Compliance September 29, 2006

IRS Implements Lifting of 10% Early Withdrawal Penalty for Reservists

September 29, 2006 (PLANSPONSOR.com) - Federal officials have announced that active duty military reservists no longer have to pay the 10% early withdrawal fee as called for in recently passed pension reform legislation.
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The Internal Revenue Service (IRS) said in a news release that the change was being applied to eligible reservists activated after September 11, 2001, and before December 31, 2007.

That means eligible reservists taking early distributions from their Roth and regular IRAs as well as distributions of a reservist’s elective contributions and earnings distributed to him or her by employer from their 401(k) and 403(b) plans no longer have to pay the extra 10% penalty for taking money before age 59 ½.

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The new Pension Protection Act (PPA) included a provision allowing this change for reservists called to active duty for at least 180 days or for an indefinite period, according to the IRS announcement. The IRS officials said regular income taxes continue to apply to these payments in most cases.

Also, because the change is retroactive, eligible reservists who already paid the 10% tax can claim a refund by using Form 1040X to amend their return for the year in which the retirement distribution was received. Eligible reservists should write the words, “active duty reservist,” at the top of the form. In Part II Explanation of Changes, the reservist should write the date he or she was called to active duty, the amount of the retirement distribution and the amount of early distribution tax paid.

Reservists can choose to re-contribute part or all of these distributions to an IRA. Ordinarily, these special contributions must be made within two years after the reservist’s active duty period ends. However, if the reservist’s active duty ended before August 17, 2006 (the date the new law was enacted), he or she will have until August 17, 2008, to make these special contributions. No deduction is available for these contributions.

Compliance September 28, 2006

SEC Gives Final Passage to 22c-2 Changes

September 28, 2006 (PLANSPONSOR.com) - Federal regulators this week gave final approval to the much anticipated redemption fee rule amendments designed to help funds enforce bans against market timing and other abusive trading practices.
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The Securities and Exchange Commission (SEC) took the action on proposed Rule 22c-2 amendments, according to an SEC Web site statement, including delaying their effective dates.

The rule, which the SEC originally adopted in 2005 (See   Timers’ Trading Could be Cut Back under New Rule ) , mandates that most funds execute shareholder information agreements with intermediaries, such as broker-dealers, that hold shares on behalf of other investors.

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According to regulators, the agreements will provide funds access to information about the identity of customers involved in such transactions, including those made through omnibus accounts. The mandate rule also requires fund boards of directors to consider whether a redemption fee policy is appropriate for their funds.

Regulators said in the statement that the amendments clarify the operation of the rule, and reduce the number of shareholder information agreements that funds must enter into with their intermediaries.

The original rule was set to kick in on October 16, 2006. The newly approved changes extend the compliance date for entering into shareholder information agreements by six months, until April 16, 2007. The date by which funds must be able to obtain information from intermediaries under those agreements will be extended by a year until October 16, 2007.

In their comments to regulators, some industry trade groups had pushed for more time to get ready for the new procedures (See   SIA Asks for Clarification on Redemption Fee Rule Amendments).   The final version of the rule is   here .

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