Changes to Social Security Opportunities in Budget Act

by Joshua A. Diveley

On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015 (the “Act”). Included in the Act were multiple changes that will remove strategies previously utilized to increase social security benefits available to individuals. The changes will affect individuals who will turn 62 in 2016 or later.

First, the Act removes the ability to utilize the “Claim Now, Claim More Later” strategy. Under this strategy, a spouse with lower earning history applies for worker’s benefits, and the spouse with a greater earning history, and who has retained full retirement age, files a restricted application for spousal benefits. This strategy permits the spouse with greater earnings to delay receipt of his or her own worker benefits, which causes delayed retirement credits to accumulate and creates the opportunity for significantly greater benefits at age 70. Upon reaching age 70, the spouse who has delayed benefits can then apply for his or her benefits, which will have increased due to the delayed retirement credits.

Second, the Act removes the ability to utilize the “File and Suspend” strategy. Under File and Suspend, the spouse with greater earnings applies for benefits at full retirement age and then immediately suspends receipt of benefits until age 70. This permits the spouse with lower earnings to receive spousal benefits while the spouse with higher earnings accumulates delayed retirement credits, which creates significantly greater benefits at age 70.

The changes under the Act affect individuals who will turn 62 in 2016 or later. Anybody that is 62 or older prior to December 31, 2015, may still be able to utilize the Claim Now, Claim More Later or File and Suspend strategies.

© 2015 Houghton Vandenack Williams
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Report on Retirement Savings by Americans

Earlier in March, the National Institute on Retirement Security issued a report on retirement planning by Americans. Although the savings in 401(k) plans and Individual Retirement Accounts (IRA) hit $11.3 trillion dollars at the end of 2013, an all-time high, the overall news regarding retirement savings remains negative.

The report notes that nearly 45% of households with working age adults have no retirement savings in a recognized retirement vehicle, such as a 401(k) plan. For all households, even those without traditional retirement vehicles, the average retirement savings is $2,500; the number jumps to $14,500 for those near retirement. The report also finds that 62% of households with working individuals between the age of 55 and 64 have total savings of less than one year of their income.

The National Institute on Retirement Security continues to highlight the worsening condition for retirement and the need for developing retirement vehicles. In fact, the Institute stated that for all working adults between 25-64 in 2014, the retirement shortfall will be approximately $4.13 trillion dollars. The report may be found at the following link:

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Longevity Annuity Contracts in Retirement Plans

By Mary E. Vandenack.

Owners of IRAs or participants in certain retirement plans can use up to $125,000 or 25% of their account balance to purchase a qualified longevity annuity contract (“QLAC”). A QLAC is an annuity that begins payments when the annuitant reaches age 85. The annuity contract is not used in calculating minimum required distributions. QLACs cannot make available cash surrender value and cannot be a variable or indexed contract presently. QLACs may contain cost of living adjustments.

© 2015 Houghton Vandenack Williams Whitted Weaver Parsonage LLC

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Inherited IRAs Are Not Protected From Creditors

By Mary E. Vandenack.

On June 12, 2014, the Supreme Court ruled that inherited IRAs are not “retirement funds” within the meaning of the federal bankruptcy exemption for retirement funds. In making its decision, the Court distinguished inherited IRAs from IRAs established and held by the owner who originally deposited the funds.

Heidi Heffron-Clark (“D”) became the owner of an inherited IRA in 2001 when her mother died designating Heidi as sole beneficiary of an IRA account. D and her husband filed bankruptcy in 2010 claiming the inherited IRA as an exempt asset under 11 U.S.C. §522(b)(3)(C). The Bankruptcy Court disallowed the exemption. The District Court reversed. The Seventh Circuit reversed the District Court. The Supreme Court granted certiorari to resolve a conflict between the Seventh and Fifth Circuits.

The Court based its conclusion that an inherited IRA is not a retirement fund on three legal characteristics of inherited IRAs. First, the holder of an inherited IRA cannot invest additional funds into an inherited IRA. Second, holders of inherited IRAs are required to withdraw money from the accounts regardless of their age when they inherit the IRA. Third, the holder of an inherited IRA can withdraw the entire IRA, without penalty, at any time whereas original IRA owners are subject to penalties on withdrawals before the age of 59 1/2.

The Court rejected the argument that the bankruptcy definition of retirement funds could be construed as any funds that were set aside for retirement simply because such funds were set aside for retirement by the original owner. The Court noted that such a definition would have the result of treating funds that had been set aside for retirement at some point in time being treated forever as retirement funds regardless of the withdrawal of such funds and later form. By way of example, the Court suggested that such definition would mean that an original IRA owner could withdraw funds, give the funds to a friend who would put the funds in a checking account and then later claim exemption based on the concept that the funds had previously been put in a qualified retirement account.

© 2014 Parsonage Vandenack Williams LLC

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What Impact Do Beneficiary Designations on My Life Insurance Policies, Annuities and Retirement Accounts Have on My Estate Plan?

A Video FAQ with Mary E. Vandenack

Beneficiary designations pass assets such as life insurance and retirement accounts directly to your beneficiaries. That allows them to bypass the probate process and get directly in their hands. One of the things you do want to look at is the tax implications of any type of beneficiary designation. An IRA, for instance, will be taxable income to the recipient of the IRA proceeds so you are going to want to make sure you structure that beneficiary designation in a way that minimizes that impact.

© 2014 Parsonage Vandenack Williams LLC

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Self Directed Plan Options Supported When Range and Mix is appropriate

In recent years, it has become increasingly common for participants to sue employers or financial matters for failing to offer appropriate investment options to participants.  In the recent case of Renfro v. Unisys Corporation, the Court ruled that there was no breach of fiduciary duty to participants where the mix and range of investment options available to participants are reasonable. An appropriate range of investment options includes varying risk profiles, investment strategies and consideration to fees.

Treatment of Goodwill Upon the Sale of a Business: Asset of the Owner v. Asset of the Company

In 1980, Larry E. Howard, D.D.S. incorporated his dental practice and entered into an employment agreement and covenant not to compete with the corporation. In 2002, Dr. Howard retired and negotiated the sale of his practice to a corporate buyer for approximately $613,000, most of which was allocated to intangible assets. Dr. Howard reported over $320,000 of the purchase price on his personal return as long-term capital gain from the sale of personal goodwill. The IRS rejected this claim and asserted that the goodwill was a corporate asset that was distributed as a dividend. The recharacterization resulted in a deficiency determination in excess of $60,000, plus penalties and interest. Dr. Howard thereafter paid the additional tax and sought a full refund. The federal district court found in favor of the IRS and determined that when an employee is covered by a covenant not to compete, any goodwill generated from the employee’s work is an asset of the employer and not personal goodwill. 

Author’s Note: While medical practices generally are not considered to have goodwill, a dental practice can be distinguished and may have goodwill.

© 2010 Parsonage Vandenack Williams LLC

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IRS Issues Guidance on Correction of Certain Failures under Code Section 409A (Notice 2010-6)

The IRS has issued guidance for taxpayers with nonqualified deferred compensation plans on correcting certain failures to comply with the document requirements of IRC Section 409A. Taxpayers may rely on this guidance for tax years beginning on or after January 1, 2009.

Unless specific requirements are met, amounts deferred under a nonqualified deferred compensation plan are includible in gross income under Section 409A to the extent that the deferred amounts are not subject to a substantial risk of forfeiture and were not previously included in income. The amounts includible in income are also subject to two additional taxes.

Nonqualified deferred compensation plans must comply with Section 409A in both form and operation. The newly issued guidance mainly addresses the failure to comply with Section 409A in form (i.e. document compliance).

The IRS guidance, issued in Notice 2010-6, includes the following information:

  1. Clarifies that certain language that is commonly included in plan documents will not cause a document failure.
  2. Provides relief by allowing certain document failures to be corrected without current income inclusion or additional taxes under Section 409A as long as the corrected plan provision does not affect the operation of the plan within one year following the date of correction.
  3. Provides relief by limiting the amount currently includible in income and the additional taxes under Section 409A for certain document failures if correction of the failure affects the operation of the plan within one year following the date of correction.
  4. Provides relief by allowing certain document failures to be corrected without current income inclusion or additional taxes under Section 409A if the plan is the service recipient’s first plan of that type and the failure is corrected within a limited period following adoption of the plan.
  5. Provides transition relief by allowing certain document failures to be corrected without current income inclusion or additional taxes under Section 409A if the document failure is corrected by December 31, 2010, and any operational failures resulting from the document failure are also corrected in accordance with Notice 2008-113 by December 31, 2010. Many examples of common types of failures and the related corrections are also provided.

Modification of Notice 2008-113. The newly issued guidance also modifies Notice 2008-113, which addresses certain operational failures of nonqualified deferred compensation plans. The areas of Notice 2008-113 that have been clarified include: (1) the application of the subsequent year correction method to late payments of amounts deferred; (2) the calculation of the amount that must be paid to the service provider as a correction of a late payment of an amount deferred under a plan if the payment would have been made in property; and (3) the calculation of the amount that must be repaid by the service provider as a correction of an early payment of an amount deferred under a plan if the early payment was made in property.

Modification of Notice 2008-115. Notice 2008-115, I.R.B. 2008-52, 1367, which relates to reporting and wage withholding for 2008 and subsequent years, has also been modified. Specifically, the notice has been modified with respect to: (1) the amount that is required to be included in income by a service provider under Section 409A, and (2) the amount that is required to be reported by the service recipient as an amount includible in income under Section 409A on Form W-2 or Form 1099-Z.

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Minimum Required Distributions Not "Required" for 2009.

On December 23, 2008 the “Worker, Retiree, and Employer Recovery Act of 2008” was signed into law by President Bush. One key provision of the Act temporarily suspends the requirement for taxpayers age 70 ½ and older (and their beneficiaries) to make annual minimum required distributions (MRDs) from their retirement plan accounts.

The Internal Revenue Code normally requires individuals over age 70 ½ with retirement accounts to make MRDs annually based on the size of the account balance at the beginning of the year and the age of the account holder (or the account beneficiaries in some cases). The new law suspends the MRD requirement for 2009. The law attempts to avoid the significant depletion of account assets that may result if MRDs were required following significant market losses in 2008 and allows the funds to be kept in the account and possibly recover some losses. This waiver is available to all defined contribution plans, including 401(k), 403(b), 457(b) and Individual Retirement Accounts (IRAs) regardless of the total account balance. The new law does not affect 2008 MRD requirements regardless of whether the distribution is made in 2009 for tax year 2008.

The new law also makes numerous technical corrections to the Pension Protection Act of 2006. The most significant is that, for tax years beginning after 2009, plan sponsors must offer non-spouse beneficiaries a rollover option. This gives much-needed flexibility to those who inherit retirement plan accounts from someone other than their spouse.

© 2009 Parsonage Vandenack Williams LLC

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Attention Pension Plan Fiduciaries:Larue v. DeWolff, Boberg & Associates


The Supreme Court of the United States recently issued a decision in the case of Larue v. DeWolff, Boberg & Associates that could have a drastic impact on fiduciaries of qualified retirement plans subject to the Employee Retirement Income Security Act (ERISA). The case centered around a claim by the plaintiff, James Larue, who brought suit against his former employer seeking lost appreciation in his 401(k) defined contribution retirement account. Larue asserted that the failure by the administrators to implement his investment strategy amounted to a breach of fiduciary duty under ERISA and sought the alleged depletion as damages.  


The lower trial court and appellate court both ruled in favor of the former employer. However, on February 20, 2008, the Supreme Court, by a unanimous decision, held that ERISA does in fact “authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.” The result in Larue is a bit of a surprise to many in the retirement plan community. The surprise from the Larue decision was due in large part by the 1985 case of Massachusetts Mut. Life Ins. Co. v. Russell in which the Court held that the remedial provision involved in Larue provides a remedy only for an entire plan, not for individuals covered by the plan. However, the current Court distinguished Russell and Larue because Russell involved a defined benefit plan, whereas Larue involved a defined contribution plan. Reasoning for the distinction, the Court provided that “[f}or defined contribution plans, however, fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive.”


Despite the holding, the Court did not find in favor of Larue outright. Rather, the Court remanded the case for further determinations by the lower court. In addition, the Court added a qualification to the opinion in footnote 3 by providing “we do not decide whether petitioner made the alleged investment directions in accordance with the requirements specified by the Plan, whether he was required to exhaust remedies set forth in the Plan before seeking relief in federal court pursuant to ERISA, or whether he asserted his rights in a timely fashion.”


As a result of Larue, it is more important than ever to clearly articulate the requirements of a plan participant with regard to directing his or her account investments and require strict adherence to such requirements. Also, plan sponsors should maintain a thorough procedure to ensure that all participants’ investment directions are implemented as requested and within the time period specified by the plan and its supporting documents.





© 2009 Parsonage Vandenack Williams LLC

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