• Ability of retirement plan participants to sue broadened: In the case of LaRue v. DeWolff, the U.S. Supreme Court unanimously held that participants in 401(k)s and other defined contribution plans can sue for investment losses incurred in their individual accounts as a result of a fiduciary’s breach of duty. Mr. LaRue sued his former employer for investment losses that resulted from an alleged failure to respond appropriately to requests for investment changes. A prior Supreme Court decision (Russell v. Mass Mutual) seemed to state that a claim for losses due to a fiduciary breach could be brought only for the plan as a whole, and not by individual participants for losses in their own accounts. In LaRue, however, the Supreme Court limited its prior decision in Russell to defined benefit plans, explaining that the Russell decision did not apply to individual account plans like 401(k) plans, which dominate the retirement landscape today. The case is likely to generate a significant increase in 401(k) plan litigation.
• Economic stimulus payment notices to be issued: Beginning this week, the IRS will begin issuing letters to 130 million households reminding them to file a 2007 federal income tax return in order to receive a 2008 economic stimulus payment. These letters are being sent to taxpayers who filed 2006 federal income tax returns. Later this month, special notices will be issued to certain recipients of Social Security and Veterans Affairs benefits, who may not ordinarily be required to file a 2007 return, but who will have to do so to obtain the stimulus payment. Despite the media coverage of the Stimulus Act and the resulting checks, there’s still quite a bit of confusion out there–expect clients to have questions (about their parents’ checks as well as their own).
• SSA says no need for recipients to request replacement 1099s: The Social Security Administration has announced that Social Security beneficiaries who are filing a 2007 federal income tax return only to obtain a 2008 economic stimulus payment do not need to request (and wait for) replacement Form 1099s. An estimate of Social Security benefits received in 2007 is sufficient.
• 529 plans–IRS waves caution flag: In an advance notice of proposed rulemaking (Announcement 2008-17), the IRS invites comments relating to rules it intends to propose to curb perceived abuses relating to 529 plans. The IRS notes that the 529 plan beneficiary rules have the potential to be manipulated to circumvent transfer tax (e.g., multiple accounts could be established with different designated beneficiaries, with the beneficiary designations later changed to a single, common designated beneficiary). The IRS also notes the possibility that an individual might attempt to avoid gift tax by contributing to a 529 account for him or herself, and then subsequently changing the designated beneficiary to a family member in the same or higher generation. To protect against these–and other–potential abuses, the IRS intends to propose anti-abuse rules that would deny favorable tax treatment when a 529 plan is used for other than its intended purpose: providing for the qualified higher education expenses of the designated beneficiary.

As of January 1, 2008, employees participating in a 401(k) or other qualified plan, 403(b) plan, or governmental 457(b) plan can roll over eligible non-Roth distributions into a Roth IRA, thanks to the Pension Protection Act of 2006 (PPA). Prior to the Act, this could only be accomplished in two steps–by first rolling the distribution over into a traditional IRA, and then converting the traditional IRA to a Roth IRA.

In Notice 2008-30, the IRS has issued guidance on these rollovers. The following are the key provisions of the Notice:

• Rollovers can be either direct rollovers or 60-day rollovers.
• Participants must include in income any amount that would have been taxable if the distribution were not rolled over.
• For taxable years beginning before January 1, 2010, a rollover is not allowed if the taxpayer has modified adjusted gross income (either individually or with a spouse) exceeding $100,000, or is married filing separately. The plan administrator is not responsible for determining whether or not a participant is eligible to make the rollover to a Roth IRA.
• The 10% early distribution tax will not apply to the rollover, However, as with conversions of traditional IRAs to Roth IRAs, if the participant takes a premature distribution from the Roth IRA within five years of the rollover, the 10% penalty will generally apply to the distribution (to the extent the distribution consists of funds that were taxed at the time of the rollover). The usual exceptions to the 10% penalty apply.
• Plans must allow participants to elect a direct rollover to a Roth IRA.
• If a participant elects to make a direct rollover to a Roth IRA, mandatory 20% withholding will not be required even though all or part of the distribution may be included in the participant’s gross income. (However, the participant and plan can agree on voluntary withholding.)
• Plan beneficiaries can directly roll over distributions to a Roth IRA, but only if the plan allows. The beneficiary’s modified adjusted gross income and filing status determine whether the beneficiary is eligible to make the rollover.

Note: Rollovers from Roth 401(k) and Roth 403(b) accounts to Roth IRAs were permitted prior to the PPA, and are subject to different rules.

Notice 2008-30 also provides guidance on several other provisions of the PPA, including qualified optional survivor annuities, and the calculation of pension plan present values using the PPA’s new definitions of “applicable interest rate” and “applicable mortality table.”