RETIREMENT AND BENEFIT PLAN CHANGES FOR 2011

Federal legislation over the past few years has brought about additional tax law revisions relating to retirement and other benefit plans that go into effect for 2011. The following are highlights of some of the lesser known provisions.

• “Simple Cafeteria Plans”. Beginning in 2011, small employers (generally, those with an average of 100 or fewer employees on business days during either of the two preceding years) may provide employees with a “simple cafeteria plan”. Under such a plan, the employer may take advantage of safe harbor rules that allow the employer to avoid the tax law’s nondiscrimination requirements that pertain to cafeteria plans generally, as well as to specified qualified benefits, such as group-term life insurance, self-insured medical reimbursement, or dependent care assistance plans.
• Health plan reimbursement restrictions. Expenses for non-prescription medicines may no longer be reimbursed with tax-advantaged dollars through certain employer-sponsored plans. Specifically, the cost of over-the-counter medicines cannot be reimbursed with excludable income for expenses incurred with respect to tax years beginning after 2010 through a health reimbursement account or a flexible spending account, unless prescribed by a doctor. For health savings accounts (HSAs) or Archer medical savings accounts (MSAs), the restriction relates to amounts paid with respect to tax years commencing in 2011 and after.
• Increased tax penalty on nonqualifying HSA and MSA distributions. Beginning with tax years starting in 2011, the additional tax assessed on nonqualifying distributions from an HSA is increased from 10% to 20%. For MSA distributions not used for qualifying medical expenses, the penalty is also increased from 15% to 20%.
• Qualifying charitable IRA distributions up to $100,000 excluded from gross income. A taxpayer age 70½ or older may make tax-free distributions up to $100,000 from an IRA to charity. The tax benefits to such charitable giving: (1) qualifying IRA distributions are not included in the donor’s gross income (nor may they be claimed as a charitable donation) for income-tax purposes and (2) charitable IRA distributions count toward the donor’s required minimum IRA distributions for the year of the distribution (a special rule applies for distributions made in early 2011). The rule is set to expire after 2011.
• Designated Roth accounts permitted in 457 plans. For tax years beginning after 2010, governmental 457(b) deferred compensation plans may offer a qualified Roth contribution program. So, a 457(b) plan maintained by a state (or a state’s political subdivision, state agency, or instrumentality) can offer a designated Roth account.
• Partial annuitization of annuities. Beginning in 2011, taxpayers may partially annuitize a nonqualified annuity, endowment, or life insurance contract. Generally, owners of nonqualified annuities may elect to receive a portion of an annuity contract in a stream of current annuity distributions. This benefits the account holder by enabling him or her to leave the remainder of the contract to accumulate on a tax-deferred basis. This rule does not change the treatment for annuities payable under qualified retirement plans, 403(a) or 403(b) annuity plans, or IRAs.

Questions?
These retirement and benefit plan-related rules are among many tax law changes that may impact your 2011 and later tax planning. Please contact us if you have any questions relating to the provisions discussed above or any issues dealing with recent changes in the tax laws. Our professionals are ready to help.