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PENSION
PROTECTION ACT OF 2006: Background The Pension Protection Act of 2006 amends numerous rules related to exempt organizations. The amendments are numerous, and affect rules that apply at the organization level. The changes affect governmental entities, educational entities, and other types of nonprofit entities. Other aspects of the Act pertain specifically to individual charitable giving activities, and are addressed under separate cover, available to you upon request if you have not already received it. Government Plans and the Purchase of Permissive Service CreditA qualified retirement plan maintained by a State or local government employer may provide that a participant may make after-tax employee contributions in order to purchase permissive service credit, subject to certain limits. Permissive service credit means credit for a period of service recognized by the governmental plan which the participant has not received under the plan and which the employee receives only if the employee voluntarily contributes to the plan an amount (as determined by the plan) that does not exceed the amount necessary to fund the benefit attributable to the period of service and that is in addition to the regular employee contributions, if any, under the plan.
The Act modifies the definition of permissive service credit by providing that permissive service credit means service credit which relates to benefits to which the participant is not otherwise entitled under such governmental plan, rather than service credit which such participant has not received under the plan. Credit qualifies as permissive service credit if it is purchased to provide an increased benefit for a period of service already credited under the plan (e.g., if a lower level of benefit is converted to a higher benefit level otherwise offered under the same plan), as long as it relates to benefits to which the participant is not otherwise entitled. In addition, the Act allows participants to purchase credit for periods regardless of whether service is performed, subject to the limits on nonqualified service. These provisions are generally effective as if they were included in the amendments made by the Taxpayer Relief Act of 1997. Application of Minimum Distribution Rules to Government Plans The minimum distribution rules apply to tax-favored retirement arrangements, including governmental plans. In general, under these rules, distribution of minimum benefits must begin no later than the so-called “required beginning date.” The minimum distribution rules are complex, and are particularly so where the plan participant who has died. Failure to comply with the minimum distribution rules results in an excise tax imposed on the plan participant equal to 50 percent of the required minimum distribution not distributed for the year.
The Act provides a measure
of relief to governmental plans by directing the IRS to issue regulations
under which a governmental plan will be treated as complying with the
minimum distribution requirements, for all years to which such requirements
apply, if the plan complies with a reasonable, good faith interpretation of
the statutory requirements. Congressional intent appears to suggest that
the regulation should be retroactive. Nondiscrimination and Participation Requirements – Government Plans A qualified retirement plan maintained by a State or local government is exempt from the nondiscrimination and minimum participation requirements. A cash or deferred arrangement maintained by a State or local government (to the extent so permitted) is also treated as meeting the participation and nondiscrimination requirements applicable to such a qualified cash or deferred arrangement. Other governmental plans are subject to these requirements. Effective for years beginning after August 17, 2006, the Act exempts all governmental plans from the nondiscrimination and minimum participation rules. The provision also treats all governmental cash or deferred arrangements as meeting the participation and nondiscrimination requirements applicable to a qualified cash or deferred arrangement. Educational Agencies/Associations and Early Retirement Incentives
A " ERISA provides rules governing the operation of most employee benefit plans. The rules to which a plan is subject depend on whether the plan is an employee welfare benefit plan or an employee pension benefit plan. For example, employee pension benefit plans are subject to reporting and disclosure requirements, participation and vesting requirements, funding requirements, and fiduciary provisions. Employee welfare benefit plans are not subject to all of these requirements. Governmental plans are exempt from ERISA. The Age Discrimination in Employment Act ("ADEA") generally prohibits discrimination in employment because of age. However, according to the Act’s Technical Explanation prepared by the Joint Committee on Taxation, certain defined benefit pension plans may lawfully provide payments that constitute the subsidized portion of an early retirement benefit or social security supplements pursuant to ADEA, and employers may lawfully provide a voluntary early retirement incentive plan that is consistent with the purposes of ADEA.
The Act
addresses the treatment of certain voluntary early retirement incentive
plans under
The Act also
addresses the treatment of certain employment retention plans under The foregoing rules are generally effective on August 17, 2006. Reporting on Insurance Contracts Held by Exempt Organizations According to the Technical Explanation prepared by the Joint Committee on Taxation, there has recently been an increase in transactions involving the acquisition of life insurance contracts using arrangements in which both exempt organizations, primarily charities, and private investors have an interest in the contract. The exempt organization has an insurable interest in the insured individuals, either because they are donors, because they consent, or otherwise under applicable State insurable interest rules. Private investors provide capital used to fund the purchase of the life insurance contracts, sometimes together with annuity contracts. Both the private investors and the charity have an interest in the contracts, directly or indirectly, through the use of trusts, partnerships, or other arrangements for sharing the rights to the contracts. Both the charity and the private investors receive cash amounts in connection with the investment in the contracts while the life insurance is in force or as the insured individuals die. The Act includes a temporary reporting requirement with respect to the acquisition of interests in certain life insurance contracts by certain exempt organizations. Specifically, the Act provides that, for reportable acquisitions occurring after the date of enactment (August 17, 2006), and on or before the date two years from the date of enactment, an applicable exempt organization that makes a reportable acquisition is required to file an information return. The information return will be required to contain the name, address, and taxpayer identification number of the organization and of the issuer of the applicable insurance contract, and such other information as the IRS requires. The information is aimed at a concern as to whether the acquisition of interests in certain insurance contracts is consistent with the tax-exempt status of the organizations at issue and, for example, whether certain these arrangements are or may be used to improperly shelter income from tax, and whether they should be listed transactions within the meaning of the regulations. Exempt Organization Penalties For acts of self-dealing by a private foundation to a person defined as a “disqualified person,” the Act increases the initial tax on the self-dealer from five percent of the amount involved to 10 percent of the amount involved. The Act increases the initial tax on foundation managers from 2.5 percent of the amount involved to five percent of the amount involved and increases the dollar limitation on the amount of the initial and additional taxes on foundation managers per act of self-dealing from $10,000 per act to $20,000 per act. Similarly, the Act doubles the dollar limitation on organization managers of public charities and social welfare organizations for participation in excess benefit transactions from $10,000 per transaction to $20,000 per transaction. The Act doubles the amounts of the initial taxes and the dollar limitations on foundation managers with respect to the private foundation excise taxes on the failure to distribute income, excess business holdings, jeopardizing investments, and taxable expenditures. Specifically, for the failure to distribute income, the initial tax on the foundation is increased from 15 percent of the undistributed amount to 30 percent of the undistributed amount. For excess business holdings, the initial tax on excess business holdings is increased from five percent of the value of such holdings to 10 percent of such value. For jeopardizing investments, the initial tax of five percent of the amount of the investment that is imposed on the foundation and on foundation managers is increased to 10 percent of the amount of the investment. The dollar limitation on the initial tax on foundation managers of $5,000 per investment is increased to $10,000 and the dollar limitation on the additional tax on foundation managers of $10,000 per investment is increased to $20,000. For taxable expenditures, the initial tax on the foundation is increased from 10 percent of the amount of the expenditure to 20 percent, the initial tax on the foundation manager is increased from 2.5 percent of the amount of the expenditure to five percent, the dollar limitation on the initial tax on foundation managers is increased from $5,000 to $10,000, and the dollar limitation on the additional tax on foundation managers is increased from $10,000 to $20,000. These provisions are effective for taxable years beginning after August 17, 2006. Excise Taxes on Net Investment Income Exempt private foundations are subject to a two-percent excise tax on their net investment income. Private foundations that are not exempt from tax, such as certain charitable trusts, also are subject to an excise tax based on net investment income and unrelated business income. The two-percent rate of tax is reduced to one-percent if certain requirements are met in a taxable year. Unlike certain other excise taxes imposed on private foundations, the tax based on investment income does not result from a violation of substantive law by the private foundation; it is solely an excise tax. In general, net investment income is defined as the amount by which the sum of gross investment income and capital gain net income exceeds the deductions relating to the production of gross investment income. Effective for taxable years beginning after August 17, 2006, the Act clarifies some confusion regarding the definition of gross investment income (including for purposes of capital gain net income) by including items of income that are “similar” to the items presently enumerated in the Code. “Similar” items include income from notional principal contracts, annuities, and other substantially similar income from ordinary and routine investments, and, with respect to capital gain net income, capital gains from appreciation, including capital gains and losses from the sale or other disposition of assets used to further an exempt purpose. Notification Requirement for Exempt Entities Not Currently Required to File a Return Under current law, certain exempt organizations are not required to file an annual return if the gross receipts in each taxable year normally are not more than $25,000. Effective for annual periods beginning after 2006, the Act requires such organizations to annually furnish to the IRS, in electronic form, the legal name of the organization, as well as other information. The Act provides that, if an organization fails to provide the required notice for three consecutive years, the organization's tax-exempt status is revoked. Donor Advised Funds and Supporting Organizations Finally, the Act provides a number of changes aimed at improving the accountability of donor-advised funds and supporting organizations. Summary As you can see, the Pension Act made a number of important changes, several which may have an impact on the entity. While the foregoing summary is intended to be an accurate account of the new law, it is not intended to be tax advice. As such, you should consult with the text of the new law, as well as its legislative history and tax counsel, for specific guidance. As always, we would be pleased to assist you before you act on any information contained in this letter. For additional guidance, or if you would like to discuss how this will affect your tax planning, please contact our firm at (412) 881-4411. If you do not have a contact at Case | Sabatini, simply ask for Jim Dee and he'll make sure to put you in touch with the CPA whose background most closely matches your needs. Disclaimer: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties that may be imposed, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. |
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