CAI NEWSBRIEFS
December, 2005

We begin this issue of CAI Newsbriefs by thanking you for your confidence in us and we trust that the service we have provided over the past year has met, and hopefully exceeded, your expectations. At CAI we pride ourselves on our availability to clients, on our responsiveness to your requests and on our ability to keep up with an ever-changing set of laws and regulations so that we can make sure that your retirement program continues to meet your objectives. Please feel free to call upon us any time you have questions or concerns about your retirement program.

We would also like to take this opportunity to wish you a happy, healthy and successful 2006.

This year-end Newsbriefs will deal first with a couple of traditional year-end issues and will then discuss the significant change in law taking place in 2006; the availability of the new Roth 401(k).

Traditional Issue 1 - Minimum Distributions: The law continues to require that anyone who is a 5% owner of a business sponsoring a retirement plan, and who has attained age 70 ˝ in the current year (i.e. those born before July 1, 1935), must take a minimum distribution from the retirement plan. The term 5% owner, includes spouses and parents of 5% owners. If age 70 ˝ was attained prior to 2005 then the distribution must be made by December 31, 2005. If the individual is just turning age 70 ˝ this year then distributions must commence by April 1, 2006. It is important to note, however, that if distributions are delayed until 2006, then 2 distributions will need to take place in 2006, with potential adverse tax consequences.

Significant penalties of up to 50% of the required distribution apply if the distribution is not made on a timely basis. Therefore, if there are any 5% owners in your company’s retirement plan who are at least age 70 ˝ and they have not as yet taken a minimum distribution for this year, please contact the Senior Consultant assigned to your plan as soon as possible. 

Traditional Issue 2 – Distribution Reporting on Form 1099R: Enclosed with this mailing is a set of forms which detail the various reporting requirements and the deadlines for each one. If CAI’s services are required for the completion of the 1099R forms, the enclosed data form should be completed and returned to us as soon as possible.

SHOULD YOU BE IMPLEMENTING A ROTH 401(K)?

The Roth 401(k) was included in the major 2001 pension legislation but with a deferred effective date of January 1, 2006. The government has had over 4 years to prepare for this new feature and, in fact, the IRS did issue proposed (i.e. preliminary) regulations earlier this year. Unfortunately, the final regulations that are needed in order to ensure that the plans are implemented and administered properly had not yet been released as of December 16. For this reason alone, many businesses which might have an interest in permitting Roth 401(k) contributions, are deferring the implementation decision until some time later in 2006. In fact, recent surveys show that over 70% of the 401(k) plans currently in operation will not have Roth 401(k) provisions in place as of January 1, 2006. If anything, we believe that the actual percentage of those deferring a decision will be even greater as a result of the IRS delay in releasing the final regulations.

As most of you are probably aware, the main differences between Roth 401(k) contributions and “Traditional” 401(k) contributions is that a) Roth contributions are not tax deductible by the participant while Traditional contributions are, and b) subject to some restrictions, all amounts distributed from a Roth account are distributed tax-free while all amounts distributable from Traditional accounts are taxable in the year of distribution. The enclosed article describes some of the other differences and provides a detailed analysis of the impact of choosing one approach over the other. The bottom line is that for most participants, the availability, or lack of availability, of Roth will not make a significant difference in their retirement.

On balance, therefore, CAI is generally recommending that our clients defer the addition of the Roth 401(k) option to your retirement program until the final IRS regulations are released and can be analyzed. This will allow for the plan to be properly amended and communicated and will avoid wasted effort and expense. However, as the enclosed article notes, participants who are looking to contribute the maximum to a 401(k) plan may benefit the most from the Roth 401(k) and those participants may want to consider suspending their 401(k) contributions until such time in 2006 when the Roth is adopted. Alternatively, you can decide to adopt Roth 401(k) on January 1, 2006 with the understanding that the implementation of the program will be somewhat more expensive than if you wait until later in the year.

Along with the article on Roth 401(k), we have included a form for you to return indicating your interest in adopting a Roth 401(k) in 2006. For those of you are interested in adopting the plan immediately, we will get back to you as soon as possible with a fee quote and a request for your authorization to proceed. Those of you who would prefer a delayed implementation will receive a notification from us during the first quarter of 2006 informing you of the recommended implementation date and the associated fee. Our fee will be based on the structure of your program and will likely range from zero (where no additional work is required by CAI) to 25% of the annual fee.

If you have any questions about the Roth 401(k), or anything else relating to your retirement program, we urge you to ASK CAI.