Internal Revenue Code Section 402(f) requires a plan administrator to notify a plan participant if the distribution he or she is about to receive is eligible to be rolled over into another eligible retirement plan. Most employers use a model notice provided by the Internal Revenue Service. The 402(f) notice advises the participant that the distribution may be rolled over into an eligible retirement plan or paid directly to the participant, and specifies the tax consequences of choosing either option. Other tax information is also included.

The notice will need to be changed now for plans that include an "automatic rollover" provision. If a plan requires a terminated participant to take an immediate distribution of his or her accrued benefit (if such benefit is more than $1,000 and less than $5,000), the plan administrator must advise the participant that if he or she fails to affirmatively elect whether to receive the distribution directly or to roll it over into another eligible retirement plan, the plan administrator will pay the distribution to an individual retirement plan selected by the plan administrator. The plan administrator must identify the trustee or issuer of the individual retirement plan that will receive such distribution.

Notice to the participant that his or her distribution will be automatically rolled over may be given either separately or as part of the employer's standard 402(f) notice provided to all distributees. Accordingly, we have revised the standard 402(f) notice to include the language necessary to comply with the automatic rollover notice requirements. You may see and print the revised 402(f) notice by clicking here.

As indicated in our memorandum dated February 11, 2005, the Veterans Benefits Improvement Act of 2004 amended the Uniformed Services Employment and Reemployment Rights Act (USERRA), requiring employers to provide employees with a notice of their rights, benefits and obligations under USERRA. The Department of Labor issued an interim rule that includes the text of the notice and a poster that can be downloaded at www.dol.gov/vets/programs/userra/poster.pdf. The notice requirements are currently in effect and can be satisfied by posting the notice where employers customarily place employee notices.

Individuals below certain income thresholds are able to make after-tax contributions to Roth IRAs that can grow without becoming subject to tax in the future. Now, through the addition of designated Roth contribution accounts to plans with 401(k) arrangements, highly compensated employees can make similar Roth IRA-type contributions under such plans. (Code Section 403(b) plans may also provide for designated Roth contributions.) Effective January 1, 2006, plans may provide for the deferral of "designated Roth contributions" in lieu of all or a portion of the pre-tax elective contributions the employee is otherwise eligible to make under the plan. The term "designated Roth contribution" means an elective contribution under a qualified cash or deferred arrangement that, to the extent permitted under the plan's terms, is designated irrevocably by the employee as a designated Roth contribution, is treated by the employer as includible in the employee's income at the time the employee would have received the amount in his or her paycheck absent the election, and is maintained by the plan in a separate account. By adding Roth accounts to such qualified plans, highly compensated employees (as well as non-highly compensated employees) will be permitted to save any combination of after-tax Roth contributions and pre-tax contributions up to the Code Section 402(g) limit ($15,000 in 2006) without future income tax liability on the earnings on the designated Roth contributions.

If you are interested in obtaining more information about adding designated Roth contribution accounts to applicable plans and the rules that govern the operation of designated Roth contribution accounts, please contact your Schiff Hardin LLP attorney or one of the members of the Employee Benefits and Executive Compensation practice group listed below.

Employers that are looking for ways to make deductible charitable contributions while also hoping to find innovative ways to benefit their employees can meet both objectives by establishing a scholarship program for the benefit of employees or their family members. This may be a particularly valuable benefit in the current environment of rapidly increasing college tuition rates and decreasing availability of federal grant money for education.

If the company establishes and funds a private foundation to award the scholarships, and if certain IRS guidelines are observed, the company's contributions to the foundation will be deductible as charitable expenses, and the scholarships will not constitute taxable income to the recipient or compensation to the employee whose family member receives the scholarship.

Among the IRS guidelines are:

• The scholarships must be awarded on an objective and nondiscriminatory basis. The selection criteria must be related to the purpose of the scholarship and unrelated to the employment of the recipients or their parents and to the employer's line of business. However, the scholarship program can be limited to children of employees as long as the number of scholarship recipients is not more than 10% of the persons eligible for the scholarship.
• The scholarship must be used for study at a qualified educational institution.
• The person or persons making the selection must be wholly independent of the sponsoring company, its managers and employees, and the foundation.
• The courses of study for which scholarships are available cannot be limited to those that would be of particular benefit to the employer, although such courses of study can be included. The fact that an applicant wishes to pursue such a course of study cannot be a factor in his or her selection as a scholarship recipient.
• The scholarship program cannot be used to recruit employees or to induce continued employment.

The scholarship program can include educational loans as well as scholarships. If your company has broader charitable inclinations, a scholarship program can also be designed to benefit students in the local community, those connected with the employer's industry in general, or any other population group the sponsoring company might care to benefit. To the extent that scholarships will be available to persons other than employees of the sponsoring company or their family members, the IRS guidelines will be relaxed.

If you would like to discuss these matters further, please contact Michael Huft, of the Estate Planning group (at 312.258.5627 or mhuft@schiffhardin.com) or one of the members of the Employee Benefits and Executive Compensation practice group listed below.