2002 AGN AUG 06 I14 - Laserfiche WebLink

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compensation used by qualified retirement plans. Under the new definition, compensation refers to all earnings and salary from the employer regardless of whether it is included in the participanYs taxable income. 2. Qualified Distribution Rules. As you are aware, distributions from 457 plans are now subject to the direct rollover rules previously applicable only to qualified retirement plans. This means that the following requirements must be met: (1) Employees terminating employment must be given a notice which describes the distribution options they have, including the option to rollover the benefits to an IRA or any other qualified or 457 plan and the tax consequences of each option. (2) Participants electing to receive a cash distribution ratherthan doing a rollover will be subject to mandatory 20% Federal income tax withholding. Required Action bv Citv: (a) Election Forms: The distribution forms which are provided to terminating participants must be updated to comply with the Section 402(� notice requirements, including the use of the model tax notice recently issued by the IRS. If you would like our office to review your current forms, please provide a copy. (b) Reportinq Procedures: Distributions are to be reported to the IRS on Form 1099R. If the employee does not elect a rollover of the account, mandatory 20% federal tax withholding should be taken. It should also be noted that the Federal law does not affect the withholding rules under State law and the employee should be given the option to have state tax withheld. Contributions are not considered wages and are therefore not subject to withholding at the time they are earned by the employee. They are subject to Medicare taxes and, if otherwise applicable, FICA. Contributions are to be reported as a nontaxable item on form W-2. 3. Minimum Distribution Rules. The law requiring minimum distribution amounts for any retiree receiving benefits after age 70 was more complicated under prior law. The new law simplifies these rules for 457 plans and requires that they be subject to the same rules as qualified retirement plans. Notwithstanding, the Plan can continue to require distribution schedules which result in installment amounts being greaterthan the minimum distribution amount. In those situations where retirees over 70 are receiving installment payments, the distribution amount should be reviewed based on both the old and the new law. If the amounts 2