IRS Determination Letter Processand January 2011 Submission

Presentation to theFCERA Board of Retirement

December 15, 2010

Laurie S. DuChateauReed Smith LLP

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What is a Tax-Qualified Plan?

Definite written program setting forth all provisions essential for Internal Revenue Code (“IRC”) qualification Written document that details how the

plan will operate in conformity with IRC Section 401(a); and

The plan must be operated in accordance with its terms

In 1988 FCERA plan was determined by the IRS to be tax-qualified

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Advantages of Maintaining Qualified Plan Status

Employer contributions not currently taxable to members

Plan earnings and income are not currently taxable to members

Favorable tax treatment available for distributions (e.g., rollover treatment)

No employment taxes paid on contributions or distributions

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Advantages of Maintaining Qualified Plan Status (cont’d)

Eligible “picked-up” employee contributions treated as pre-tax contributions

Grandfathering and transitional rules apply

Favorable benefit limits

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What is a Determination Letter?

The IRS’s opinion that the plan terms conform to the tax-qualification requirements in the IRC

IRS bound by the determination

Plan currently has an IRS determination letter issued May 6, 1988

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Advantages to Obtaining a Determination Letter

Protection from retroactive disqualification of plan for plan term deficiencies upon plan audit

Binding opinion of the IRS as to the qualified status of the plan

Full access to IRS program - Employee Plans Compliance Resolution System (“EPCRS”)

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Advantages to Obtaining a Determination Letter (cont’d)

Evidence of qualification to provide to third parties including other plans accepting member’s rollover distributions or investment transaction partners

May avoid foreign tax withholdings in some countries

Members may have additional protection in the event of personal bankruptcy

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Disadvantages to Obtaining a Determination Letter

Financial costs

IRS filing fee $1,000

Legal Fees

EPCRS filing fee of up to $25,000

Diversion of staff time

Disclosure of deficiencies to IRS may result in a loss of control addressing such issues

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Determination Letter Filing Process

File under IRS Cycle E which ends on January 31, 2011

Next scheduled filing is Cycle C (February 1, 2013 – January 31, 2014)

Filing off-cycle may result in delayed processing of the request and loss of remedial amendment period

IRS filing fee $1,000

EPCRS filing fee up to $25,000

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EPCRS

IRS program available for self correction of plan document and operational failures

If plan not under IRS audit, plan may present deficiencies to IRS, pay required filing fee and correct deficiencies

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EPCRS (cont’d)

Upon approval by IRS, a compliance letter is issued by IRS

Compliance letter is binding on IRS and cannot, upon audit, penalize plan for corrected issues subject to the compliance letter

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Proposed 2010 Internal Revenue Code Compliance Policy

Plan must be established and maintained by an employer or employers as a government defined benefit plan (IRC § 401(a)(1)

Proposed compliance policy supplements the plan by incorporating the IRC required provisions as needed

Proposed compliance policy clarifies IRC required provisions as may be necessary

Changes may eventually be included in CERL

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Exclusive Benefits – No Reversion – IRC § 401(a)(2)

Plan must be operated for the exclusive benefit of its members

Change clarifies current intention of plan

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Vesting – IRC § 401(a)(17)

Plan subject to pre-ERISA vesting requirements

To the extent funded plan must provide 100% vesting upon termination of the plan or complete discontinuance of contributions

Vesting would also be required for accrued benefits upon a member’s attainment of normal retirement age

Change clarifies required vesting provisions

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Forfeitures – IRC § 401(a)(8)

Forfeitures of benefits may only be used to reduce future employer contributions

Change clarifies existing plan terms

Proposal to update CERL for this provision to be proposed by SACRS

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Required Distributions – IRC § 401(a)(9)

Benefits must be distributed, or begin to be distributed, by the required beginning date (RBD)

RBD is April 1 of calendar year following the later of the calendar year in which:

the member attains age 70-1/2; or separates from service

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Required Distributions – IRC § 401(a)(9) (cont’d)

Benefits must be distributed over member’s life expectancy or life expectancies of member and designated beneficiary

Benefits must meet the incidental benefit rule which requires certain minimum distributions to ensure that the benefit is primarily a retirement benefit

Change clarifies CERL provisions

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Compensation Limits – IRC § 401(a)(17)

The plan must limit the compensation used to calculate benefits to $200,000 (as adjusted for inflation - $245,000 for 2011)

Additional clarifying language included

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Compensation Limits – IRC § 401(a)(17) (cont’d)

Members who first joined plan prior to July 1, 1996 are grandfathered

Grandfathering based on plan provisions in effect on July 1, 1993

No compensation limit for grandfathered members

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Rollovers – IRC § 401(a)(31)(A)

The plan must provide for tax-free rollovers of distributions out of the plan by members and beneficiaries

Notice requirements must be satisfied

Changes provide technical clarification

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Rollovers – IRC § 401(a)(31)(A) (cont’d)

Distributions from the Plan may be rolled over into:

401(k) qualified plans

403(b) plans

governmental 457(b) plans, and

IRAs, including after 2009 Roth IRAs

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Rollovers – IRC § 401(a)(31)(A) (cont’d)

Beginning in 2010, the plan must extend to non-spouse beneficiaries rollover rights to inherited IRAs

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Qualified Domestic Relations Orders (“QDROs”) – IRC § 414(p)

Permits favorable income tax treatment for allocation of member benefits made pursuant to a domestic relations order

A domestic relations order will be treated as a QDRO if it meets the Code definition

Spouse or former spouse receiving distribution under QDRO is taxed upon distribution, not member

Provides criteria for making determination

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Military Benefits (Heart Act and USERRA) – IRC § 414(u) and IRC § 401(a)(37)

USERRA - Uniformed Services Employment and Re-employment Rights Act of 1994

Contributions, benefits and service credit with respect to qualified military service must meet the requirements of USERRA

HEART Act – Heroes Earnings Assistance and Relief Act of 2008

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Military Benefits (Heart Act and USERRA) – IRC § 414(u) and IRC § 401(a)(37) (cont’d)

Survivors of member who dies while performing qualified military service are entitled to same benefits as provided if the member had been reemployed and terminated employment on account of his/her death

Accruals during period of qualified military service are not required

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Limits on Contributions – IRC § 415

Defined benefit plan benefits limited to the IRC “dollar limit” of $160,000 (as adjusted for inflation – $195,000 for 2011)

Testing based on straight life annuity beginning at age 62

Police/fire fighters with 15 or more years of service have more favorable limits

Benefits may be subject to other adjustment for testing purposes

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Limits on Contributions – IRC § 415 (cont’d)

Benefits in excess of dollar limit payable from the replacement benefit plan

Annual additions to a defined contribution plan and post-tax employee contributions to a defined benefit plan cannot exceed the “annual additions” to plan

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Limits on Contributions – IRC § 415 (cont’d)

Annual addition – the lesser of

100% of compensation or

$40,000 (adjusted for inflation by the IRS - $49,000 for 2011)

Limits are modified for permissive service credit purchases in a defined benefit plan (IRC § 415(n))

Special rules apply to restoration of withdrawals (IRC § 415(k)(3))

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Limits on Contributions – IRC § 415 (cont’d)

Pick-ups of members’ mandatory contributions will be tested under IRC § 415(b) (IRC § 414(h))

Rollovers and transfers are not subject to these limits

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Picked-Up Employee Contributions – IRC § 414(h)

Employers under a governmental plan may “pick-up” employee contributions to the plan

Pick-up is the pre-tax treatment of the contributions

Pick-up contributions available for permissive service credit

IRS guidance has restricted the ability to pick-up voluntary employee contributions, including service purchases (Rev. Rul. 2006-43)

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Picked-Up Employee Contributions – IRC § 414(h) (cont’d)

One time irrevocable pick-up election

If service purchase pick-ups are eliminated, a member may purchase the service using post-tax contributions, rollovers, and transfers

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Prohibited Transactions – IRC § 503 (b)

The plan may not engage in “prohibited transactions”

Limited exceptions apply to prohibited transaction rules

Prohibited transactions involve transactions between the plan and related parties such as the County

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Questions?

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Laurie S. DuChateauReed Smith LLP225 Fifth Avenue

Suite 1200Pittsburgh, PA 15222

412.288.3004lduchateau@reedsmith.com