2006 Pension Client Letters

Table of Contents

2501. Highlights of the Pension Protection Act of 2006

2502. New investment advice rules in the Pension Protection

           Act of 2006

2503. Liberalized plan payout and rollover rules in the Pension

           Protection Act of 2006

2504. Reform of the multiemployer pension system in the

           Pension Protection Act of 2006

2505. Reform of the single-employer defined benefit plan rules

           in the Pension Protection Act of 2006

2506. Charitable reforms and incentives in the Pension

            Protection Act of 2006

2507. New disclosure rules for qualified plans in the Pension

           Protection Act of 2006

2508. Retirement savings provisions made permanent in the

           Pension Protection Act of 2006

 2501. Highlights of the Pension Protection Act of 2006

To the practitioner: You can use the following client letter to provide clients with an overview of the Pension Protection Act of 2006.

Dear client,

The recently passed Pension Protection Act of 2006 is a massive tax bill that overhauls the funding and disclosure rules for defined benefit plans, addresses conversions of pension plans to cash balance plans, carries liberalized payout and rollover rules, and makes a host of other changes relating to pension plans and their beneficiaries. Here's an overview of the key tax changes in this important new legislation:

Reform of the single-employer defined benefit rules

For single-employer defined benefit plans, the Act:

• requires employers to make contributions to their single-employer defined benefit pension plans over the next seven years in order to make them 100% funded. Formerly, a 90% funding level was acceptable;

• specifies that the discount rate used to calculate the present value of current pension liabilities be based on a segmented yield curve of corporate bonds;

• triggers accelerated contributions for “at-risk” plans;

• reduces the smoothing of interest rates to two years (instead of five for assets and four for liabilities under current law);

• permits employers to make additional maximum deductible contributions;

• prohibits further benefit accruals for lump-sum distributions or shutdown benefits from plans funded at less than 60%;

• restricts the use of deferred executive compensation arrangements for employers with severely underfunded plans;

• permanently establishes an employer-paid termination premium of $1,250 per participant if a plan sponsor terminates its employee pension plan upon entering bankruptcy; and

• establishes special rules for airlines.

Reform of the multiemployer pension system

The Act's changes relating to multiemployer plans include:

• identifying underfunded multiemployer pension plans and establishing quantifiable benchmarks for measuring a plan's funding improvement;

• providing new notice requirements for underfunded plans;

• changing the amortization schedule for any plan benefit amendments from 30 years to 15 years;

• increasing the maximum deductible limit to 140% of current liability;

• requiring plans trustees to improve the health of the plan by one-third within 10 years if a plan is less than 80% funded or will hit a funding deficiency within seven years; and

• prohibiting benefit increases if the increase causes the plan to fall below 65% funded status.

New disclosure rules for qualified plans

One of the overarching themes of the Act is that there should be more pension transparency so that workers, regulators and investors can better keep tabs on the financial health of traditional pension plans. To meet this need, the Act:

• requires both single and multiemployer plans to include more detailed and specific information on their Form 5500 filings;

• enhances Form 4010 disclosure requirements and makes all Form 4010 information filed with PBGC available to the public, save for sensitive corporate proprietary information;

• establishes an 80%, at-risk threshold that determines whether plans pose a threat to PBGC and therefore must file 4010 information;

• requires both single and multiemployer pension plans to notify workers and retirees of the funded status of their plan within 120 days after the close of the plan year;

• prohibits companies from forcing employees to invest any of their own retirement savings contributions in the stock of the employer;

• makes it clear that companies have a fiduciary responsibility for workers' savings during “blackout” periods, when workers are temporarily barred from making changes to their 410(k) investments; and

• requires companies to give workers quarterly benefit statements that include information about accounts, including the value of their assets, their rights to diversify, and the importance of maintaining a diversified portfolio.

New investment advice rules

The Act:

• permits qualified “fiduciary advisers” to offer investment advice to help employees manage their 401(k) and other retirement options;

• puts in place fiduciary and disclosure safeguards to ensure that advice provided to employees is solely in their best interest;

• requires fiduciary advisers for employer-sponsored plans to base their recommendations on a computer model that is certified and audited by an independent party; and

• requires fiduciary advisers for non-employer sponsored plans to charge a flat rate fee for one year (with no computer model).

Liberalized plan payout and rollover rules

Provisions in the Act that liberalize plan payout and rollover rules include the following:

• after 2007, taxpayers will be permitted to make direct rollovers from qualified plans to Roth IRAs;

• for purposes of the 401(k) hardship distribution rules, “hardship” includes hardship of any beneficiary under the plan (not just a spouse or dependent);

• members of the National Guard and Reserves called to active duty through 2007 can make penalty-free withdrawals from retirement plans. Withdrawn amounts may be repaid to the IRA or pension plan within two years of the distribution;

• the 10% early withdrawal penalty for distributions to public safety employees over age 50 (including police, fire, and emergency medical services) who may retire early is waived;

• effective for post-2006 distributions, nonspouse designated beneficiaries are allowed to make rollovers of inherited amounts in qualified plans, governmental Sec. 457 plans, or tax-sheltered annuities to their own IRAs (treated as inherited IRAs); and

• effective for distributions in plan years beginning after 2006, defined benefit plans can make in-service distributions to age-62-or-older participants.

Retirement savings provisions made permanent

The Act makes permanent a number of retirement plan and IRA liberalizations that were added to the tax laws in 2001 but were set to sunset after 2010. By making the 2001 changes permanent, the new law preserves the advantages of higher employee contribution limits for employer plans, higher IRA contribution limits, more flexible plan rules, portability, a catch-up for those over 50, and an increase in employer contribution limits. The new law also makes permanent the saver's credit, which would not have been available after 2006 absent the extension.

Charitable reforms

The Act also contains a package of provisions to help prevent abuse in the charitable sector and provide additional tax incentives for Americans to give more resources to the charitable community. The incentives include:

• Tax-free distributions from IRAs for charitable purposes. Taxpayers can exclude from gross income certain distributions of up to $100,000 from a traditional or Roth IRA if made to a tax-exempt organization to which deductible contributions can be made. The provision is effective for two years through 2007.

• Charitable deduction for contributions of food inventory. An enhanced deduction for donations of food inventory which was formerly available only to C corporations is extended to all trades and businesses, effective for two years through 2007.

• Basis adjustment to stock of S corporation contributing property. If an S corporation contributes property to a charity, an S corporation shareholder only has to reduce his basis in stock of the S corporation by his pro rata share of the adjusted basis of the contributed property, rather than by the amount of the charitable contribution that flows through to him. The provision is effective for two years through 2007.

• Charitable deduction for contributions of book inventory. The current-law provision that adds public schools to the list of eligible donees for the enhanced deduction for contributions of qualified book inventory by C corporations is extended for two years through 2007.

• Qualified conservation contributions. The new law raises the charitable deduction limit—from 30% of adjusted gross income to 50%—for qualified conservation contributions, as long as it does not prevent the use of the donated land for farming or ranching purposes. The charitable deduction limit is raised to 100% of adjusted gross income for eligible farmers and ranchers. Unused contributions can be carried forward for up to 15 years. The provision is effective for two years through 2007.

On the charitable reform side, the new rules:

• require reports to the Treasury Department on certain life insurance contracts;

• double the fines and penalties applicable to certain activities by charities, social welfare organizations, private foundations and exempt organization managers;

• clarify the terms of facade easements in historic districts, and also clarify that the charitable deduction is reduced if a rehabilitation tax credit has been claimed with respect to the donated property;

• limit the basis for donated taxidermy property and provide that the value of the deduction is equal to the lesser of basis or fair market value;

• require the recapture of any tax benefit derived from the contribution of property with respect to which a fair market value deduction was claimed if the property is not used for an exempt purpose of the donee organization, effective for contributions made after Sept. 1, 2006;

• generally prohibit deductions for contributions of clothing and household items unless they are in good used condition or better;

• require that in the case of a charitable contribution of money, regardless of the amount, the donor must maintain a cancelled check, bank record or receipt from the donee organization showing the name of the donee organization, the date of the contribution, and the amount of the contribution. This is effective for contributions made after the enactment date;

• lower the threshold for imposing accuracy-related penalties on a taxpayer who claims a deduction for donated property for which a qualified appraisal is required;

• impose certain requirements on tax-exempt organizations that offer credit counseling services;

• apply an excess benefits transaction tax on any grant, loan, compensation or other similar payments from a donor-advised fund to a person that with respect to such fund is a donor, donor adviser, or a related person, and from a supporting organization to a substantial contributor or a related person; and

• require that unrelated business income tax returns of 501(c)(3) organizations be made publicly available.

Please keep in mind that I've described only the highlights of the most important changes in the new law. Please call me at your earliest convenience if you need more details on how you may be affected by this important tax legislation.

Very truly yours,

2502. New investment advice rules in the Pension Protection Act of 2006

To the practitioner: You can use the following client letter to inform clients of these important provisions in the Pension Protection Act of 2006.

Dear client,

I am writing to inform you of key provisions in the recently passed Pension Protection Act of 2006 which change the rules on who is permitted to offer investment advice on 401(k) and IRA plans. Most importantly, for the first time, the same companies that administer 401(k) plans—such as mutual fund, brokerage and insurance companies—will be allowed to offer specific advice to plan participants on how to invest their accounts. Here are the details.

In the past, federal conflict-of-interest laws prohibited firms from both managing investment plans and offering advice for fear that they would recommend their own high-fee funds to maximize their fee income, at the expense of the best interests of the plan participants. Financial institutions, however, have long lobbied Congress to be allowed to provide this type of investment advice, and their lobbying has borne fruit. The new rules let 401(k) providers give personalized investment advice to participants of employer-sponsored plans as long as the advice is based on a computer model that has been certified as bias-free by an independent third party.

A different rule applies for IRA providers. They can offer specific investment advice to plan participants, but they are required to charge a flat rate fee for one year (with no computer model). During that time, Department of Labor and Treasury will study whether a computer model exists to tailor professional investment advice to an individual's own unique needs based on personal and subjective criteria about their financial and family circumstances. If they cannot certify that such a model exists, then the advisers will be allowed to provide advice free from the prohibited transaction exemption as long as they certify in writing that the company has adopted written policies and procedures which ensure that the investment advice provided is in the participant's best interest. The new law also puts in place fiduciary and disclosure safeguards thought to ensure that advice provided to employees is solely in their best interest. The new rules go into effect with respect to investment advice provided after December 31, 2006.

I hope this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to call.

Very truly yours,

2503. Liberalized plan payout and rollover rules in the Pension Protection Act of 2006

To the practitioner: You can use the following client letter to inform clients of these important provisions in the Pension Protection Act of 2006.

Dear client,

The recently passed Pension Protection Act of 2006 includes a number of significant tax incentives to enhance retirement savings for millions of Americans. I am writing to inform you of several provisions in the Act that are designed to liberalize the qualified plan and IRA payout and rollover rules. These new provisions include the following:

... After 2007, taxpayers will be permitted to make direct rollovers from qualified plans to Roth IRAs.

... For purposes of the 401(k) hardship distribution rules, “hardship” includes hardship of a beneficiary under the plan (even if the beneficiary is not a spouse or dependent). This provision is effective on the enactment date. IRS is directed to issue regs within 180 days after the enactment date to effect this change.

... Members of the National Guard and Reserves called to active duty through 2007 can make penalty-free withdrawals from retirement plans. Withdrawn amounts may be repaid to the IRA or pension plan within two years of the distribution without regard to the annual contribution limit.

... The 10% early withdrawal penalty for distributions to public safety employees over age 50 (including police, fire, and emergency medical services) who may retire early is waived, effective for distributions made after the enactment date.

... Effective for post-2006 distributions, nonspouse designated beneficiaries are allowed to make rollovers of inherited amounts in qualified plans, governmental Sec. 457 plans, or tax-sheltered annuities to their own IRAs (treated as inherited IRAs).

... Effective for distributions in plan years beginning after 2006, defined benefit plans can make in-service distributions to age-62-or-older participants.

I hope this information is helpful. If you would like more details about these or any other aspect of the new law, please do not hesitate to call.

Very truly yours,

2504. Reform of the multiemployer pension system in the Pension Protection Act of 2006

To the practitioner: You can use the following client letter to inform clients of these important provisions in the Pension Protection Act of 2006.

Dear client,

The massive Pension Protection Act of 2006 which was recently passed by both houses of Congress contains among its many provisions several measures designed to help secure the long-term financial health of endangered multiemployer pension plans. These changes are important because while only 10% of defined benefit plans are multiemployer plans, these plans cover 25% of all participants in defined benefit plans. The new legislation is intended to prevent endangered pension plans from declining further and keep significantly troubled plans from becoming insolvent. Here is a brief overview of the new provisions.

Background

Multiemployer pension plans are defined benefit pension plans maintained by two or more employers in a particular trade or industry, such as trucking or construction, that are collectively bargained between an employer and a labor union. These plans must have an equal number of employer and union representatives on the board of trustees, which manage the plan. While multiemployer and single employer pension plans have some similarities, there are some fundamental differences as well. While single employer plan sponsors generally may adjust their pension contributions to meet funding requirements, the contributions of individual employers in multiemployer plans cannot be easily modified because their benefit contributions are fixed by the terms of collective bargaining agreements. In addition, because multiemployer contributions are tied directly to the total number of hours worked by active workers, any reduction in the number of active participants results in low contributions to multiemployer plans, which contribute to plan underfunding.

All defined benefit plans, including multiemployer plans, are required to meet minimum funding standards under the Internal Revenue Code. Multiemployer plans, however, are subject to different rules than single employer plans. Single employer plans have generally aimed to be at least 90% funded in order to avoid the trigger of additional contributions (note that the Act raises this requirement to 100%). There has been no such funding target for multiemployer plans.

Multiemployer pension funding reforms

The Act creates new provisions for underfunded multiemployer plans and separates them into two broad categories: (1) plans between 65% and 80% funded are categorized as “endangered” plans; and (2) plans that are less than 65% funded are categorized as “critical” plans.

Endangered multiemployer plans. Under the new law, if a plan is less than 80% funded or will hit a funding deficiency in seven years, plan trustees must design and adopt a program that will improve the health of the plan by one-third within 10 years, unless a plan's actuary certifies that the plan cannot meet the improvement benchmark. If a plan cannot meet the one-third improvement benchmark within 10 years, the plan must develop a program to improve the health of the plan by one-fifth within 15 years, and must certify each year (until the end of the collective bargaining agreement) that the plan is unable to meet the one-third improvement benchmark. Plans that are between 65-70% funded are required to improve by one-fifth within 15 years. The Act prohibits trustees from increasing benefits if the increase would cause the plan to fall below 65% funded status. In addition, the plan trustees must adopt certain other measures for increasing contributions and restricting benefit increases until the plan meets that one-third benchmark.

Critical multiemployer plans. The Act includes a series of requirements to address multiemployer plans funded at less than 65% that face significant and immediate funding problems. The Act strengthens the funding requirements for critical multiemployer plans and requires trustees to develop a rehabilitation proposal to exit the critical status within 10 years. Multiemployer plans must provide sufficient and timely notice to workers, contributing employers, unions, employer bargaining representatives, as well as the PBGC, Internal Revenue Service, and Department of Labor that the plan is in reorganization.

Under the Act, the rehabilitation plan must include a combination of employer contribution increases, expense reductions, funding relief measures, restrictions on future benefit accruals, and reductions of certain ancillary benefits. These changes must be adopted by all bargaining parties, both management and labor trustees. If the plan cannot emerge from reorganization within 10 years, the rehabilitation plan must describe alternatives, explain why emergence from reorganization is not feasible, and develop actions that the trustees must take to postpone insolvency.

The Act also requires multiemployer plan trustees to provide contributing employers, within 30 days after the plan provides the notice of reorganization status, with a series of automatic contribution surcharges. The surcharge will end when a new collective bargaining agreement is implemented that adopts a schedule of benefits based on the rehabilitation plan.

Changing the amortization schedule

Under the minimum funding standard, the portion of the cost of a plan that is required to be paid for a particular year depends upon the nature of the cost. For example, the normal cost for a year is generally required to be funded currently. Other costs are spread (or amortized) over a period of years. The new law modifies the amortization periods applicable to multiemployer plans so that the amortization period for most charges is 15 years. Under the new rules, past service liability under the plan is amortized over 15 years (rather than 30); past service liability due to plan amendments is amortized over 15 years (rather than 30); and experience gains and losses resulting from a change in actuarial assumptions are amortized over 15 years (rather than 30). As under prior law, experience gains and losses and waived funding deficiencies are amortized over 15 years. The new amortization periods do not apply to amounts being amortized under prior-law amortization periods. That is, no recalculation of amortization schedules already in effect is required under the provision. The new law also eliminates the alternative funding standard account.

Deduction limit increased

The new law increases the maximum deductible limit to 140% of current liability, providing additional funding flexibility for plans each year. This provision is effective for taxable years beginning after 2005.

I hope this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to call.

Very truly yours,

2505. Reform of the single-employer defined benefit plan rules in the Pension Protection Act of 2006

To the practitioner: You can use the following client letter to inform clients of these important provisions in the Pension Protection Act of 2006.

Dear client,

I am writing to give you a quick overview of the changes in the single-employer defined benefit rules brought on by the recently passed Pension Protection Act of 2006. While the Act is a massive tax bill that overhauls the disclosure rules for defined benefit plans, addresses conversions of pension plans to cash balance plans, carries liberalized payout and rollover rules, and makes a host of other changes relating to pension plans and their beneficiaries, at the core of the new legislation are provisions that reform the laws governing funding of single-employer defined benefit pension plans and the premium structure for the Pension Benefit Guaranty Corporation (PBGC). Among the driving forces behind the push for pension reform were the twin problems of large and growing deficits for the PBGC and continued underfunding of pension plans, particularly for financially weak companies. The new legislation addresses these problems by compelling employers with defined benefit pension plans to meet their funding obligations and seeking to prevent companies from terminating plans and shifting the financial burden to the taxpayer. More specifically, the Act:

... Requires employers to make contributions to their single-employer defined benefit pension plans over the next seven years to make them 100% funded. Formerly, a 90% funding level was deemed acceptable.

... Specifies that the discount rate used to calculate the present value of current pension liabilities be based on a segmented yield curve of corporate bonds. Pre-Act law required the use of a 30-year Treasury rate for certain calculations. For 2004 and 2005, a long-term corporate bond interest rate was substituted for the 30-year Treasury rate for plan funding and PBGC premiums. The Act extends the 2004 and 2005 temporary rates to 2006 and 2007. For plan years beginning after 2007, the Act requires a plan to calculate lump sum values using a three-segment yield curve. The yield curve value is phased in over 5 years at 20% per year (the remainder is based on existing methodology). The yield curve is based on a monthly interest rate.

... Prohibits employers from using credit balances if their plans are funded at less than 80%. Employers can continue using credit balances so long as their plans remain at least 80% funded. Credit balances had come under harsh criticism from the administration and some lawmakers, who said they contribute to plan underfunding by allowing plan sponsors to skip contributions.

... Triggers accelerated contributions for “at-risk” plans.

... Reduces the smoothing of interest rates to two years (instead of five for assets and four for liabilities under current law) to improve funding accuracy and protect plans against market and funding volatility.

... Permits employers to make additional maximum deductible contributions. This provision allows plan sponsors to contribute more during times of prosperity, building a cushion that can survive lean times. For contributions after 2007, the Act increases the deductible limit for single-employer plans to the year's normal cost (generally the cost of benefits accrued in the year) plus the amount necessary to fully fund the funding target. In addition, employers can contribute and deduct a cushion. The cushion is 50% of the funding target plus additional amounts reflecting projections of the participants' compensation and the statutory compensation limits. The Act allows plans to contribute and deduct the maximum at risk liability for both target and normal if this is more. For 2006 and 2007, the deduction limit is increased from 100% to 150% of the plan's current liability.

... Prohibits employers and union leaders from increasing benefits if a plan is less than 80% funded, unless the benefits are paid for immediately. In other words, a plan that is less than 80% funded can not increase benefits without first funding the benefits.

... Prohibits further benefit accruals for lump-sum distributions or shutdown benefits from plans funded at less than 60%. In other words, if a plan is less than 60% funded, the Act prohibits further benefit accruals and freezes the plan. Once a plan is above 60% the employer and the union then decide how to credit past service accruals.

... Restricts the use of deferred executive compensation arrangements for employers with severely underfunded plans.

... Permanently establishes an employer-paid termination premium of $1,250 per participant if a plan sponsor terminates its employee pension plan upon entering bankruptcy.

... Gives airlines that opt for a “hard freze” of their pension plans an additional 10 years to meet their funding obligations and avoid defaulting on their plans and turning these obligations over to PBGC. An employer-paid termination premium of $2,500 per plan participant also must be paid by these airlines if they terminate their employee pension plan upon entering bankruptcy.

... Gives airlines that opt for a “soft freeze” of their pension plans an additional three years to meet their funding obligations and avoid defaulting on their plans and turning these obligations over to PBGC. An employer-paid termination premium of $2,500 per plan participant also must be paid by these airlines if they terminate their employee pension plan upon entering bankrupty. For these airlines, the Act also extends the deficit reduction contribution relief—that was included in the 2004 Pension Funding Equiity Act—through 2007.

I hope this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to call.

Very truly yours,

2506. Charitable reforms and incentives in the Pension Protection Act of 2006

To the practitioner: You can use the following client letter to inform clients involved in charitable giving of these important provisions in the Pension Protection Act of 2006.

Dear client,

The recently enacted Pension Protection Act of 2006 contains a package of provisions to help prevent abuse in the charitable sector and provide additional tax incentives for Americans to give more resources to the charitable community. Here is a brief overview of those provisions.

Charitable Giving Incentives

The Act contains a charitable giving incentives package designed to encourage charitable donations. The incentives include:

• Tax-free distributions from IRAs for charitable purposes. The new law permits taxpayers to exclude from gross income certain distributions of up to $100,000 from a traditional individual retirement account (IRA) or Roth IRA which would otherwise be included in income. The charitable distribution must be made to a tax-exempt organization to which deductible contributions can be made. The change is effective for two years through 2007.

• Charitable deduction for contributions of food inventory. Under the new law, an enhanced deduction for donations of food inventory which was formerly available only to C corporations is extended to all trades and businesses, effective for two years through 2007.

• Basis adjustment to stock of S corporation contributing property. The Act provides that if an S corporation contributes property to a charity, an S corporation shareholder only has to reduce his basis in stock of the S corporation by his pro rata share of the adjusted basis of the contributed property, rather than by the amount of the charitable contribution that flows through to him. For example, if an S corporation with one individual shareholder makes a charitable contribution of stock with a basis of $200 and a fair market value of $500, the shareholder will be treated as having made a $500 charitable contribution and will reduce the basis of the S corporation stock by $200. The provision is effective for two years through 2007.

• Charitable deduction for contributions of book inventory. The provision extends the current-law provision that adds public schools to the list of eligible donees for the enhanced deduction for contributions of qualified book inventory by C corporations. The provision is effective for two years through 2007.

• The tax treatment of certain payments to controlling exempt organizations. Under prior law, rent, royalty, annuity, and interest income paid to a tax-exempt organization by a controlled taxable subsidiary was generally treated as unrelated business income, which was taxable to the tax-exempt parent organization. The new law modifies that rule such that only the portion of such payments which is not regarded as fair market value will be treated as unrelated business taxable income. Exempt organizations are required to report certain amounts received from controlled organizations. The provision is effective for two years through 2007.

• Qualified conservation contributions. The new law raises the charitable deduction limit—from 30% of adjusted gross income to 50%—for qualified conservation contributions, as long as it does not prevent the use of the donated land for farming or ranching purposes. The charitable deduction limit is raised to 100% of adjusted gross income for eligible farmers and ranchers. Unused contributions can be carried forward for up to 15 years. The provision is effective for two years through 2007.

Charitable reform

The Act also imposes new requirements and restrictions on exempt organizations. The new rules:

... Require reports to the Treasury Department on certain life insurance contracts.

... Double the fines and penalties applicable to certain activities by charities, social welfare organizations, private foundations and exempt organization managers.

... Clarify the terms of facade easements in historic districts, and also clarify that the charitable deduction is reduced if a rehabilitation tax credit has been claimed with respect to the donated property.

... Limit the basis for donated taxidermy property to the cost of preparing, stuffing and mounting an animal and provide that the value of the deduction is equal to the lesser of basis or fair market value.

... Require the recapture of any tax benefit derived from the contribution of property with respect to which a fair market value deduction was claimed if the property is not used for an exempt purpose of the donee organization. The change is effective for contributions made after Sept. 1, 2006.

... Prohibit deductions for contributions of clothing and household items unless they are in good used condition or better. In addition, IRS may deny a deduction for any item with minimal monetary value. These rules, which are effective for contributions made after the enactment date, don't apply to any contribution of a single item of clothing or a household item for which a deduction of more than $500 is claimed if the taxpayer includes with his return a qualified appraisal for the donated property.

... Require that in the case of a charitable contribution of money, regardless of the amount, the donor must maintain a cancelled check, bank record or receipt from the donee organization showing the name of the donee organization, the date of the contribution, and the amount of the contribution. The change is effective for contributions made after the enactment date.

... Require that charities receiving a fractional interest in an item of tangible personal property take complete ownership of the item within 10 years or the death of the donor, whichever occurs first. In addition, the donee must have (i) taken possession of the item at least once during the10-year period as long as the donor remains alive, and (ii) used the item for the organization's exempt purpose. Failure to comply with these requirements results in the recapture of all tax benefits plus interest and the imposition of a 10% penalty. The change is effective for contributions, bequests, and gifts made after the enactment date.

... Lower the threshold for imposing accuracy-related penalties on a taxpayer who claims a deduction for donated property for which a qualified appraisal is required.

... Impose certain requirements on tax-exempt organizations that offer credit counseling services, subject to a four-year transition rule to limit the allowable amount of debt management plan income to 50% of revenues.

... Apply an excess benefits transaction tax on any grant, loan, compensation or other similar payments from a donor-advised fund to a person that with respect to such fund is a donor, donor adviser, or a related person, and from a supporting organization to a substantial contributor or a related person.

... Require that unrelated business income tax returns of section 501(c)(3) organizations be made publicly available.

I hope this information is helpful. If you would like more details about these or any other aspect of the new law, please do not hesitate to call.

Very truly yours,

2507. New disclosure rules for qualified plans in the Pension Protection Act of 2006

To the practitioner: You can use the following client letter to inform clients of these important provisions in the Pension Protection Act of 2006.

Dear client,

One of the overarching themes of the massive new Pension Protection Act of 2006 is that there should be more pension transparency so that workers, regulators and investors can better keep tabs on the financial health of traditional pension plans. Too often in recent years, participants have mistakenly believed that their pension plans were well funded, only to receive a shock when the plan was terminated. Without basic information, workers, contributing employers, lawmakers, and the federal agencies that oversee pension plans are left without the most complete and accurate information about the true funded status of these pension plans, which has troubling implications for workers who are relying on them for their retirement, and taxpayers who ultimately could face the risk of bailing out these plans. To meet this need, the Act adds several important measures designed to give workers, investors, and lawmakers more timely and useful information about the status of pension plans to ensure greater transparency and accountability. Here are the essentials:

... Both single and multiemployer plans are required to include more detailed and specific information on their Form 5500 filings. The principal source of information about private sector defined benefit plans is Form 5500, the equivalent of a pension plan's federal tax return. The Act requires plans to include more information on their Form 5500 filings. Specifically, if plans merge and file one Form 5500, the plan must provide the funded percentage for the preceding plan year and the new funded percentage after the plan merger. In addition, a plan's enrolled actuary must explain the basis for all plan retirement assumptions on schedule B, the actuarial statement filed along with Form 5500 that provides information on the plan's assets, liabilities, and compliance with funding rules. The Act also requires multiemployer plans to include on their Form 5500 filings the number of contributing employers in the plan as well as the number of employees in the plan that no longer have a contributing employer on their behalf.

... Form 4010 disclosure is made publicly available. Under current law, employers who sponsor single-employer defined benefit plans that are underfunded, in the aggregate, by more than $50 million must disclose to the PBGC certain information annually on Form 4010. The Act enhances these disclosure requirements and makes all Form 4010 information filed with the PBGC available to the public, save for sensitive corporate proprietary information.

... An 80% at-risk threshold is established that determines whether plans pose a threat to PBGC and therefore must file 4010 information. In other words, when pension assets fall below 80% of expected obligations, more disclosure of plan finances is required.

... Both single and multiemployer pension plans are required to notify workers and retirees of the funded status of their plan within 120 days after the close of the plan year. Within the first four months of each year, workers and retirees will receive a detailed report about the financial state of their pension plans, along with comparisons with the prior two years, and with reports that include data on the pensions' financial health, investments, and number of participating workers and retirees.

... Companies are prohibited from forcing employees to invest any of their own retirement savings contributions in the stock of the employer.

... The new law makes it clear that companies have a fiduciary responsibility for workers' savings during “blackout” periods, when workers are temporarily barred from making changes to their 401(k) investments.

... Companies are required to give workers quarterly benefit statements that include information about accounts, including the value of their assets, their right to diversify, and the importance of maintaining a diversified portfolio.

These changes seem sensible and well intentioned. The fact remains, however, that pension accounting is an arcane and murky area. While the Act increases the quality and frequency of financial updates, whether that will do much to make pension finances more understandable to most workers remains to be seen.

I hope this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to call.

Very truly yours,

2508. Retirement savings provisions made permanent in the Pension Protection Act of 2006

To the practitioner: You can use the following client letter to inform clients of these important provisions in the Pension Protection Act of 2006.

Dear client,

The recently passed Pension Protection Act of 2006 includes a number of significant tax incentives to enhance retirement savings for millions of Americans. Specifically, the Act makes permanent a number of retirement plan and IRA liberalizations that were added to the tax laws in 2001 but were set to sunset after 2010. Here are the details.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) substantially increased pension and individual retirement account (IRA) contribution limits through 2010 as well as making other improvements in pensions and retirement savings through enhanced vesting, portability and reduced regulatory burdens. For example, prior to 2001, the maximum amount that a taxpayer could contribute to a tax-favored IRA plan was $2,000 a year. EGTRRA increased that limit in steps to $5,000 by 2008. (The limit is $4,000 today.) The $5,000 limit will then be increased each year after 2008 to reflect inflation. The 2001 legislation similarly increased the limits on the maximum tax-deductible amount that an employee can contribute to an employer-sponsored defined contribution retirement plan such as a 401(k) plan. This limit was increased in steps from the $10,500 a year in effect in 2001 to $15,000 a year in 2006. That limit will then be adjusted to reflect inflation in years after 2006. EGTRRA also instituted new catch-up contributions for individuals age 50 and older—allowing them to annually contribute an extra $5,000 to 401(k) plans and an extra $1,000 to IRAs. Catch-up contributions provide a significant savings boost for baby boomers, women previously out of the workforce, and those who fell behind in their retirement savings. The 2001 legislation also created incentives for small employers to offer pension plans. As I mentioned above, all these favorable provisions were scheduled to end at the conclusion of 2010 (reverting back to pre-EGTRRA law and limits), but under the new law these favorable changes are made permanent.

Similarly, EGTRRA removed existing barriers that prevented employers from being able to take their retirement savings with them when they switched jobs, particularly when they moved from different employment sectors. For the first time, employees changing jobs were permitted to take their retirement savings with them when they moved between 401(k), 403(b) and state and local 457 arrangements. If EGTRRA had not been made permanent, this portability would have ended, once again presenting employees with a frustrating set of barriers that often led them to cash out their retirement savings. The new law, however, ensures that these flexible rollover and portability rules will stay in place.

In short, the new law, by making EGTRRA permanent, preserves the advantages of higher employee contribution limits for employer plans, higher IRA contribution limits, more flexible plan rules, portability, a catch-up for those over 50, and an increase in employer contribution limits.

The new law also makes permanent the saver's credit, which would not have been available after 2006 absent the extension. The saver's credit is a tax credit for low and moderate-income savers who contribute to workplace retirement plans or IRAs. Under this provision, single individuals earning up to $15,000 and married couples earning up to $30,000 can receive a tax credit of up to 50 percent of the first $2,000 contributed to a plan or IRA. The new law also indexes the saver's credit income limits to prevent this benefit from being eroded by inflation.

I hope this information is helpful. If you would like more details about these or any other aspect of the new law, please do not hesitate to call.

Very truly yours,