|
|
|
||||||||||||||||||||||||||||
|
Dear Retirement Plan Sponsor: We are pleased to let you know that President Bush has signed the pension reform package that was passed by Congress on May 26th, 2001. The title of this legislation is the "Economic Growth and Tax Relief Reconciliation Act of 2001" aka EGTRRA. EGTRRA offers greater savings opportunities for not only the employer but the employee as well. It also adds flexibility to qualified plans and IRAs. EGTRRA is entirely separate from the previous legislation referred to as "GUST" (General Agreement on Tariffs and Trade, the Uniform Services Employment and Re-employment Rights Act of 1994, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997 and the IRS Restructuring and Reform Act of 1998). How the changes will affect plan documents is not entirely clear. Speculation has been made that a snap on amendment to the recently restated GUST document will be required of plan sponsors sometime during 2002. Please note that all of the provisions contained in EGTRRA revert to prior law after 2010, unless additional legislation is enacted before then. We will continue to provide additional information as further guidance is issued. Please feel free to contact our office if you have any questions regarding the enclosed material. Sincerely, President |
|
ECONOMIC
GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001
|
|
RETIREMENT PLAN
AND IRA PROVISIONS
|
|
Qualified Plan
Provisions
|
|
 |
Elective deferral limits (401(k), 403(b), and 457) to $11,000 in 2002, then increased $1,000 each year till $15,000 in 2006, and then indexed in $500 increments. |
|
SIMPLE plan employee deferral limit increased $1,000 each year beginning in 2002 till $10,000 in 2005, and then indexed in $500 increments. |
|
415(b) dollar limit for defined benefit plans increased to $160,000 in 2002, then indexed in $5,000 increments. |
|
No 415 actuarial reductions in the limit for defined benefit plans required for retirement ages between ages 62 to 65. |
|
415(c) dollar limit for contributions to defined contribution plans increased to $40,000 in 2002, and then indexed in $1,000 increments. |
|
401(a)(17) limit on compensation increased to $200,000 in 2002, then indexed in $5,000 increments. |
|
Plan loans for partners and subchapter S shareholders allowed beginning in 2002. |
|
Top-heavy: 5-year look back rule repealed beginning in 2002; the dollar threshold for officers increased to $130,000; matching contributions count toward satisfying the top heavy minimum; the top heavy matching safe harbor will be deemed to satisfy top heavy; frozen DB plans will not have to make top heavy minimums. The family attribution rule provision was not included, so family attribution will still apply in determining who is a key employee. |
|
100% of elective deferrals can be excluded from the 404 deduction limit for defined contribution plans beginning in 2002. Also, the definition of compensation used for purposes of the 404 deduction limit may include elective deferrals. |
|
The deferral limits between 401(k) plans and 457 plans are no longer coordinated beginning in 2002. |
|
New small employer plans will be exempt from having to pay a user fee for a determination letter beginning in 2002. |
|
Beginning in 2002, the profit-sharing deduction limit will be increased to 25%. |
|
Roth 401(k) plans will be permitted beginning in 2006. |
|
The tax credit for the start-up costs of a new small business retirement plan beginning in 2002. It applies for the first 3 years of the plan. |
|
The qualified plan catch-up contribution for people age 50 or older will be $1,000 in 2002, then increased each year by $1,000 until $5,000 in 2006, and then indexed in $500 increments. The SIMPLE catch-up will always be 50% of these amounts. Catch-up contributions are exempt from nondiscrimination testing provided all employees over age 50 participating are eligible to make a catch-up. |
|
415(c) 25% of compensation limit for defined contribution plans increased to 100% of compensation in 2002, and the maximum exclusion allowance for 403(b) plans repealed in 2002. |
|
Portability provisions allowing rollovers between defined contribution vehicles without restrictions and allowing rollovers from IRAs to workplace retirement plans, effective in 2002. |
|
The full funding limit is phased-up to 170% in 2002 and then repealed in 2004. The maximum deduction rule of section 404(a)(1)(D) would be extended to all PBGC-covered plans regardless of size. Further, such plans would be permitted to fund up to termination liability in the year of plan termination. |
|
It will be required to provide expanded information in the ERISA 204(h) notice for plan amendments significantly reducing benefit accruals. The provision directs treasury to provide simplified notice requirements for plans with less than 100 participants. |
|
Beginning in 2002, all matching contributions will have to follow a top-heavy vesting schedule. |
|
Beginning in 2002, involuntary cash-outs in excess of $1,000 will have to be automatically rolled over to an IRA unless the participant affirmatively elects to receive the amount in cash or directs the amount be rolled over to another plan or IRA. DOL is directed to proscribe safe harbor investments for this purpose and the provision is not effective until after these regulations are issued. |
|
The multiple use test for 401(k) plans is repealed effective in 2002. |
|
Beginning in 2002, if a participant takes a hardship withdrawal, the participant must be prohibited from making additional employee deferral contributions for 6 months. |
|
The same desk rule is eliminated by replacing "separation from service" with "severance from employment." The provision applies to distributions after December 31, 2001, regardless of when the severance from employment occurred. |
|
Low Income Saver
Credit
|
|
|
The bill includes a tax credit for low-income taxpayers who contribute to an IRA, 401(k), 403(b), or 457 plan. The tax credit can be as much as 50% on up to $2,000 of contributions. The contributions remain tax deductible even though a credit is also provided. This credit is effective in 2002 and sunsets at the end of 2006. |
|
IRA Provisions
|
|
|
IRA contribution limit to $3,000 in 2002 through 2004; $4,000 in 2005 through 2007; and $5,000 in 2008, and then indexed in $500 increments. |
|
IRA catch-up contribution for people age 50 and older is an additional $500 in 2002 through 2005, and thereafter an additional $1,000. |
|
Beginning in 2003, 401(k) plans will be permitted to facilitate IRA contributions on top of 401(k) contributions for those employees eligible. Frankly, no one is too sure how useful this will be. |
| RETIREMENT PLAN DOLLAR AND PERCENTAGE LIMITS | |||||||
|
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
| Annual Plan Compensation Limits |
$170,000
|
$200,000
(Indexed in $5,000 increments)
|
N/A
|
N/A
|
N/A
|
N/A
|
| Defined Benefit Plan, Basic Limit |
$140,000
|
$160,000 (Indexed in $5,000 increments) |
N/A
|
N/A
|
N/A
|
N/A
|
| 401(k), Profit Sharing & Money Purchase, Basic Limit |
$35,000
|
$40,000
(Indexed in $1,000 increments)
|
N/A
|
N/A
|
N/A
|
N/A
|
| 401(k) Elective Deferral Limit |
$105,000
|
$11,000
|
$12,000
|
$13,000
|
$14,000
|
$15,000
(Indexed in $500 increments)
|
| 457 Plan Elective Deferral Limit |
$8,500
|
$11,000
|
$12,000
|
$13,000
|
$14,000
|
$15,000
(Indexed in $500 increments)
|
| 401(k)/403(b)/457 Catch-up |
N/A
|
$1,000
|
$2,000
|
$3,000
|
$4,000
|
$5,000
(Indexed in $500 increments)
|
| SIMPLE Plan Elective Deferral Limit |
$6,500
|
$7,000
|
$8,000
|
$9,000
|
$10,000
(Indexed in $500 increments)
|
N/A
|
| SIMPLE Plan Catch-up |
N/A
|
$500
|
$1,000
|
$1,500
|
$2,000
|
$2,500
(Indexed in $500 increments)
|
