Compliance July 5, 2006

Feds Advise on Plan Excise Tax Computations

July 5, 2006 (PLANSPONSOR.com) - Federal tax officials have advised that the prohibited transaction excise tax imposed when an employer does not transfer participant deferrals or other contributions to a 401(k) plan on a timely basis is based on interest on that unpaid money.
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In  Revenue Ruling 2006-38 , the Internal Revenue Service (IRS) said the provision only applies to purposes of determining the amount involved under Section 4975 where there is a failure to transmit participant contributions or amounts that otherwise would have been payable to the participant in cash. It does not apply for self-dealing violations under Section 4941, IRS said.

According to the tax officials, failure to transmit contributions constitutes a prohibited transaction, which is subject to the excise tax under Section 4975. The IRS said Section 4975(a) imposes a 15% excise tax (the first tier excise tax) on a prohibited transaction, while Section 4975(b) imposes a 100% tax on the amount involved if the transaction is not corrected during the taxable period.

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Those having to pay the tax include any disqualified person involved in the prohibited transaction, other than a person fiduciary role, the IRS said. Under Section 4975, the applicable excise tax is applied to the amount involved in the prohibited transaction, it said.

According to the revenue ruling, Section 4975(f)(4) defines the term “amount involved” generally as the greater of the amount and the fair market value of the other property given, or the amount of money and the fair market value of the other property received in such transaction. For purposes of the first tier excise tax, the fair market value is determined by date that the prohibited transaction occurs, it said.

The tax agency said that the “taxable period” was the period beginning with the date on which the prohibited transaction occurs and ending on the earliest of the date of the mailing of a statutory notice of deficiency, the date on which the first tier excise tax is assessed, or the date on which correction of the prohibited transaction is completed, the ruling said.

The ruling said that if an employer failed to segregate $100,000 in participant contributions from its assets and transmit it to the plan on December 8, 2004, but did not do so until December 30, 2005, the delay would be subject to excise taxes for both years.

The amount involved for 2004 would be the interest (of 5% for underpayments) on the $100,000 from December 8 to December 31, ($314). The amount involved for 2005 would be the interest on the 2004 amounts plus the $100,000, from January. 1 to December 30, 2005 ($5,002). The taxable period for both years ended on December 30, the date of the correction.

The 15% excise tax on the amount involved would be $47 for the 2004 taxable year and $797 for the 2005 taxable year, for a total excise tax of $844, the IRS said.

Administration July 4, 2006

Vermont Pension Funds Pursue Plan To Environmentally Screen Portfolios

April 19, 2005 (PLANSPONSOR.com) - New England Pension Consultants (NEPC), for Vermont Treasurer Jeb Spaulding, has issued a Request for Information (RFI) from investment managers who focus on environmental sustainability strategies.
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The Vermont State Retirement System (VSRS) and Vermont State Teachers’ Retirement System (VSTRS) are pursuing plans to screen portfolios by environmental criteria, which is the reason for the RFI, according to SocialFunds.com. Spaulding administers investment policies and strategies adopted by the Boards of Trustees for both Vermont state pensions. Combined, the systems have assets of over $2.4 billion.

Investment managers have until May 6 to submit responses.

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“This RFI results from a request from me to the trustees of the two systems to consider an allocation to environmentally sound investment management strategies by conducting an RFP [Request for Proposals] for an environmentally managed US large-cap or Global mandate,” Spaulding told SocialFunds.com. The objective is to reduce environmental financial risk to the state’s portfolios, according to Spaulding.   “We plan to review the responses to the RFI and invite selected vendors to submit formal proposals,” he added.

Spaulding is undecided as to what type of screen he prefers, but will decide based on the responses to the RFI. The RFI requests detailed information on managers’ experience in environmental screening.

The criteria used to make the final decision will include financial performance and information on how environmental screens have impacted performance in the past, SocialFunds.com reports.

The size of the environmentally screened portfolio has yet to be set by Spaulding. He has, however, suggested that about 3% of the state’s total large-cap allocation (about $20 million) should be screened by environmental factors.

Spaulding follows the lead of the California Public Employees’ Retirement System (CalPERS), who recently implemented such a program. One prong of this four-pronged “Green Wave” program calls for applying environmental screens on a $500 million portfolio (See CalSTRS Investment Follows the ‘Green’ ).

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