Beginning in 2006, the IRS permitted taxpayers who had attained age 70½ to make IRA

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1 THE March 2013 Quality forum Volume 8, Issue 1 Qualified Charitable Distributions Reinstated Beginning in 2006, the IRS permitted taxpayers who had attained age 70½ to make IRA Charitable Rollovers or Qualified Charitable Distributions (QCDs) directly to eligible charities (including colleges and universities) of up to $100,000 in total annually. This legislation expired at the end of However, the American Taxpayer Relief Act of 2012 (ATRA) has reinstated this legislation with a two-year extension that is retroactive back to January 1, 2012, and is set to expire again on December 31, Under ATRA 2012, taxpayers who took RMDs during the month of December 2012 were able to elect to make charitable gifts of these distributions in January The charitable gifts will be treated as having occurred in December 2012, and the taxpayers will not need to report the RMDs as income for In addition, for those taxpayers who had gone ahead and made QCDs directly from their IRA custodians to charities during 2012 (hoping that there would be new retroactive legislation), the IRS has indicated that these rollovers will be treated as QCDs retroactive to January 1, 2012, and will not need to be reported as income for Finally, taxpayers who did not make QCDs during 2012 were given an opportunity to do so during January 2013 and to have the QCDs (up to $100,000) treated as 2012 charitable rollovers, not reportable as income for 2012 or These taxpayers were also eligible to make QCDs during the remaining 11 months of 2013 of up to another $100,000 that will be considered QCDs for 2013 and will not need to be reported as income in n I n T h i s I s s u e Qualified Charitable Distributions Reinstated... 1 News Clips Roth Features Comparison Chart for Education Savings Plan Comparison Chart for Compliance Calendar

2 American Taxpayer Relief Act of 2012 In-Plan Conversions to Roth Accounts The American Taxpayer Relief Act of 2012 includes a provision that allows defined contribution retirement accounts not otherwise distributable to be converted within the plan to Roth accounts. Previously, only amounts that were deemed distributable (such as when the participant attained age 59½) could be converted to in-plan Roth accounts. Although the provision was effective January 1, 2013, it may be applied to account balances in existence prior to that date. Because these conversions are taxable, Congress expects that this provision will generate $12.2 billion in tax revenue over the next ten years. On February 26, 2013, the American Society of Pension Professionals and Actuaries (ASPPA) sent a letter to the Internal Revenue Service (IRS) requesting further guidance on the provisions of the American Taxpayer Relief Act that expand the scope of in-plan Roth conversions. ASPPA specifically asked for clarification of the beginning date of the 5-year period of participation required for a tax-free distribution from a Roth account that was created by an internal conversion. Coverdell Accounts Retained Prior to the American Taxpayer Relief Act (ATRA) of 2012, it was feared by many (and hoped by some) that Coverdell Education Savings Accounts would be gutted to the point that they would disappear from use. However, the ATRA of 2012 has made permanent all of the benefits that EGTRRA (Economic Growth and Tax Relief Reconciliation Act of 2001) expanded for Coverdells, including: Tax-free use of Coverdells for K 12 expenses; $2,000 annual contribution limit (was $500 before EGTRRA); Ability to contribute to both a Coverdell and a 529 plan for the same beneficiary in the same tax year. Reporting on 2010 Roth Conversions The IRS recently released a notice reminding taxpayers of the reporting requirements for 2010 Roth conversions. Under a special rule that applied only to 2010 conversions, taxpayers could delay reporting portions of the conversions until 2011 and Taxpayers who converted amounts from a non-roth retirement account to either a Roth IRA or a designated Roth account [in a 401(k) plan or a 403(b) plan] in 2010 and who did not report the conversion for 2010 were required to report one half of the conversion amount as taxable income for 2011 and the other half of the conversion amount as taxable income for The reporting deadline (, 2013) has now arrived. News Clips Continued on page 3 2

3 SEC Announces National Examination Program Priorities for 2013 On February 21, 2013, the SEC s Office of Compliance Inspections and Examinations (OCIE) announced its 2013 examination priorities for financial institutions. The publication identifies the market-wide issues on which the SEC will be focused, and also the specific subjects of interest within the distinct areas of OCIE s National Examination Program. For all SEC registrants, OCIE will be paying particular attention to issues of: Fraud identification leveraging quantitative and qualitative tools Corporate governance and enterprise risk management executive management of financial, legal, compliance, operation, and reputational risks Conflicts of interest steps taken to mitigate and disclose conflicts where they arise Use of technology governance and supervision of information technology systems In its discussion of priorities for each of the different examination program areas, OCIE identified the ongoing risks, emerging risks, and policy topics for each area of focus. For investment companies, OCIE has announced a particular interest in examining, among other things: Distribution payments to intermediary distributers, cloaked as payments for client servicing Performance marketing, including as an indicator of valuation deficiencies Fund governance, including the provision of information to Boards, and their use of such information For broker-dealers, OCIE will be taking a particularly keen look at: Sales practices and fraud concerning retail investors, including the role of supervision by the regulated entity Anti-money-laundering programs, particularly customer identification program elements Market access rule, especially the use of master/sub-account arrangements by customers Sales of exchange-traded funds. For transfer agents, the examination priorities for 2013 will include: Core TA activities such as transaction timeliness, recordkeeping accuracy, record retention, and safeguarding of funds and securities Risk mitigation policies and procedures including business continuity plans, record backups, and third-party access and security Oversight of TA functions that are outsourced to other transfer agents or financial intermediaries Third-party administration services provided by registered TAs News Clips Continued on page 4 3

4 Department of Labor Agenda for 2013 The Department of Labor (DOL) has published a lengthy regulatory agenda for 2013 that includes: 1. An amendment under the Abandoned Plan Program that would expand the scope of individuals entitled to act as a Qualified Termination Administrator (QTA); the comment period for the proposal ended February 11, A Guide for 408(b)(2) disclosures; DOL wants plan providers to give precise details about where particular items can be found in the disclosures; guide requirement will be prospective; anticipated date for proposed regulation is May A (re)proposal of fiduciary advice rules; includes expanded definition of fiduciary and prohibited transaction exemptions; anticipated date of reproposed regulation is July A proposal to require retirement income projections on participant statements; DOL to explore how statements for defined contribution plans should communicate this information. 5. An amendment to require additional disclosures for target-date funds (TDFs) under participant disclosure rules and qualified default investment alternative (QDIA) rules; anticipated date for final regulation is November 2013; as part of this initiative, in February 2013, the Employee Benefits Security Administration (EBSA) issued guidance for plan sponsors on selecting TDFs. SEC Requests Data to Facilitate Its Consideration of a Uniform Rule for Investment Advisers and Broker-Dealers That Provide Personalized Investment Advice On March 1, 2013, the Securities and Exchange Commission issued a request for information to aid the agency in its consideration of revisions to the respective standards of care imposed on investment advisers and broker-dealers when they provide personalized investment advice. In particular, the SEC staff seeks quantitative data and economic analysis pertaining to existing and potential standards of care. This request is the SEC s next step in its consideration of whether to impose a uniform fiduciary standard for all providers of personalized investment advice. It follows the January 2011 SEC staff publication, Study on Investment Advisers and Broker-Dealers As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. While that study was mandated by section 913 of the Dodd-Frank Act, that same section authorized, but did not require, the SEC to engage in rulemaking relating to this issue. Although the staff s study recommended that the Commission engage in rulemaking, the Commission felt that insufficient data had been produced to facilitate a fully informed decision on the propriety of any rulemaking. This request aims to fill that gap. The final date for receipt of comments is July 5, News Clips Continued on page 5 4

5 Sec Requires Funds to Include New 3.8% Tax on Net Investment Income When Providing Standardized After-Tax Return Calculations On February 22, 2013, the SEC s Division of Investment Management provided guidance on the inclusion of the new 3.8% tax on net investment income, imposed on certain taxpayers as of January 1, 2013, in determining the highest individual marginal federal income tax rate for purposes of completing certain sections of the Form N-1A Registration Statement. This change affects the disclosure of after-tax returns provided in fund prospectuses, as well as fund marketing and advertising materials. According to the SEC staff, this tax, imposed by the Health Care and Education Reconciliation Act of 2010, should be included in the after-tax return calculations for ordinary income, and qualified dividend income and long-term capital gains required by Item 26(b)(2) and (3) of Form N-1A. n Roth Features Comparison Chart for 2013 ROTH FEATURES COMPARISON CHART FOR 2013 ROTH 401(K) ROTH IRA 402(g) Contribution Limit = $17,500 Contribution Limit = $5,500 Age 50 Catch-up Contribution = $5,500 Age 50 Catch-up Contribution = $1,000 Contribution may be matched by employer No matching contributions Post-tax contribution; no current tax benefit Same Contributions not allowed beyond age 70 Contributions allowed beyond age 70 Must be an active plan participant to contribute No plan participation requirement Available to all participants regardless of income Contributions are phased out for single taxpayers with incomes $112,000/$127,000 and for marrieds filing jointly with incomes $178,000/$188,000. Subject to Required Minimum Distribution rules Not subject to Required Minimum Distribution rules Offers anti-alienation protection (including rollovers from IRAs) Anti-alienation protection not available Distribution to finance first-time home purchase is Distribution to finance first-time home purchase not qualified or tax-free is qualified and tax-free Participant loans permissible Loans not permitted 5

6 Year 2013 Rules Federal Income Tax Federal Estate Tax Treatment Education Savings Plan Comparison Chart for 2013 Education Savings Plan Comparison Chart 529 Plan Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher-education expenses. Value removed from donor s gross estate; partial inclusion for death during a 5-year election period. Coverdell Education Savings Account Same as 529 plan except earnings withdrawn for qualified K 12 expenses also excluded. Value removed from donor s gross estate. UGMA/UTMA Earnings and gain taxed to dependent child (under age 19, or under 24 if full-time student); first $1,000 is tax-exempt; next $1,000 taxed at child s rate; excess over $2,000 taxed at parents rate. Value removed from donor s gross estate unless donor remains as custodian. Maximum Investment Established by the program; many in excess of $250,000 per beneficiary over lifetime of program. Individual taxpayer annual contribution limit is $14,000 per beneficiary ($28,000 for married couple filing joint return). Individual taxpayer accelerated gift limit is $70,000 per beneficiary ($140,000 for married couple filing joint return). $2,000 per beneficiary per year combined from all sources. No limit. Qualified Expenses Tuition, fees, books, supplies, equipment as required by eligible educational institution. Room and board for minimum half-time students. Same as 529 plan plus additional categories of K 12 expenses. No restrictions. Able to Change Beneficiary Yes, to another member of the beneficiary s family. Yes, to another member of the beneficiary s family. No; represents an irrevocable gift to the child. Time/Age Restrictions None unless imposed by the program. Contributions before beneficiary reaches age 18; use of account by age 30. Custodianship terminates when minor reaches age established under state law (generally 18 or 21). Income Restrictions None. Ability to contribute phases out between $95,000 and $110,000 for single filers, head of household, married filing separately; phases out between $190,000 and $220,000 for married filing jointly. None. Financial Aid Counted as asset of parent or other account owner; not counted as a student asset. Counted as asset of parent or other account owner; not counted as a student asset. Counted as a student asset. Investments Menu of investment strategies as developed by the program. Broad range of securities and certain other investments. As permitted under state laws. Use for Nonqualifying Expenses Withdrawn earnings subject to federal tax and 10% penalty. Withdrawn earnings subject to federal tax and 10% penalty. Funds must be used for benefit of the minor. 6

7 Compliance Calendar Q April 1 Required Beginning Date for participants attaining age 70 ½ or retiring after age 70½ in Date by which retirement account owners/participants must take first Required Minimum Distribution (RMD). Date by which excess contributions need to be removed from IRAs in order to avoid the 6% excise tax (unless the taxpayer is on extension to October 15). Date by which contributions must be made to Traditional IRAs in order to be deductible for 2012 (extension to file Form 1040 does not apply). Date by which 402(g) distributions of excess deferral amounts due to plan participants must be made. Date by which taxpayer requests for extension of filing deadline for federal returns to October 15 must be received by the IRS. n Editor: Patricia D. Jones, Director of Compliance Published by: National Quality Review Summer Exchange Building, Suite 50, 101 Arch Street, Boston, MA This publication is designed to provide accurate, but general, information in regard to the subject matter. This publication should not be construed as legal, tax, or other business advice. 7