NEW DISCLOSURES FOR
UNDERFUNDED DEFINED BENEFIT PLANS

By Steven H. Ellner, ASA, EA, Geller & Wind, Ltd.

The Retirement Protection Act of 1994 (RPA '94) adds a new annual notice requirement to participants of underfunded defined benefit (DB) plans, disclosing the extent of the plan's underfunding and the limits on benefits guaranteed by the Pension Benefit Guaranty Corporation (PBGC) if the plan terminates while underfunded (PBGC regulations 2627, issued June 30, 1995). The notice contains specific language and must be distributed to all participants of underfunded DB plans that are subject to the PBGC variable rate premium. The notice must be distributed within two months after the due date of Form 5500 for the previous plan year (including extensions of time for filing).

The notice requirement is first effective for plan years beginning in 1995. However, plans with fewer than 100 participants are first subject to this notice requirement for the plan years beginning in 1996. Therefore, it is likely that many plans will be required to distribute this notice for the first time in 1996 (for example, an underfunded plan with less than 100 participants must first distribute this notice by September 30, 1996, if the 1995 Form 5500 is filed on July 31, 1996). The notice must also disclose any missed quarterly contributions (if paid more than 60 days late). The notice must inform participants whether the missed quarterly payment has been made, and if it has, the date of late payment. Failure to issue timely notices may bring penalties of up to $1,000 per day, assessed by the PBGC.

The notice is not required for a year if the plan's current liability funded percentage is 90% or more for the current plan year or for the immediately preceding plan year. Furthermore, under a "volatility rule," notice is not required if the following test is met for either the current or preceding plan year: The plan's current liability funded percentage for the year is at least 80%, and the current liability funded percentage is at least 90% for a consecutive two of the three immediately preceding years. A transition rule exists for testing the 1994 plan year (which is relevant only for plans with over 100 participants).

It may be advisable that plan sponsors fully fund their current liability (to the extent deductible) in the current year. Technical note: For plans with more than 100 participants, contributions needed to fully fund the current liability are fully deductible.

In summary, the best position a plan sponsor can take with regard to the notice may be one of proper avoidance (i.e., increase the funding level of an underfunded plan with a larger employer contribution, if feasible). This encourages better funding of the plan sponsor's defined benefit plan. *

TIME REDUCED FOR EMPLOYERS TO DEPOSIT 401(K) CONTRIBUTIONS

By J. Michael Mermensolo, Esq., Geller & Wind, Ltd.

The Department of Labor (DOL) has issued proposed regulations that would reduce the maximum amount of time an employer will have to transmit employee salary reduction contributions amounts to a Sec. 401(k) plan.

Current Rule

Under the existing Employee Retirement Income Security Act of 1974 (ERISA) regulations, employee salary reduction contributions are deemed to be plan assets on the earliest date on which the employee salary reduction contribution amounts can be reasonably segregated from the general assets of the employer but in all cases no later than 90 days from the date of withholding by the employer.

Proposed Rule

The proposed regulation will continue to require that employee salary reduction contribution amounts be transmitted to a Sec. 401(k) plan as soon as they can be reasonably segregated from the employer's general assets. However, the proposed regulation also will provide that the maximum amount of time employers will have to transmit employee salary reduction contribution amounts would be no later than the maximum amount of time employers now have under the employment tax deposit rules for the transmission of Social Security tax and Federal income tax withholdings to the IRS.

The amount of time that an employer has to deposit employment tax amounts is determined by the amount of employment taxes paid by the employer during a 12-month look-back period. In general, the new rule would require all but the smallest of employers sponsoring Sec. 401(k) plans to make deposits of employee salary reduction contribution amounts within a few days of withholding such amounts from their respective employees' wages, while smaller employers may make these deposits on a monthly basis.

In particular, employers who have more than $50,000 in Social Security tax and Federal income tax withholdings annually must deposit the employee salary reduction contribution amounts that were withheld within a few days of such withholding.

If an employer has withholdings of Social Security tax and Federal income tax amounting to $50,000 or less annually, the employer must make deposits of employee salary reduction contribution amounts to the Sec. 401(k) plan on or before the 15th day of the month following the month in which the employer withheld the employee salary reduction contribution amounts from the wages of such employees.

This new regulation is due to become effective on or about March 15, 1996.

However, comments from interested parties are being accepted; so that the final version may differ slightly from the proposed rule. *

NEW LAW ELIMINATES STATE SOURCE TAX ON RETIREMENT BENEFITS

Courtesy of David Berdon & Co. LLP

Taxing pension benefits of those who live in another state is anti-senior and frankly, anti-American. Your freedom to travel and retire to any part of this great country should not be limited by the tax policies of your former state of residence. Representative Karen L. Thurman (D-Florida).

On January 10, 1996, President Clinton signed into law a proposal invalidating a state's right to tax most retirement benefits of nonresident retirees. Under the new law, in most cases, it will be beyond the powers of the source state (i.e., where the retirement or pension benefits were earned) to reach over state borders and tax the pension or retirement income.

Previously, 13 states had laws allowing them to tax pension plan distributions and other retirement benefits of individuals who earned income in their state, regardless of whether or not they were residents of the state. Among these states was New York where, prior to the new law, if an employer contributed to a pension plan on behalf of an employee who worked in New York and subsequently moved to Florida, then the employee would generally continue to pay New York taxes on the pension income.

The new legislation is virtually all encompassing. It prohibits a state from taxing a nonresident on almost all forms of deferred compensation received after December 31, 1995, including--

* 401(k) plans,

* qualified retirement plans,

* simplified employee pensions,

* annuity plans or contracts,

* individual retirement accounts,

* eligible deferred compensation plans under IRC Sec. 457,

* Federal government retirement programs,

* executive excess retirement benefit plans, and

* nonqualified deferred compensation plans providing substantially equal payments for life or life expectancy or at least 10 years.

There are some notable exceptions to the new state source tax law. Income from the following sources can be taxed, whether or not you are a resident of the source state--

* stock options,

* severance plans, and

* unemployment benefits.

As a result of the new law, individuals can now move to any state and, in most cases, not be concerned that their former source state can tax their retirement nest egg. *

Editors:

Sheldon M. Geller, Esq.

Geller & Wind, Ltd.

Avery E. Neumark, CPA

Rosen Shapss Martin & Company

Contributing Editor:

Steven Pennacchio, CPA

KPMG Peat Marwick LLP