MARKET TREND:  Despite explicit prohibitions on taking loans from IRAs, some IRA holders have used rules applicable to tax-free rollovers to effectively “borrow” amounts held in their IRAs for short periods – generally, up to 60 days. A recent Tax Court decision and follow-on guidance from the IRS, however, will now limit this method of access to IRA funds. 

SYNOPSIS:  In Bobrow v. Commissioner, the Tax Court recently concluded that the rollover treatment that allows taxpayers to take money out of, and repay money to, IRAs on a tax-free basis is limited to one rollover per 12-month period per taxpayer, regardless of the number of IRAs held by the taxpayer. This ruling differs significantly from the previous IRS position, which applied the tax-free rollover rules on an IRA-by-IRA basis. After the Tax Court’s decision, however, the IRS issued Announcement 2014-15, indicating that it now will follow Bobrow’s interpretation of the IRA rollover rules. 

TAKE AWAY:  The Bobrow decision and the IRS’s revised position have significantly restricted an IRA holder’s ability to access his or her IRA funds on a short-term, tax-free basis. This, combined with the recent proposal to eliminate “stretch” IRAs found in both the draft “Tax Reform Act of 2014” and the President’s FY2015 Budget (see discussion in WRMarketplace#14-10), evidence that additional changes to the tax treatment of IRAs may be possible. Regardless, these savings vehicles currently remain important and popular tools for retirement planning. Thus, clients maintaining IRAs (and their advisors) must be aware of the IRS’s change in position to avoid inadvertent violations of the rollover rules, which could cause unexpected current taxation of amounts purportedly rolled over after December 31, 2014. 

MAJOR REFERENCES: Bobrow v. Commissioner, T.C. Memo. 2013-21 (2014);Internal Revenue Service Announcement 2014-15. 

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MARKET TREND:  As the hunt for additional revenue continues, one focus seems to be on limiting approaches to deferring compensation to mitigate taxes, possibly making retirement planning more challenging in the future. 

SYNOPSIS:  The draft “Tax Reform Act of 2014” and the President’s FY 2015 budget each contain several provisions that would affect tax-qualified retirement plans. In both cases, the provisions indicate an intent to enhance retirement savings (particularly by lower-income individuals), simplify the administration of qualified plans, restrict the maximum amounts that may accrue for the benefit largely of higher earning individuals and raising revenue for the federal government. Interestingly, however, the two reform proposals have only one specific provision in common, which may indicate that there may not be much consensus on this subject. In addition, the draft “Tax Reform Act of 2014” contains two other notable provisions relating to executive compensation. The passage of some or any of these proposals would lead to extreme changes to compensation planning across the board. 

TAKE AWAYS:  As noted in Part I of this WRMarketplace Report, the discussion draft and budget have not yet been introduced as legislation, and members of both parties have indicated that we are unlikely to see tax reform in 2014. However, these proposals are important because they may indicate potential law changes affecting qualified retirement plan implementation and operation and tax planning using qualified and nonqualified retirement arrangements. Given that several of the draft and budget provisions could affect AALU members who consult on retirement plan administration and/or tax planning relating to deferred compensation, heightened awareness is warranted, and continued monitoring and interaction with those who craft legislation will be crucial. AALU will remain vigilant in advocacy and monitoring these proposals. 

PRIOR REPORTS: 14-10; 13-16; 12-22; 12-10; 12-9; 11-22; 11-17; 10-81; 09-46; 08-33. 

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MARKET TREND: Compensation planning has become the “hot topic” among executives and employers, with wealth preservation and employee retention as the main focus. A tax-qualified retirement plan remains a key vehicle to accomplishing both of these objectives. These plans are available to a broader participant population than are nonqualified deferred compensation plans, and they provide greater security against loss that could result from an employer’s financial difficulties.

SYNOPSIS: Tax-qualified retirement plans generally come in two forms – “defined contribution” plans and “defined benefit” plan – with varying plan types within each category. Differences among plans include how the benefits for participants are determined, whether the employer or the employee has an obligation to make contributions, whether the employer or the employee bears the investment risk with respect to plan assets, the maximum benefit the plan can provide to the participant, the amount the employer can deduct in connection with the plan contributions, and when benefits can be paid. The table set forth below highlights the salient features for the most common types of plans.

TAKE AWAY: Combining an understanding of the conceptual and practical differences among plans, as described herein, with the technical aspects of the plan types will be valuable in advising executives and their organizations in the selection and implementation of an effective compensation plan that will appeal to both parties. To assist, see the attached table summarizing the key differences among the various types of retirement plans from the perspective of the tax-qualification requirements and restrictions.

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