COLLECTED WISDOM™ On The Economic Growth and Tax Relief Reconciliation Act of 2001

Here is a collection of articles, tables, commentary, rulings and other information on The Economic Growth and Tax Relief Reconciliation Act of 2001 commonly called EGTRRA.

Changes made by EGTRRA will impact your retirement plans. Therefore, plan sponsors should evaluate their 401k plan and make decisions to ensure that the plan is current. In many cases, plan amendments will be necessary.

Summary Of Retirement Provisions Contained In The Economic Growth and Tax Reconciliation Act

ASPA summarizes the retirement provisions that were included in The Economic Growth and Tax Reconciliation Act of 2001 as follows:

• Elective deferral limits (401k, 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 limit increased $1,000 each year beginning in 2002 till $10,000 in 2005, and then indexed in $500 increments.
• 415(b) dollar limit increased to $160,000 in 2002, then indexed in $5,000 increments.
• No 415 actuarial reductions in the limit required for retirements between ages 62 to 65.
• 415(c) dollar limit to $40,000 in 2002, and then indexed in $1,000 increments.
• 401(a)(17) limit to $200,000 in 2002, then indexed in $5,000 increments.
• Plan loans for partners and sub s shareholders allowed beginning in 2002.
• Top-heavy: 5-year look back rule repealed; the dollar threshold for officers increased to $130,000; matching contributions count toward satisfying the top heavy minimum; the top heavy matching safe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 beginning in 2002. Also, the definition of compensation used for purposes of the 404 deduction limit may include elective deferrals.
• The deferral limits between 401k 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, the profit-sharing deduction limit will be increased to 25%.
• Roth 401k plans will be permitted beginning in 2006.
• The tax credit for the start-up costs of a new small business retirement plan was added. It applies for the first 3 years of the plan. The more expensive tax credit for employer contributions to a new small business retirement plan was dropped.
• 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 catchup 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 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% 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.
• The House cash balance language was taken that basically directs treasury to expand 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.
• 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 regs are issued.
• The multiple use test is repealed effective in 2002.

IRS Guidance on EGTRRA Related Issues

IRS Issues More EGTRRA Guidance - Summary: On October 22, 2001, the IRS issued proposed regulations providing guidance on the requirements for retirement plans offering catch-up contributions for participants age 50 or older.

More On IRS EGTRRA Guidance - Summary: In reviewing...Notice [2001-42], keep in mind the goals of the IRS. The IRS does not want to delay the process of amending plans for GUST because both the IRS and practitioners have already allocated significant resources to this process. The IRS is also aware that having extended periods of operational compliance with changes in the law followed by retroactive amendments is problematic. Thus, there is a desire to have plans amended for EGTRRA within a reasonable period of time. In addition, the IRS is sensitive to the inefficiencies that would be present if employers are required to amend their plans for GUST, and then within a short period of time, amend their plans for EGTRRA.

Links To Details On The Retirement Provisions Of This Legislation

Sun Shines on EGTRRA - Summary: The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) overhauled many retirement plan rules. Thanks to PPA, the EGTRRA rules became permanent and will not sunset on the last day of December 2010. Here are some of the rules that EGTRRA brought us that are here to stay. Located at: McKay Hochman, August 2006.

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