee contributions made by the member, is subject to Code Sec. 415(b) testing. PLR 200729036, July 20, 2007. See Section I "Distribution Rules", below. H. Non-Qualified Plans (457(f), 409A) IRS Notice 2008-62, 2008-29 IRB, July 1, 2008. This Notice describes a rule that the Treasury Department and the IRS anticipate will be included in regulations to be proposed under Code Sec. 457(f). The regulations to be proposed are expected to address certain types of arrangements involving recurring part-year compensation, including common arrangements involving public school employees who provide services during a 10-month school year and elect to be paid ratably over 12 months. It is expected that the regulations would provide that if certain conditions described below are satisfied, Code Sec. 457(f) would not apply to such arrangements. It is also expected that a conforming change will be proposed for regulations under Code Sec. 409A, so that Code Sec. 409A also will not apply to such arrangements if such conditions are met. Section II of the Notice describes the rule expected to be included in the proposed regulations. Taxpayers may immediately rely on the rule described in Section II of the Notice. IRS Notice 2007-100, 2007-52 IRB, December 3, 2007. This Notice provides transition relief and guidance on the correction of certain failures of a nonqualified deferred compensation plan to comply with Code Sec. 409A(a) in operation. IRS Notice 2007-89, 2007-46 IRB 998, October 23, 2007. This Notice provides guidance to employers and payers on their: (i) reporting and wage withholding - 10 -

93 requirements for calendar year 2007 with respect to amounts includible in gross income under Code Sec. 409A; and (ii) reporting requirements with respect to all deferrals of compensation under Code Sec. 409A for 2007. This notice does not affect the application of Code Sec. 3121(v)(2) or an employer's reporting obligations under 31.3121(v)(2)-1 of the Employment Tax Regulations. IRS Notice 2007-86, 2007-46 IRB 990, October 22, 2007. This notice provides additional transition relief regarding the application of Code Sec. 409A to nonqualified deferred compensation plans. IRS Notice 2007-78, 2007-41 IRB, September 10, 2007. This notice provides transition relief and additional guidance on the application of Code Sec. 409A to nonqualified deferred compensation plans. IRS News Release 2007-41, August 7, 2007, "Effect of New Deferred Compensation Rules on Teacher Salaries." The IRS responded to questions concerning annualized pay elections for teachers and other school employees by stating that Code Section 409A will not apply to annualized compensation elections with respect to school years starting before January 1, 2008. The IRS also said that school districts are not required to offer annualization elections. IRS Notice 2007-62, 2007-32 IRB, July 23, 2007. This Notice announces the intent of the Treasury Department and the IRS to issue guidance under Code Sec. 457 concerning the definitions of a bona fide severance pay plan under Code Sec. 457(e)(11) and substantial risk of forfeiture under Code Sec. 457(f)(1)(B). The IRS states that the guidance in many respects would be similar to the rules in the recent final regulations under Code Sec. 409A. IRS Final Regulations on Application of Section 409A to Nonqualified Deferred Compensation Plans, [TD 9321] (72 FR 19234), April 17, 2007. This document contains final regulations regarding the application of Code Sec. 409A to nonqualified deferred compensation plans. Corrections were issued for the preamble (72 FR 38477, July 13, 2007) and for the regulations (72 FR 41620, July 31, 2007). See IRS Announcement 2007-68, 2007-32 IRB 348, August 2, 2007 and IRS Announcement 2007-78, 2007-38 IRB 663, September 13, 2007 for corrections to these final regulations. I. Distribution Rules Including IRC 72, 104, 402, and 401(a)(9) IRS Proposed Rules on Reasonable Good Faith Interpretation of Required Minimum Distribution Rules by Governmental Plans [REG-142040-07] (73 FR 39630), July 10, 2008. This document contains proposed regulations under Code Sec. 401(a)(9) and 403(b) to permit a governmental plan to comply with the required minimum distribution rules by using a reasonable and good faith interpretation of the statute. IRS Rev. Rul. 2008-40, 2008-30 IRB, July 1, 2008. A transfer of amounts from a trust under a plan qualified under Code Sec. 401(a) to a nonqualified foreign trust is treated as a distribution from the transferor plan. A transfer of assets and liabilities from a qualified plan to a plan that satisfies section 1165 of the Puerto Rico Code is also treated as a - 11 -

94 distribution from the transferor plan, even if the plan is described in section 1022(i)(1) of ERISA. Rev. Rul. 67-213 is amplified. IRS CCA 200823001, June 6, 2008. The retired employees are not entitled to a refund of FICA taxes paid on the reasonably ascertainable value of nonqualified deferred compensation plan benefits when a portion of the valued benefits will never ultimately be distributed to the retired employees due to the nonqualified deferred compensation plan's termination. For purposes of determining the period of limitations under Code Sec. 6511 for a retired employee's claim for refund of FICA taxes, the applicable three-year period begins on April 15th of the year following the year in which the employee retired and the employer filed the FICA tax return and remitted the appropriate FICA taxes to the IRS with respect to the reasonably ascertainable value of nonqualified deferred compensation plan benefits. IRS CCA 200819001, May 9, 2008. The Service may not exercise the taxpayer's right to suspend membership in the fund in order to obtain an immediate distribution of the taxpayer's assets in the fund when the taxpayer has not yet reached retirement age. The Service may levy upon a retirement plan even if a participant has no immediate right to receive benefits. However, the fund is not obligated to turn over any assets pursuant to the Service's levy until the taxpayer reaches the age in which she is eligible for retirement benefits under the plan or the taxpayer voluntarily suspends her membership in the plan. PLR 200811028, March 14, 2008. For decedent who died prior to attaining his required beginning date, and who named Taxpayer (surviving child) as the beneficiary of the IRAs, the IRS found the following. The required minimum distributions from IRAs for specified years and all subsequent years, may be calculated based on the life expectancy of Taxpayer as determined under the Single Life Table of Section 1.401(a)(9)-9 of the Income Tax Regulations. The failure to timely take the required minimum distributions on behalf of Taxpayer for the specified years does not affect the calculation of minimum required distributions in subsequent years based on the single life expectancy of Taxpayer initially determined in specified year and reduced as provided in the final regulations. The failure to timely make Code Sec. 401(a)(9) required minimum distributions for the specified years resulted in the imposition of the 50% excise tax under Code Sec.4974(a). Notice 2008-30, 2008-12 IRB 638, March 5, 2008. This Notice provides guidance: (i) in the form of Q&A with respect to certain distribution-related provisions of PPA '06 ( 824, 1004, and 302), that are effective in 2008; and (ii) on amending plans to require that distribution of excess deferrals includes earnings from the end of the taxable year to the date of distribution ("gap-period" earnings). PLR 200809011, February 29, 2008. Based on the information submitted, authorities cited and, in particular, the recent State court decision, the Service concluded as follows: With respect to those members who are retired pursuant to the presumption in Statute A (if a safety member, a fireman member, or a member in active law enforcement with at least five year of service develops heart trouble, such heart trouble so developing or manifesting itself in such cases will be presumed to arise out of and in the course of employment), Statute A is in the nature of a workmen's compensation act under Code - 12 -

95 Sec.104(a)(1) and section 1.104-1(b) of the regulations. Statute B (upon retirement of any member for service-connected disability, he receives an annual retirement allowance equal to one-half of his final compensation) provides that if a member, receiving an allowance on account of a service-connected disability, is qualified for a service retirement, he shall receive his service retirement allowance if such allowance is greater. Therefore, in the event that a member, retired under Statute A, falls within this provision, only an amount equal to one-half of his final compensation is excludable under Code Sec.104(a)(1) and the remainder is includible in the recipient's gross income. PLR 200807023, February 15, 2008. This ruling applies to participants of both the defined benefit plan and defined contribution plan of System (a governmental plan for eligible employees of state and political subdivisions). State Legislature adopted following amendments to Statutes B, "A member whose original date of retirement is on or after the effective date of this amendment to this section may exercise a one-time election to rescind the joint and survivor annuity option elected by the member if the contingent annuitant dies or ceases to be a contingent annuitant pursuant to the terms of a qualified domestic relations order." Amendments comply with the rules contained in Regulations section 1.401(a)(9)-6, Q&A-14, which sets forth the conditions under which annuity payments are permitted to increase. State Legislature adopted conditional amendments to the pop-up and pop-down provisions of Statutes B, which will apply to any member who retires on or after the effective date of the amendments. Amendments comply with the rules contained in Regulations section 1.401(a)(9)-6, Q&A-14, and as such, limiting the pop-up elections of future retirees to only the two events described in Regulations section 1.401(a)(9)-6, Q&A-14 will not cause System to lose the special grandfathering provisions applicable to governmental plans contained in Regulations section 1.401(a)(9)-6, Q&A-16, applicable to pop-up and pop-down elections by members who retire before the effective date of amendment because these benefits were in effect on April 17, 2002. PLR 200806013, February 8, 2008. Company proposes to amend Plan (profit sharing plan) to allow a participant to elect to direct Trustee to acquire long-term care insurance coverage for the participant, his or her spouse and dependents. The premiums for the long-term care insurance provided under Policy will be periodically deducted from the Elective Contribution Account or the self-directed Employer Non-Elective Contribution Account of the participant who elects such coverage. Pursuant to Rev. Rul. 61-164, the use of the above accounts, in this case, to pay the premiums for the long-term care insurance is treated as a distribution within the meaning of Code Sec. 402 to the participant from Plan at the time such amount is used to pay the premiums. Accordingly, a participant who elects to have long-term care insurance benefits under Plan for himself or herself, their spouse, and dependents as proposed by Company will be currently taxable on the cost of the long-term care insurance coverage under Code Sec. 402(a). The amounts Company proposes to allow participants to use to pay the premiums to acquire the long-term insurance coverage are amounts allocated to a participant's Elective Contribution Account and/or the participant's Employer Non-Elective Contribution Account, amounts which are made to Plan pursuant to Code Sec. 401(k)(2)(A), and which therefore are subject to the restrictions on distributions in Code Sec. 401(k)(2)(B). - 13 -

96 A distribution of insurance premiums in this case would cause Plan to fail to comply with Code Sec. 401(k)(2)(B) and Code Sec. 401(a). PLR 200752038, December 28, 2007. Pursuant to Code Sec. 402(c)(3)(B), the Service waived the 60-day rollover period found in Code Sec. 402(c)(3)(A) for a distribution of a plan loan offset amount, when Taxpayer was not notified of the distribution of the plan loan offset of amount and her failure to timely accomplish a rollover of amount was due to the failure of the plan sponsor to provide timely and accurate information concerning a plan distribution of a plan loan offset of amount. IRS Notice 2007-99, 2007-52 IRB, December 3, 2007. This Notice modifies Q&A-23 of Notice 2007-7 to provide that Code Sec. 402(l) with respect to the payment of certain health insurance premiums by certain pension plans does apply to premiums paid to an accident or health plan that is self-insured. IRS PLR 200745022, November 9, 2007. Distributions to affected Plan (defined benefit plan) participants/case class members from the referenced escrow account qualify for treatment in accordance with Code Sec. 402(c) and for rollover treatment in accordance with Code Sec. 402(c). The 60-day rollover period found in Code Sec. 402(c)(3) shall commence with respect to a Plan participant/case class member from the date a distribution from the referenced escrow account is received by a payee or distributee as the case may be of said distribution. Distributions from the referenced escrow account will be subject to the consent requirement under Code Sec. 411(a)(11) and 417. As a result, participant and spousal consent must be obtained where necessary. IRS Proposed Rules on Medical and Accident Insurance Benefits Under Qualified Plans [REG 148393 06] (72 FR 46421), August 20, 2007. This document contains proposed regulations under Code Sec. 402(a) regarding the tax treatment of payments by qualified plans for medical or accident insurance. See 72 FR 54614, September 26, 2007 and IRS Announcement 2007-98, 2007-43 IRB 896, October 19, 2007 for corrections. PLR 200730028 and PLR 200730030, July 27, 2007. A governmental defined benefit plan, which offers a lifetime annuity, permits withdrawal of accumulated employer contributions upon retirement or separation from service. The plan was amended to include a partial lump sum option, with an actuarially reduced pension benefit. The IRS ruled that special tax treatment is available under IRC 72(e)(8)(D). However, amounts in excess of pre-1987 investment will be taxable under the pro-rata rules of IRC 72(e)(8)(13). PLR 200729036, July 20, 2007. The proposed trustee-to-trustee transfer of a Group Member's excess survivor contributions from Plan X (a defined benefit plan) to Plan Y (a money purchase plan qualified under Code Sec. 401(a) and governmental plan under Code Sec. 414(d)) shall not be deemed to be an actual or constructive distribution to the Group Member of the amounts transferred and as a result shall not be subject to taxation at the time of the transfer under Code Sections 402(a) and 72(t). The tax basis associated with the survivor contributions that were made to Plan X with after-tax contributions and transferred directly to accounts established for Group Members in Plan Y will also be - 14 -

97 transferred from Plan X to Plan Y. Finally, the survivor contributions will be tested against 415(c) when transferred to Plan Y. J. Line of Duty Disability and Death Benefits 104(a)(1) PLR 200822002, May 30, 2008. Section 806.5 of the Statute limits benefits to a class of employees with service-incurred injuries or disease and the benefits are not determined with reference to the employee's age, length of service or prior contributions. Accordingly, section 806.5 of the Statute is a statute in the nature of a workmen's compensation act. Amounts paid under section 806.5 of the Statute, as funded through the plan in the amount of the offset provided by section 804.(2) of the Statute, are excludable from the participant's gross income under Code Sec. 104(a)(1). K. Procedural Rules IRS Notice and Request for Comments on Proposed Collection; Comment Request for Regulation Project [Regulation Section 601.201] (73 FR 25828), May 7, 2008. The IRS is soliciting comments concerning an existing regulation, 26 CFR 601.201, Instructions for Requesting Rulings and Determination Letters. Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans was revised March 2008. Instructions for Form 5307 were revised May 2008. Form 4461-A, Application for Approval of Master or Prototype or Volume Submitter Defined Benefit Plan was revised March 2008. Announcement 2008-23, 2008-14 IRB 731, March 14, 2008. The Service will soon issue opinion and advisory letters for pre-approved and volume submitter defined contribution plans that were timely filed with the Service to comply with EGTRRA and other changes in plan qualification requirements listed in the 2004 Cumulative List. The Service expects to issue the letters on March 31, 2008, or, in some cases, as soon as possible thereafter. Employers using these pre-approved plan documents to restate a plan for EGTRRA will be required to adopt the EGTRRA-approved plan document by April 30, 2010. The Service will accept applications for individual determination letters submitted by adopters of these pre-approved plans starting on May 1, 2008. This announcement describes certain changes to the determination letter application procedures for preapproved plans that will simplify the application process for many applicants, and it informs plan sponsors that revised application forms for these plans will be available in the near future. IRS Rev. Proc. 2008-8, 2008-1 I.R.B. 233, January 4, 2008. This Rev. Proc. provides guidance on the amount of fees that will be charged to taxpayers requesting letter rulings, determination letters, etc., from the Commissioner, Tax Exempt and Government Entities Division. IRS Rev. Proc. 2008-7, 2008-1 IRB 229, January 4, 2008. This Rev. Proc. updates Rev. Proc. 2007-7, 2007-1 C.B. 227, by providing a current list of those areas of the Internal - 15 -