PENSION PLANS AND IRAs
UNDER EGTRRA

By Noel C. Ice

The Economic Growth and Tax Relief Reconciliation Act of 2001[1] (EGTRRA or the “2001 Act”) is known primarily for the substantial income tax cuts so publicly favored by President Bush, and for the much hyped (if often illusory) changes to the estate and gift tax laws. Less well known is the fact that EGTRRA contains a boatload full of changes to the laws affecting retirement plans, many more changes, in fact, than were even alleged to be made to the estate and gift laws.

This ugly Teutonic sounding acronym, EGTRRA, was, in a previous incarnation more mellifluously named the “RELIEF Act,” short for “The “Restoring Earnings to Lift Individuals and Empower Families Act of 2001” (H.R. 1836). Although the original acronym was easier on the ear, that which it stood for was too big a mouthful even for the Congressional maw, which is saying a lot, given that Congress is an institution not generally adverse to overblown and even fanciful legislative monikers.

ARTICLE 1
Benefit and contribution Limits increased

1.1 Effective Dates Are For Years Beginning After 2001.[2]

The changes to the limitations on benefits, discussed below in this Article I, are generally effective for years beginning after December 31, 2001. However, the defined benefit plan 415(b) limit increases are effective for limitation years ending in 2002.[3] The changes to 403(b) plans and SEPs that treat contributions to them as if they were made to defined contribution plans (DCPs) are effective for limitation years beginning after 1999.[4]

1.2 415 Limits Increased.

IRC[5] §415 puts limits on the size of benefits that an employee can accrue under either a defined benefit or defined contribution plan. Traditionally there have been both a dollar limit and a percentage of compensation limit. The change that has everyone’s attention is the increase in the percentage limit for contributions to a defined contribution plan to 100% of the participant compensation, not to exceed the dollar limit, which is now $40,000.

1.2(a) Limitations Applicable Under 415(c) to Defined Contribution Plans.

The amount that can be allocated to a participant’s account under a defined contribution plan during a limitation year is limited by IRC §415(c). There are two limits: a dollar limit and a percentage of compensation limit. The limit that applies is the lesser of the two.

1.2(a)(1) The 415(c)(1)(A) Dollar Limit is Now $40,000.[6]

The dollar limit changes all the time. It goes up and down with the whims of Congress, and has been subject to COLA adjustments in recent years. Under EGTRRA, the annual additions to a defined contribution plan during a limitation year can be as much as $40,000 beginning in 2001 (the dollar limit was $35,000 in 2001). Beginning in 2003, the limit will be adjusted for inflation in $1000 increments.[7] Annual additions, which are subject to the limit, consist of contributions and forfeitures to a participant’s account under a defined contribution plan (e.g., a profit-sharing or 401(k) plan).

1.2(a)(2) The 415(c) Defined Contribution Percentage Limit is Now 100%.[8]

For as long as I can remember the percentage limit for annual additions under a defined contribution plan (DCP) has been 25% of annual compensation. Thus, if a person made $50,000 per year, $12,500 would be the applicable DCP limit on annual additions under the old rules. Under EGTRRA, the 415(c) limit would be $40,000 (the lesser of 100% of compensation or $40,000)! Furthermore, salary reduction (401(k)) contributions do not reduce compensation for purposes of this rule.

1.2(a)(3) Contributions to SEP-IRAs Are Still Limited to 15% of Compensation.

While §415(c) generally applies to qualified plans, not IRAs, 415(k)(4), which was added by EGTRRA[9] now provides that contributions to a SEP are treated as contributions to a DCP, as discussed later. Nevertheless, IRC §402(h)(2) still provides:

(2) Limitations on employer contributions. Contributions made by an employer to a simplified employee pension with respect to an employee for any year shall be treated as distributed or made available to such employee and as contributions made by the employee to the extent such contributions exceed the lesser of—

(A) 15 percent of the compensation (within the meaning of section 414(s)) from such employer includible in the employee's gross income for the year (determined without regard to the employer contributions to the simplified employee pension), or

(B) the limitation in effect under section 415(c)(1)(A), reduced in the case of any highly compensated employee (within the meaning of section 414(q)) by the amount taken into account with respect to such employee under section 408(k)(3)(D).

Note that the deduction for SEPs was increased to 25% of total participant compensation,[10] even though the statute quoted above still provides that contributions made by an employer to a SEP will be treated as distributed to the extent the contribution exceeds “15 percent of the compensation” of the employee.[11] It is hard to say just what is going on here. Even if 415 and 404 allow contributions to SEPs in excess of 15% of compensation, so long as 402(h)(2) reads as it does, a contribution in excess of 15% looks to me as if it will be taxable.

There are two additional points worth noting: (1) the 404(h) limit is based on total aggregate participant compensation, but is limited by the 401(a)(17) limit on the compensation that can be considered for any one participant ($170,000/$200,000); (2) the 402(h) limit applies separately to each participant, but is not limited by the 401(a)(17) limit on the compensation that can be considered for any one participant.

1.2(b) The 415(b)(1)(A) Defined Benefit Dollar Limit is Now $160,000.[12]

Defined benefit plans have dollar and percentage limits too.[13] These are expressed in terms of an annual benefit that the defined benefit plan can promise to pay. The percentage limit is 100% of the participant’s high three year average compensation, and the dollar limit changes with the Congressional mood swings. The last major change pegged the dollar limit at $90,000, which, adjusted for inflation was $140,000 pre-EGTRRA.

Under EGTRRA, the dollar limit on the size of a defined benefit (DB) pension plan has been increased to $160,000, for limitation years beginning in 2001 (it was $140,000). Beginning in 2003, the limit will be adjusted for inflation in $5000 increments.[14]

1.2(b)(1) Changes Linked to Social Security Retirement Age.

Previously, the dollar limit was actuarially adjusted up or down by reference to the Social Security retirement age of the employee (currently 65). Now, the limit is adjusted downward for pensions beginning prior to age 62 (as before),[15] and is adjusted upward after age 65 (as before); but, unlike former law, is not adjusted downward between ages 62 and 65.[16]

1.2(b)(2) Guidance.

For guidance in applying the increased DB limits, the Committee Reports state that the principles of Notice 99-44, 1999-35 IRB 326 should apply.

1.2(b)(3) Special Effective Date.

For some inexplicable reason, the increase in the 415(b) dollar limit was made effective for plan years ending in 2002.[17] This means that a fiscal year plan, could find the new rule applicable to it in 2001, beginning with the day EGTRRA was passed. This could be good or it could be very bad. If a participant had already accrued a year of service for benefit accrual purposes when EGTRRA was passed, and if the plan benefits were effectively limited by the 415(b) dollar cap, which has now been raised, then the employer may find that its funding obligations just went up, without ever having had the opportunity to think about whether that increase was desirable or affordable.

1.2(c) Special Rules Affecting Collectively Bargained Plans, Employees of Government and Tax Exempt Plans, etc.

There are special provisions in EGTRRA affecting pilots,[18] certain collectively bargained plans, and employees of government and tax exempt plans.[19] There used to be a floor on benefits beginning at or after age 55 that applied only to governmental and tax-exempt employees. This floor has been eliminated.[20]

The 100%-of-compensation limit no longer applies to a multiemployer (collectively bargained) DB plans.[21] These plans have a special dollar limit, however, which under EGTRRA is $80,000 (half of $160,000), indexed.[22]

1.3 Compensation Considered Under 401(a)(17) is Increased to $200,000.

The amount of compensation that can be considered for purposes of (a) the contribution and benefit limits,[23] (b) deduction limits,[24] and (c) certain discrimination testing,[25] changes frequently with the current legislative mood and because of COLA adjustments. In 2001 it was $170,000. Under EGTRRA it will be $200,000,[26] indexed for inflation in $5000 increments, using July 1, 2001 as the base quarter.[27]

Example: If a money purchase plan provided that the employer would contribute 10% of pay, a person making $250,000 per year would get a $17,000 contribution in 2001. In 2002, that same person, under the same facts, would be entitled to $20,000.

1.4 Elective Deferral Limits Under 402(g) Increased.[28]

Under pre-EGTRRA law, the limit on the amount of elective deferrals under a 401(k) plan or under a 403(b) plan (tax-sheltered annuity or TSA) was $10,500 (as adjusted for inflation in 2001). EGTRRA increases the 402(g) limit to $11,000 in 2002, and by an additional $1000 per year thereafter, until 2006, when the limit will be $15,000. The $15,000 limit will be adjusted for inflation in $500 increments beginning in 2007, using July 1, 2005 as the base quarter.[29]

IRC §408(p) was amended by EGTRRA §611(f) to provide that the limit on elective deferrals to SIMPLE plans will be $7000 for 2002, increasing $1000 per year until it will be $10,000 in 2005. COLA adjustments will apply after that.[30]

1.5 Increase in Allowable Benefits Under 457 Plans (Nonqualified Plans Maintained by Certain Tax Exempt and Governmental Entities).[31]

I have moved this discussion to a special article devoted only to changes in the 457 Plan rules.

1.6 403(b) Plans.

Every year, 403(b) plans more closely resemble 401(k) plans, though historically their roots are in entirely different soil. EGTRRA repeals the complicated exclusion allowance,[32] and replaces it with the normal 415 rules applicable to defined contribution plans.[33]

1.6(a) Special Definition of Compensation.

A special, and very liberal definition of compensation is given:

(3) Includible compensation. For purposes of this subsection, the term “includible compensation” means, in the case of any employee, the amount of compensation which is received from the employer described in paragraph (1)(A), and which is includible in gross income (computed without regard to section 911) for the most recent period (ending not later than the close of the taxable year) which under paragraph (4) may be counted as one year of service. Such term does not include any amount contributed by the employer for any annuity contract to which this subsection applies or any amount received by a former employee after the fifth taxable year following the taxable year in which such employee was terminated. Such term includes—

(A) any elective deferral (as defined in section 402(g)(3)), and

(B) any amount which is contributed or deferred by the employer at the election of the employee and which is not includible in the gross income of the employee by reason of section 125, 132(f)(4), or 457.[34]

1.6(b) 403(b) Annuity is Treated as a Defined Contribution Plan (DCP) Maintained by Employer Controlled by the Participant.

Physicians who own other businesses (professional or otherwise) that sponsor qualified plans, and who also participate in a hospital’s 403(b) plan, take note of the following:

EGTRRA §632(b)(2)(A) provides that in limitation years beginning after 1999, a 403(b) annuity contract is treated as a defined contribution plan maintained by each employer within the same controlled group as the participant (as modified by 414(h)).[35] This has implications for any plans sponsored by the participant in another capacity, which plans could now be found to be discriminatory if the 403(b) plan participant is highly compensated and also controls another business that sponsors and otherwise unrelated plan.

Of course, §415 was always an issue, because 415(a)(2),(g) and (h) conspired to take 403(b) benefits into account in applying the qualified plan annual addition and benefit limitations. But my belief has always been that since a 403(b) plan was not a qualified plan, its existence could not make a 401(a) plan (controlled by the 403(b) participant) discriminatory. What is new under EGTRRA is that, in addition to 415 considerations, we now must aggregate, for purposes of the discrimination rules, the participant’s 403(b) contract with any other plans the participant controls. This is because the contract is now treated as a plan. This aggregation could impact not just the participant, but any other plans the participant controls.

This is a good point to note that 415(h) control test is only 50%, not 80%, and this has been the law for quite some time.[36] Under the conventional control rules of 414, a more difficult to meet 80% control test usually governs.

1.6(c) Contributions to a SEP Are Treated As an Employer Contribution to a Defined Contribution Plan (DCP).[37]

For purposes of the above rule, contributions to a SEP are treated as contributions to a DCP.

1.6(d) 403(b) Participants Participating in Defined Benefit Plans (DBPs).[38]

For tax years beginning after 1999 and before 2002, a plan may disregard the regulations that provide that contributions to DBPs are treated as previously excludable amounts for purposes of the exclusion allowance.

1.7 Changes Affecting Roth and Traditional IRAs.[39]

Under pre-EGTRRA law, certain individuals are eligible to make contributions to IRAs up to the lesser of $2000 or compensation for the year. If the individual or spouse is an “active participant” in a qualified plan, the $2000 figure is phased out after a certain level of compensation. EGTRRA §601(a)(1) amends IRC §219(b)(1)(A) by increasing the $2000 figure to $3000 in 2002, to $4000 in 2005, and to $5000 in 2008 and thereafter.[40] COLA adjustments apply beginning in 2008.[41]

1.8 Changes Affecting Church Plans.[42]

EGTRRA repealed the special 403(b)(2) minimum exclusion allowance (MEA), applicable to church employees whose adjusted gross income (AGI) was $17,000 or less. Also repealed was the special rule that this MEA would not violate the annual addition limitations of 415(c).[43] Finally, the 415(c)(4)(A) catch-up election for the year of separation from service was also repealed.[44] Not repealed, however, was the special $10,000 annual/$40,000 aggregate catch-up election.[45]

1.9 Changes Affecting ESOPS.[46]

Under prior law, IRC §664(d) allowed a charitable remainder trust (CRT) to make a “qualified gratuitous transfer” of “qualified employer securities” to an ESOP. Any securities so transferred were required to be held in a suspense account, and could only be allocated within the 415(c) dollar and percentage limits. These old limits remain unchanged, despite the increases otherwise applicable. Thus the dollar limit is $35,000 (as adjusted for inflation in 2001) and the percentage limit is the old 25% of pay.

ARTICLE 2
Deduction Limits For Defined Contribution Plans Changed [47]

EGTRRA made important changes in the deduction rules affecting defined contribution plans. Significant changes affecting defined benefit plans were also made, but these are treated in a separate article describing changes to plans subject to the minimum funding rules.

2.1 Effective Date is For Years Beginning After 2001.[48]

The changes to the deduction rules discussed below in this Article are generally effective for plan years beginning after December 31, 2001.

2.2 Overview and Comparison Between the Deduction Limits of 404 and the Limitation on Annual Additions Under 415(c).

Under pre-EGTRRA law, no more that 15% of total participant compensation could be contributed to a profit sharing type or stock bonus plan (including a 401(k) plan). Depending on the allocation formula, the permitted disparity rules, and the nondiscrimination rules of IRC §401(a)(4), the allocation of an employer contribution could easily mean that one or more participants (but not all) could have allocations greater than 15% of that particular participant’s compensation.

A qualified plan is not allowed to allocate amounts to a participant’s account under a defined contribution plan (DCP) or to increase a participant’s benefit under a defined benefit plan (DBP) if to do so would violate the 415(c) limit on annual additions or the 415(b) limit on benefits. These limits were discussed above. A 15% allocation under the old rules would not violate the §415 percentage limit, because the §415(c) percentage limit was 25% of compensation. Under the new rules the percentage limit is 100% of compensation, so 415(c) is even less likely to be a problem.

Further, it used to be that 415(c) compensation was basically determined in the same manner as W-2 income, which meant that compensation was reduced for elective deferrals (salary reduction contributions) under a 401(k) plan. This meant that a person earning $30,000 per year prior to making elective deferrals, but who had W-2 income of $22,500 because of a $7500 deferral, was in violation of the 415 percentage limit of 25% of compensation. This was recently changed (prior to EGTRRA) by adding back the elective deferrals for purposes of determining 415 compensation. More recently still, EGTRRA changed the 415 percentage limit to 100%. These two rules in combination seem to allow an employee making $10,000 per year to defer it all. However, the 415 limits are only a part of the equation that an employer must take into account in funding a qualified plan. The employer is also constrained by the limitations on allowable deductions under IRC §404. Under pre-EGTRRA law, the employer could not deduct more than 15% of total participant compensation to a profit sharing or stock bonus plan.

What is the compensation of the employee in the example just given where the employee deferred 100% of compensation? It is $0 for W-2 purposes. This would not necessarily make the contribution nondeductible, unless there were many participants deferring all income, since the deduction limit was a percentage of the payroll, rather than a percentage of the allocation to any one employee. Under EGTRRA, elective deferrals will be disregarded in computing the employer deduction limits. This is new. There are still percentage limits on the employer’s deduction (25% in a profit-sharing or 401(k) plan, up from 15%, of total participant compensation), but the percentage limit (whatever its size) will be easier to meet if compensation is not reduced by the deferrals.

2.3 Profit Sharing and Stock Bonus Plan Deduction Increased to 25% of Total Participant Compensation.

Under EGTRRA, IRC §404(a)(3) now provides that an employer cannot deduct more than 25% of total participant compensation to a defined contribution plan, with few exceptions, if any.[49] The limit used to be 15% in the case of a stock bonus or profit sharing plan.

2.4 The Deduction For SEPs.

The deduction for SEPs is similarly increased to 25% of total participant compensation;[50] however, IRC §402(h)(2) still provides that contributions made by an employer to a SEP will be treated as distributed to the extent the contribution exceeds “15 percent of the compensation (within the meaning of section 414(s)) from such employer includible in the employee's gross income for the year (determined without regard to the employer contributions to the simplified employee pension).”[51] It is hard to say just what is going on here.

2.5 Money Purchase Plans No Longer Necessary to Reach 415 Limit.

Since the 415(c) percentage limit was 25% (it is now 100%), and since the deduction limit was 15%, many small employers, pre-EGTRRA, adopted a money purchase plan in order to allow participants to achieve the largest pension the law allowed. Now that the employer can deduct, and allocate, up to 25% of compensation to a profit sharing plan, the need to maintain a supplemental money purchase plan has been largely eliminated.

2.6 All DCPs Are Now Subject to a Deduction Limit of 25% of Compensation.

A money purchase plan is a type of defined contribution plan (DCP) where the contribution of the employer is fixed each year under a mandatory formula usually expressed as a percentage of each participant’s compensation. There is no explicit percentage limit, as such, on the size of the formula, but IRC §415(c) would generally have had the indirect effect of limiting the formula to 25% or less of compensation. Because contributions are mandatory, a money purchase plan is subject to the minimum funding requirements of IRC §412. Historically, contributions in satisfaction of §412 were deductible, no matter what the relationship to participant compensation, if necessary to satisfy minimum funding.

Perhaps it is because the 415(c) percentage limit is now 100% of compensation (instead of 25%) that EGTRRA §616(a)(2)(A) amended IRC §404(a)(3)(A)(v) to impose the same 25% limit now applicable to profit sharing plans on money purchase plans, target benefit plans and other DCPs subject to the IRC §412 minimum funding obligation.[52]

The statute is oddly worded. IRC §404(a)(3) maintains its traditional heading, “(3) Stock bonus and profit-sharing trusts.” “[I]f the contributions are paid into a stock bonus or profit-sharing trust,” then, under §404(a)(3)(A)(i)(I), the deduction is limited to “25 percent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries under the stock bonus or profit-sharing plan.” Then, a page later, we find the following:

(v) Defined contribution plans subject to the funding standards. Except as provided by the Secretary, a defined contribution plan which is subject to the funding standards of section 412 shall be treated in the same manner as a stock bonus or profit-sharing plan for purposes of this subparagraph.

Are there any defined contribution plans other than stock bonus, profit-sharing, and those subject to §412? ESOPs? I haven’t analyzed this all that carefully, but it seems to me that there could have been a more direct way to express the new rule.

2.7 Elective Deferrals Added to Compensation For Purposes of Computing Deduction Limits—Elective Deferrals Always Deductible.[53]

The percentage limit on employer deductions (now 25% across the board) is applied against participant compensation in the aggregate. For this purpose, compensation is 415 compensation (415(c)(3)(C) or (D)). Elective deferrals are now added back to W-2 compensation for purposes of §415. This means that elective deferrals, if otherwise proper, are always deductible. Further, they do not reduce the deduction for other types of contributions. This is beneficial on two counts, and obviously means that a larger employer deduction will be available.

Elective deferrals include such things as salary reduction contributions under a 401(k) plan, employer contributions to a SAR-SEP, employer contributions under a 403(b) plan (TSA), and elective deferrals under a cafeteria plan (§125 plan), etc. This has the effect of increasing the compensation considered, which means that the limits will be larger, since the deduction limit is a percentage of total participant “compensation.”

IRC 404(n) is explicit:

(n) Elective deferrals not taken into account for purposes of deduction limits. Elective deferrals (as defined in section 402(g)(3)) shall not be subject to any limitation contained in paragraph (3), (7), or (9) of subsection (a), and such elective deferrals shall not be taken into account in applying any such limitation to any other contributions.[54]

2.8 Compensation For Deduction Purposes Now Includes Pre-Disability Compensation.[55]

In certain cases compensation is specially defined to mean “the compensation the participant would have received for the year if the participant was paid at the rate of compensation paid immediately before becoming permanently and totally disabled.”

ARTICLE 3
The Catch-Up Rules - increased elective contributions For the AGE 50 and Over [56]

The baby boomers are apparently a force in Congress. They have joined forces with the AARP generation to give special pension benefits to persons 50 and over. Having paid my dues in years, I was recently inducted into this specially favored class of citizens. Since this statute directly benefits me, I am in favor of it, and make an exception to my general aversion to special interest tax legislation.

3.1 Effective Date is For Years Beginning After 2001.[57]

The changes discussed below in this Article are generally effective for contributions made in tax years beginning after December 31, 2001.

3.2 “Eligible Participants” in “Applicable Employer Plans” Can Make Increased Elective Deferrals Up to the Adjusted “Applicable Dollar Amount” in Effect for the Year.

“Eligible Participants” in “Applicable Employer Plans” are permitted to make elective deferrals in excess of those otherwise permitted by 402(g), the ADP nondiscrimination rules, or other plan terms.

3.2(a) Eligible Participant Defined.[58]

An “eligible participant” is a plan participant who is age 50 or over during the plan year and who could not otherwise make any other elective deferrals, due to the application of the plan terms or IRC §414(v)(3).

3.2(b) Applicable Employer Plan Defined.

An “applicable employer plan” includes qualified plans, 403(b) plans (TSAs), SEPs, 408(p) Simple plans, and certain 457 plans.

3.2(c) Applicable Dollar Amount Defined.

In the case of a 401(k) plan, TSA or SEP, the applicable amount is $1000 in 2002, increasing by $1000 per year until reaching $5000 in 2006. In the case of a Simple 401(k) plan or Simple IRA, the applicable amount is $500 in 2002, increasing by $500 per year until reaching $52,500 in 2006. After 2006, the $5000 and $2500 amounts will be adjusted for inflation.

3.2(d) Adjusted Applicable Amount.

The increased contribution allowed is the lesser of the applicable dollar amount or the excess of the participant’s 415(c)(3) compensation over any other elective deferrals for the year.[59] One would expect that the applicable dollar amount will always be the lesser figure, but because of the fact that the 415(c) percentage limit is now 100%, I can imagine cases where a nonhighly compensated employee making large deferrals could bump into this rule.

3.3 The Additional Elective Deferrals Are Ignored in Computing Other Contribution Limits and in Applying Most of the Nondiscrimination Rules.

Contributions made under the additional elective deferral rules are ignored in applying the limits under IRC §§402(g) (the dollar limit on elective deferrals), 402(h) (SEPs), 403(b) (TSAs), 404(a) (deductions for employer contributions), 404(h) (SEPs), 408(k) (SEPs), 408(p) (SIMPLE plans), 415 (limitations on annual additions), and 457 (nonqualified plans of governmental and certain other tax exempt employers).[60]

Catch-up contributions are exempted from a host of other nondiscrimination rules, including:

IRC §401(a)(4) (general nondiscrimination);

IRC §401(a)(26) (minimum participation);

IRC §401(k)(3) (the ADP tests);

IRC §401(k)(11) (SIMPLE 401(k) plans);

IRC §401(k)(12) (alternative nondiscrimination rules);

IRC §401(m) (nondiscrimination test for matching contributions);

IRC §403(b)(12) (TSAs);

IRC §408(k) (SEPs);

IRC §408(p) (SIMPLE plans);

IRC §410(b) (minimum coverage); and

IRC §416 (the top-heavy rules).[61]

3.4 If Catch-Up Contributions are Allowed to be Made by Some, They Must be Allowed to Made by All.[62]

IRC §401(a)(4) requires that in order to be qualified, a pension plan, among other things, must be designed and operated in a manner that ensures that “the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees.” This one phrase has generated 100s of pages of regulations and millions of words of interpretation found in cases, rulings, etc. Although catch-up contributions are not generally subject to 401(a)(4), there is a special rule that says that 401(a)(4) will apply unless the plan and all related plans allow all eligible participants to make the same catch-up elections permitted under 414(v).

3.5 Matching Contributions for Catch-Up Elective Deferrals Are Permitted, But They are Subject to 414(m).

According to the Committee Reports, the employer can match catch-up contributions. However, the match would be tested for discrimination under 414(m) as in the case of normal matching contributions.

3.6 Special Rules For Governmental 457 Plans.

The catch-up rules of 414(v) do not apply to governmental 457 plans in the three final tax years in ending before an employee reaches normal retirement age, in which the normal dollar limits are doubled.[63]

3.7 Special Rules For Traditional and Roth IRAs.

A person who is 50 years of age or older during the tax year, the applicable amount that can be contributed to an IRA under IRC §219 is increased by $500 beginning in 2002, and by $1000 beginning in 2006.[64]

ARTICLE 4
Faster vesting for Matching contributions [65]

4.1 Effective Date is For Years Beginning After 2001.[66]

The changes discussed below in this Article are generally effective for contributions made in plan years beginning after December 31, 2001. A special effective date applies to collectively bargained plans.

4.2 Matching Contributions Must Vest 100% in 3 Years or Under a 6 Year Graded Vesting Schedule.

Matching contributions must be 100% vested after 3 years of vesting service credit, or under a 6 year graded vesting schedule, which begins with 20% vesting after 2 years, and increases at the rate of 20% per year until 100% vesting is reached after 6 years.[67] You may wish to note that this is the same vesting schedule that applies to top-heavy plans.[68]

ARTICLE 5
Hardship Distributions

5.1 Hardship Distribution Ineligible For Rollover.[69]

Effective for distributions after 2001,[70] hardship distributions are not eligible for rollover. Previously, only hardship distributions of 401(k) elective deferrals were ineligible. Of course, under a profit sharing plan, distributions from a non 401(k) account that is over two years old can be made for no reason at all, if the plan allows for it, and these distributions continue to be subject to rollover.

5.2 12 Month Moratorium on Elective Deferrals Following a Hardship Distribution is Lowered to 6 Months.[71]

Congress has directed the IRS, effective for plan years beginning after 2001,[72] to revise its regulations pertaining to hardship distributions under IRC §401(k)(2)(B)(i)(IV) to reduce the period that an employee is prohibited from making elective deferrals and after-tax employee contributions following a hardship distribution from 12 months to 6 months, in order for a distribution to satisfy the financial need test.

5.3 Hardship Exception to the 60-Day Rollover Rule.[73]

Effective after 2001, the IRS has authority to waive the 60-day rollover requirement in the event of a casualty, disaster, or other event beyond the taxpayer’s reasonable control, if not waiving the requirement would be against equity or good conscience.

ARTICLE 6
Top-Heavy Rule Changes [74]

6.1 Effective Date Begins in 2002.[75]

The top-heavy changes are effective for plan years beginning after 2001.

6.2 Definition of Key-Employee Changed.

6.2(a) Four Year Look-back Period Replaced by One Year Period.[76]

The four year look-back rule has been eliminated. Whether or not a person is a key-employee is now determined by looking at the preceding plan year only.

6.2(b) The Compensation Test Simplified.[77]

A key-employee is no longer determined by reference to the IRC §415(b)(1)(A) DBP limit. Also, the “top ten stockholder” test has been eliminated. Under the new test, a “key-employee” is an employee who, during the preceding plan year was: (a) an officer receiving more than $130,000 in compensation (indexed beginning in 2003), (b) a 5% owner (determined under IRC §318),[78] regardless of compensation, or (3) a 1% owner receiving more than $150,000 in compensation. EGTRRA also eliminated the method for determining which of two employees having equal ownership interests is a key employee.[79]

6.3 Frozen Top-Heavy Plans Now Exempt From the Minimum Benefit Requirement.

Under prior law, a top-heavy defined benefit plan could be required to accrue a 2% minimum benefit for each year of service of a non-key employee, even if the plan was frozen. Beginning in 2002, service in plan years in which the plan does not benefit any key employee or former key employee is disregarded.[80]

6.4 Certain Safe-Harbor 401(k) and 401(m) Plans Exempt From Top-Heavy Rules.

Beginning in 2002, certain safe-harbor 401(k) and 401(m) plans are excluded from the definition of a top-heavy plan. A safe-harbor plan for this purpose is a plan that meets the 401(k)(12) ADP safe-harbors for elective deferrals, and the 401(m)(11) ACP safe-harbors for matching contributions.[81] Safe-harbor plans are now treated similarly to SIMPLE 401(k) plans under IRC §401(k)(11).

6.5 Matching Contributions Count as Top-Heavy Minimum Contributions.

Beginning in 2002, employer matching contributions will count toward satisfying the top-heavy minimum contribution requirements.[82]

6.6 The Rules for Determining the Present Value of Accrued Benefits for Top-Heavy Purposes Changed.[83]

Under EGTRRA, only distributions added back in determining the present value of an employee’s accrued benefit are those made during the previous year, unless the distributions were made in-service. A five-year look-back rule will apply to in-service distributions.[84] Best of all, if a participant has not performed any services for the employer during the prior year, the participant’s accrued benefit is disregarded entirely in making the top-heavy determination.[85]

The 2001 Act further provides that, after 2001, neither the accrued benefit nor the account of an individual who has not performed services for the employer maintaining the plan during the one-year period ending on the determination date will be used in the top-heavy determination.[86]

ARTICLE 7
Special Rules Affecting Plans Subject To Minimum Funding (Dbps and mpps)

7.1 Annual Actuarial Valuation Requirement for DBP and MPPs Can be Satisfied Using Prior Year’s Valuation.[87]

Generally, defined benefit plans (DBPs) and money purchase plans (MPPs) are required to perform an annual actuarial valuation as of a date during the current plan year (or within a month before it). However, beginning in 2002,[88] defined benefit plans (DBPs) and money purchase plans (MPPs) may, alternatively, use the prior year’s valuation if the plan assets are at least 125% of current liabilities, determined in that year.[89] These changes basically codify Prop. Treas. Reg. §1.412(c)(9)-1(b)(1).

7.2 Excise Tax on Nondeductible Employer Contributions to DBPs Modified.[90]

IRC §4972(a) imposes a 10% excise tax on nondeductible employer contributions. Believe it or not, under pre-EGTRRA law, a contribution to a DBP can be nondeductible, even if the contribution does not cause the value of the trust to exceed the value of the benefits accrued to date. Under EGTRRA, a contribution will be deductible if it does not exceed the full-funding limitation determined without regard to the current liability limit in IRC §412(c)(7)(A)(i)(I). But what if the employer sponsors both a defined benefit and a defined contribution plan?

IRC §4972(c)(7) now provides:

(7) Defined benefit plan exception. In determining the amount of nondeductible contributions for any taxable year, an employer may elect for such year not to take into account any contributions to a defined benefit plan except to the extent that such contributions exceed the full-funding limitation (as defined in section 412(c)(7), determined without regard to subparagraph (A)(i)(I) thereof). For purposes of this paragraph, the deductible limits under section 404(a)(7) shall first be applied to amounts contributed to defined contribution plans and then to amounts described in this paragraph. If an employer makes an election under this paragraph for a taxable year, paragraph (6) shall not apply to such employer for such taxable year. [Emphasis added.]

404(a)(7) provides:

(7) Limitation on deductions where combination of defined contribution plan and defined benefit plan.

(A) In general. If amounts are deductible under the foregoing paragraphs of this subsection (other than paragraph (5)) in connection with 1 or more defined contribution plans and 1 or more defined benefit plans or in connection with trusts or plans described in 2 or more of such paragraphs, the total amount deductible in a taxable year under such plans shall not exceed the greater of—

(i) 25 percent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries under such plans, or

(ii) the amount of contributions made to or under the defined benefit plans to the extent such contributions do not exceed the amount of employer contributions necessary to satisfy the minimum funding standard provided by section 412 with respect to any such defined benefit plans for the plan year which ends with or within such taxable year (or for any prior plan year).

A defined contribution plan which is a pension plan [i.e., a money purchase pension plan] shall not be treated as failing to provide definitely determinable benefits merely by limiting employer contributions to amounts deductible under this section. For purposes of clause (ii), if paragraph (1)(D) applies to a defined benefit plan for any plan year, the amount necessary to satisfy the minimum funding standard provided by section 412 with respect to such plan for such plan year shall not be less than the unfunded current liability of such plan under section 412(l) .

(B) Carryover of contribution in excess of the deductible limit. Any amount paid under the plans in any taxable year in excess of the limitation of subparagraph (A) shall be deductible in the succeeding taxable years in order of time, but the amount so deductible under this subparagraph in any 1 such succeeding taxable year together with the amount allowable under subparagraph (A) shall not exceed 25 percent of the compensation otherwise paid or accrued during such taxable years to the beneficiaries under the plans.

(C) Paragraph not to apply in certain cases. This paragraph shall not have the effect of reducing the amount otherwise deductible under paragraphs (1), (2), and (3), if no employee is a beneficiary under more than 1 trust or under a trust and an annuity plan.

(D) Section 412(i) plans. For purposes of this paragraph, any plan described in section 412(i) shall be treated as a defined benefit plan. [Emphasis added.]

This rule is effective for years beginning after 2001.[91]

7.3 Defined Benefit Plans Can Now Deduct Unfunded Current Liability.[92]

Under a pre-EGTRRA rule, certain defined benefit plans were allowed to deduct an amount equal to 100% of the plan’s unfunded current liability, even if less than the minimum funding standard.[93] However, this rule only applied to plans having more than 100 participants, and that were not multiemployer plans. Under the new rule,[94] multiemployer plans now get the benefit of this rule, as do plans having less than 100 participants, except that in the latter case, the unfunded current liability does not include liability attributable to benefit increases for HCEs resulting from a plan amendment within the last two years.[95] (See below.)

7.3(a) Small Plans.

There are special rules for small plans covering highly compensated employees[96] (HCEs). If the plans within the controlled group[97] has 100 participants or less, the unfunded current liability does not include liability attributable to benefit increases for HCEs resulting from a plan amendment within the last two years.[98]

7.3(b) Terminating Plans.

A single employer DB plan subject covered by the PBGC and terminating under ERISA[99] §4041, may deduct the amount required to fund benefit liabilities.[100] This is nice, don’t you think? Unfortunately, this rule does not apply to plans exempt from PBGC coverage,[101] such as small plans of professionals.

7.4 Unfunded Current Liability Definition Changed; the Current Liability Full Funding Limit is Accelerated in 2002 and 2003 and Repealed Thereafter.[102]

A plan’s unfunded current liability is the excess (if any) of: (1) its current liability, over (2) the value of the plan's assets, as determined under IRC §412(c)(2).[103] Current liability is not a factor in determining the full funding limit after 2004.[104]

IRC §412(c)(7)(A)(i), prior to EGTRRA, defined the full funding limitation as:

the lesser of (I) the applicable percentage of current liability (including the expected increase in current liability due to benefits accruing during the plan year), or (II) the accrued liability (including normal cost) under the plan (determined under the entry age normal funding method if such accrued liability cannot be directly calculated under the funding method used for the plan), over

IRC §412(c)(7)(A)(i), after EGTRRA, defines the full funding limitation as:

(i) the lesser of (I) in the case of plan years beginning before January 1, 2004, the applicable percentage of current liability (including the expected increase in current liability due to benefits accruing during the plan year), or (II) the accrued liability (including normal cost) under the plan (determined under the entry age normal funding method if such accrued liability cannot be directly calculated under the funding method used for the plan), over

412(c)(7)(A)(ii) is unchanged:

(ii) the lesser of—

(I) the fair market value of the plan's assets, or

(II) the value of such assets determined under paragraph (2) .

The applicable percentage is determined under IRC §412(c)(7)(F), and it has been bumped up 5% by EGTRRA beginning in 2002 to 165% and 170% in 2003, after which it goes away.

ARTICLE 8
ESOP CHANGES

8.1 401(k) Plans Investing in Qualified Employer Securities.

The '97 Taxpayer Relief Act amended ERISA §407(b)(2) in such a way that 401(k) elective deferrals do not qualify under the special rule that permits eligible individual account plans to invest more than 10% of the account in qualifying employer securities or employer real property unless the investment is made at the direction of the participant. EGTRRA changes the effective date of this rule so that it does not apply to assets in 1998 or earlier or acquired under a written binding contract entered into during that period.[105]

8.2 Employer Deduction for Dividends on Employer Securities in an ESOP Where Participants Can Elect to Have Dividends Reinvested in Employer Stock.[106]

IRC §404(k)(1) allows a corporation to deduct “applicable dividends” paid in cash with respect to “applicable employer securities.” The term “applicable dividends” is defined in §404(k)(2). Prior to EGTRRA, “applicable dividends” did not include dividends on employer stock held in an ESOP where the dividends were reinvested in employer stock. Effective 2002, §404(k)(2)(A)(iii) has been amended to allow a deduction for a dividend, even if reinvested in qualifying employer securities. §404(k)(2)(A) now reads as follows:

(2) Applicable dividend. For purposes of this subsection—

(A) In general. The term “applicable dividend” means any dividend which, in accordance with the plan provisions—

(i) is paid in cash to the participants in the plan or their beneficiaries,

(ii) is paid to the plan and is distributed in cash to participants in the plan or their beneficiaries not later than 90 days after the close of the plan year in which paid,

(iii) is, at the election of such participants or their beneficiaries—

(I) payable as provided in clause (i) or (ii) , or

(II) paid to the plan and reinvested in qualifying employer securities, or

(iv) is used to make payments on a loan described in subsection (a)(9) the proceeds of which were used to acquire the employer securities (whether or not allocated to participants) with respect to which the dividend is paid.

(B) Limitation on certain dividends. A dividend described in subparagraph (A)(iii) which is paid with respect to any employer security which is allocated to a participant shall not be treated as an applicable dividend unless the plan provides that employer securities with a fair market value of not less than the amount of such dividend are allocated to such participant for the year which (but for subparagraph (A)) such dividend would have been allocated to such participant.

EGTRRA §662(b) also changed §404(k)(5)(A) by adding the words italicized by me below:

(A) Disallowance of deduction. The Secretary may disallow the deduction under paragraph (1) for any dividend if the Secretary determines that such dividend constitutes, in substance, an avoidance or evasion of taxation.

8.3 Allocations of Employer Stock in S-Corporation ESOPs to Disqualified Persons Owning More than 50% of Shares Are Subject to 50% Excise Tax.[107]

Effective for plan years beginning after 2004,[108] an ESOP sponsored by an S-corporation must provide that “no portion of the assets of the plan attributable to (or allocable in lieu of) such employer securities may, during a nonallocation year, accrue (or be allocated directly or indirectly under any plan of the employer meeting the requirements of section 401(a)) for the benefit of any disqualified person.”[109]

To the extent a plan fails to meet these requirements, “the plan shall be treated as having distributed to any disqualified person the amount allocated.”[110] This will, in turn, result in an excise tax under IRC §4979A of 50% of the amount involved.

A more detailed discussion of these provisions is perhaps called for, but is, nevertheless, reserved for now.

ARTICLE 9
Same Desk Rule eliminated

Effective for distributions made after 2001 (but regardless when separation takes place), the phrase “separation from service” has been changed to “separation from employment, in those sections of the IRC governing distributable events under 401(k), 457 and 403(b) plans.[111] The intent was to eliminate the “same desk rule,” under which the IRS refused to recognize a separation from service simply because an employee was employed by a new employer as a result of a sale, reorganization or other change of ownership.

Because of this change, EGTRRA §646(a)(1)(B) eliminated the special rule found in IRC §401(k)(10)(A)(ii) & (iii), permitting 401(k) distributions upon the disposition of substantially all of a corporation’s of assets and disposition of a subsidiary. §401(k)(10)(C) was also repealed in this connection as no longer necessary.[112]

In order to take advantage of this new rule, the IRS says that a plan has to be amended to incorporate the EGTRRA change. See Notice 2002-4, 2002-2 IRB 298, 12/21/2001.

ARTICLE 10
Rollovers and Transfers

10.1 Eligible Rollover Distributions Defined.

As amended by EGTRRA, IRC §402(c)(4) defines an “eligible rollover distribution” as follows:

(4) Eligible rollover distribution. For purposes of this subsection, the term “eligible rollover distribution” means any distribution to an employee of all or any portion of the balance to the credit of the employee in a qualified trust; except that such term shall not include—

(A) any distribution which is one of a series of substantially equal periodic payments (not less frequently than annually) made—

(i) for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and the employee's designated beneficiary, or

(ii) for a specified period of 10 years or more,

(B) any distribution to the extent such distribution is required under section 401(a)(9), and

10.2 Distributions Which Otherwise Qualify as Eligible Rollover Distributions Can Now Be Rolled Both To and From a Variety of “Eligible Retirement Plans.”

Generally, effective in 2002 at the latest, Eligible Retirement Plans can receive rollovers from other Eligible Retirement Plans, and vice-versa. The term “eligible retirement plan” is circuitously defined variously by reference to “clause (iii), (iv), (v), or (vi) of section 402(c)(8)(B),” which, in turn describes the following:

(ii) an individual retirement annuity described in section 408(b) (other than an endowment contract),

(iii) a qualified trust,

(iv) an annuity plan described in section 403(a),

(v) an eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A),[113] and

(vi) an annuity contract described in section 403(b).

10.3 IRAs Can Now Be Rolled Into All Sorts of Plans Other than 401(a) Qualified Plans.[114]

IRC §408(d)(3)(A) has been amended by EGTRRA §642(a), effective in 2002, to provide that an otherwise taxable distribution from an IRA can be rolled over tax-free to any “eligible retirement plan.” The term “eligible retirement plan” is defined in the flush language to 408(d)(3)(A) as a plan described “in clause (iii), (iv), (v), or (vi) of section 402(c)(8)(B)” which turns out to mean—

§ IRAs,

§ Qualified Plans,

§ Qualified 403(a) Annuities,

§ Governmental 457(b) Plans, and

§ 403(b) Plans

In the case of a so-called “conduit IRA,” the benefits of 10-year averaging or capital gain treatment, if any, will only be preserved if the rollover is back to qualified plan, however.[115]

10.4 Eligible Rollover Distributions From 403(b) Plans Can Be Rolled Over to Any Eligible Retirement Plan.[116]

Effective after 2001, eligible rollover distributions from 403(b) plans can be rolled over to any of a number of “Eligible Retirement Plans.”

As indicated above in the reproduction of IRC §402(c)(8)(B), “Eligible Retirement Plans” include:

§ IRAs,

§ Qualified Plans,

§ Qualified 403(a) Annuities,

§ Governmental 457(b) Plans, and

§ 403(b) Plans

10.5 403(b) Plans Can Receive Eligible Rollover Distributions From Other Eligible Retirement Plans.[117]

Effective after 2001, 403(b) plans can receive eligible rollover distributions from any of the same “Eligible Retirement Plans” listed above, which could have been rolled over to a 403(b) Plan.

10.6 Distributions From Governmental 457 Plans Now Can Qualify as Eligible Rollover Distributions.[118]

Generally, effective in 2002 at the latest, Eligible Retirement Plans can receive rollovers from other Eligible Retirement Plans, and vice-versa.

10.7 New Rules Governing the Taxation of Rollovers to Non-IRAs.

IRC §72 contains a set of complicated and frequently changed rules for determining the taxation of distributions that could be made up of taxable and nontaxable portions. Effective in 2002, EGTRRA §643(c) amends IRC §408(d)(3)(H) to modify the application of 72 by providing:

(H) Application of section 72.

(i) In general. If—

(I) a distribution is made from an individual retirement plan, and

(II) a rollover contribution is made to an eligible retirement plan described in section 402(c)(8)(B)(iii), (iv), (v), or (vi) with respect to all or part of such distribution,

then, notwithstanding paragraph (2), the rules of clause (ii) shall apply for purposes of applying section 72 .

(ii) Applicable rules. In the case of a distribution described in clause (i) —

(I) section 72 shall be applied separately to such distribution,

(II) notwithstanding the pro rata allocation of income on, and investment in, the contract to distributions under section 72, the portion of such distribution rolled over to an eligible retirement plan described in clause (i) shall be treated as from income on the contract (to the extent of the aggregate income on the contract from all individual retirement plans of the distributee), and

(III) appropriate adjustments shall be made in applying section 72 to other distributions in such taxable year and subsequent taxable years.

Thus, the amount rolled over to a non IRA eligible retirement plan is treated as if made from the income portion of the “contract,” notwithstanding the general rule which requires a prorata allocation between the taxable and nontaxable portion of a distribution.

10.8 After-Tax Contributions Can Now Be Rolled.[119]

Effective in 2002,[120] an individual can rollover the nontaxable portion of an eligible rollover contribution to an IRA and to certain qualified plans. If the rollover is to another qualified plan, IRC §402(c)(2)(A) provides that the portion rolled over must be transferred in a direct trustee-to-trustee transfer to a defined contribution plan (DCP) “which agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible.”

10.9 Surviving Spouse May Rollover to Any Eligible Retirement Plan.

Effective in 2002, EGTRRA §641(d) amends IRC §402(c)(9) to provide that a surviving spouse has the same rollover options that the deceased participant would have had if living. Previously, a surviving spouse could only rollover to an IRA. Now the spouse can rollover to any of the various eligible qualified plans described above: i.e., 403(a) & (b) plans and 457 plans, and 401(a) qualified plans, as well as to IRAs.

10.10 Rollover Accounts Disregarded in Applying the $5000 Involuntary Cash-Out Limit.[121]

If a participant has an account balance of under $5000, the IRC allows the employer to cash out the participant, without regard to all of the distribution restrictions, options, etc. otherwise generally applicable. Effective after 2001, the employer can now ignore rollover accounts in determining whether a participant’s account balance is $5000 or more.

10.11 Capital Gains and 10-Year Averaging Not Available in the Case of Rollovers From 457 and 403(b) Plans.[122]

The special rule that used to allow capital gain treatment and 5/10 year averaging in the case of lump sum distributions from qualified plans, which rule is changed every time Congress is in session, and which now only applies to persons born before 1936, and then only in narrow circumstances, will not apply to conduit rollovers to a qualified plan from a 457 or 403(b) plan or vice versa. Prior to EGTRRA, nothing was needed to address this issue, since 403(b) and 457 plans could not be rolled into qualified plans.

ARTICLE 11
EGTRRA Changes Affecting Only 457 Plans

There are so many EGTRRA changes affecting 457 Plans, that I decided to put most, but not all, of them in one place.

11.1 Background.

457 plans used to be unfunded. In fact, that was a requirement of non-governmental plans in order to be exempt from ERISA Title I. After all, a 457 plan is simply a nonqualified plan of deferred compensation sponsored by a tax exempt entity (other than a church). In the case of a non-governmental plan, the plan would have to be unfunded and established on behalf of a select group of highly compensated employees. Recently, governmental plans, which are exempt from ERISA altogether, were required to hold 457 benefits in trust. (I can only imagine that this was because Congress was afraid of the solvency of the plan sponsors.) This rule was not made applicable to non-governmental tax-exempt entities.

11.1(a) Application of ERISA to Nonqualified Plans.

Some nonqualified plans are not covered by ERISA at all (and thus are not subject to preemption) while others clearly are. However, those that are covered by ERISA preemption are usually not covered by the ERISA anti alienation rule. As indicated in MacKey,[123] this is not the best of all possible categories in which to fall.

Unfunded “excess benefit plans,”[124] as well as all governmental and most church plans, are entirely exempt from Title I.[125] An excess benefit plan is a plan, whether or not funded, that is maintained by an employer solely for the purpose of providing benefits for certain employees in excess of the limitation on contributions and benefits imposed by IRC §415.

There is another type of nonqualified plan, sometimes called a “top hat plan,” which, although covered by ERISA, is exempt from most of the more burdensome provisions of Title I, such as funding, vesting and most reporting.[126] These plans are not covered by Part 2 of ERISA and thus, are not covered by the ERISA §206(d) anti alienation rule; they are covered by the preemption rule however.

A 457 plan maintained by a nongovernmental tax-exempt entity (other than a church) would almost certainly be designed as a top-hat plan, of necessity. (Since the plan is unfunded, it is fair to ask what there is to attach. Presumably, a creditor could get an order similar to a garnishment order that would cause the benefits when paid to be paid to the creditor.)

ERISA §206(d)(1): “Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.” IRC §401(a)(13) is similar: “A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that benefits provided under the plan may not be assigned or alienated.” The language required by ERISA §206(d)(1) and IRC §401(a)(13) is sometimes referred to as an “anti alienation clause.” Similar language found in most common law trusts is commonly known as a “spendthrift clause.”

ERISA §206(d)(1) is found in Part 2 of Title I of ERISA. Part 2 does not apply to all employee benefit plans. For example, Part 2 does not apply to “employee welfare benefit plans,”[127] nor does it apply to most nonqualified plans (including 457 plans),[128] government plans or most church plans.[129] Nor does it apply to IRAs or SEPs.[130] Whereas ERISA §206(d)(1) is mandatory (“each pension plan shall provide . . .”), IRC §401(a)(13) is proscriptive (“a trust shall not constitute a qualified trust . . . unless . . .”). IRC §401(a)(13) does not mandate an anti alienation clause, but if a trust does not have one, it will not enjoy the tax benefits of a qualified plan. It follows that IRC §401(a)(13) simply has no application to nonqualified plans, IRAs, welfare benefit plans, or the like.

11.1(b) Application of ERISA Preemption and Anti-Alienation to Nonqualified Plans of Governmental and Other Tax Exempt Entities.

Once the above has been sorted out, I believe that the conclusion is that a nongovernmental 457 plan would be subject to pre-emption but not to the anti-alienation provisions of ERISA. If that is true, then 457 benefits would be alienable, but state divorce law that otherwise does not conflict with ERISA would probably not be pre-empted, at least if it did not mention ERISA specifically.[131] If 457 benefits are alienable, then one could argue that there is nothing violative of ERISA in a divorce decree that orders 457 benefits to be paid to the non-participant spouse. Since I have never heard or seen this issue discussed by anyone other than me, I am not positive that I have it right.

11.1(c) Application of the IRC to 457 Plans.

Whether or not ERISA applies, 457(b) has its own distribution rules, which could be violated if a domestic relations order that was not a QDRO forced a noncomplying distribution.

11.2 The “Made Available” Rule Eliminated for Governmental 457 Plans and Made Explicitly Applicable for all Other 457 Plans.[132]

Effective 2002, compensation deferred under a governmental 457 plan will be includable in income in the year actually paid, not when “made available.” However, compensation deferred under a non-governmental 457 plan will be includable in income in the year actually paid or made available. Perhaps the reason for the distinction is that governmental 457 plan assets are held in trust, but non-governmental 457 plans are usually unfunded.

11.3 Normal Minimum Required Distribution (MRD) Rules Now Apply to 457 Plans.[133]

Prior to EGTRRA, 457 plans had their own MRD rules, in addition to the rules of IRC §401(a)(9). The special rules have been eliminated, effective in 2002, and now there are only the §401(a)(9) MRD rules with which a 457 Plan must contend.

11.4 Increase in Allowable Benefits Under 457(b) Plans (Nonqualified Plans Maintained by Certain Tax Exempt and Governmental Entities).[134]

11.4(a) The Old Dollar and Percentage Limits Are Replaced By an Increased Dollar Limit.

The old rule was that a 457(b) plan participant could defer the lesser of $8500 (indexed) or 33.33% of compensation and still be 100% vested. (If the employee agreed that the deferral would be subject to a substantial risk of forfeiture, the sky was the limit.[135])

11.4(a)(1) Applicable Dollar Amount.

The applicable dollar amount under a §457 Plan for 2002 is $11,000 (up from $8500 in 2001). [136] The limit is increased by $1000 a year until it will be $15,000 in 2006. After that it is indexed for inflation in $500 increments using July 1, 2005 as the base quarter.[137]

11.4(a)(2) The Percentage Limit is Now 100% of Compensation.

The percentage limit on deferrals under a section 457 plan is now 100% of compensation (up from 33%).[138]

11.4(b) Non-Governmental 457 Plans are Still Subject to ERISA, and Thus, Coverage Is Restricted to Highly Compensated.

Since an unfunded non-governmental 457 plan (i.e., a plan subject to ERISA[139]) had to be a top-hat plan —meaning that it could only be maintained for a select group of highly compensated employees—, it was hard to imagine when the old 33% limit could apply to a non-governmental plan. However, since all governmental plans and most church plans are completely exempt from ERISA,[140] these plans could be designed without regard to the top-hat rules and could cover employees at all compensation levels. In any case, the old scheme for limiting benefits under a 457 plan has been replaced by the concept of an “applicable dollar amount,” and the 33% limit is now effectively a 100% limit. However, if 100% of compensation is less than the applicable dollar amount, then let us hope that the plan is not an ERISA plan.

11.4(c) 457 plans, 401(k) plans, 403(b) plans and SEPs on a Parity.

Note that these changes put 457 plans, 401(k) plans, 403(b) plans and SEPs on the same footing.

11.4(d) Change in the Old Catch-Up Rule.

§457(b)(3) used to provide that “for 1 or more of the participant's last 3 taxable years ending before he attains normal retirement age under the plan, the ceiling” shall be the lesser of (1) twice the dollar limit[141] or (2) the sum of the otherwise applicable limit for the year plus the positive difference between the deferrals made and the deferrals that could have been made.

In the inimitable words of the statute, the latter limitation is expressed, perhaps more precisely, as follows:

§457 (b)(3)(B)

(B) the sum of—

(i) the plan ceiling established for purposes of paragraph (2) for the taxable year (determined without regard to this paragraph ), plus

(ii) so much of the plan ceiling established for purposes of paragraph (2) for taxable years before the taxable year as has not previously been used under paragraph (2) or this paragraph,

The “twice the dollar amount” special rule of former IRC §457(b)(3)(A) has been replaced with “$15,000,” but the prolix §457 (b)(3)(B) rule has been retained.

The catch-up rule only applies to trusteed 457 plans (governmental plans).

11.4(e) Offset Rules Eliminated.

Under the old rules, the 457 limits were offset by benefits payable under 403(b) plans, 401(k) plans, SEPs, etc. Under EGTRRA, the offset rules have been eliminated,[142] and are replaced by the limit on the “applicable dollar amount.”[143]

11.4(f) Changes to the 457 Offset Rules Are Contrary to Committee Reports.

The IRC’s changes to the offset rules are contrary to the Conference Report. Perhaps this is because nongovernmental 457 plan sponsors are also entitled to adopt a 401(k) plan, which a governmental entity cannot do. Thus a nongovernmental entity can avail itself of the 401(k) catch-up rules as well as the 457 catch-up provisions.

11.5 Distributions From Governmental 457 Plans Now Can Qualify as Eligible Rollover Distributions.[144]

Generally, effective in 2002 at the latest, Eligible Retirement Plans can receive rollovers from other Eligible Retirement Plans, and vice-versa. “Eligible Retirement Plans” include:

§ IRAs,

§ Qualified Plans,

§ Qualified 403(a) Annuities,

§ Governmental 457(b) Plans, and

§ 403(b) Plans

11.6 Contributions to Governmental 457 Plan Are Not Treated as Wages Subject to Withholding. [145]

Amounts contributed to a governmental 457 plan will not be treated as wages subject to withholding. Of course, amounts distributed are subject to the usual 20% withholding, in the absence of a direct rollover.

ARTICLE 12
Miscellaneous Provisions

12.1 Governmental and Church Plans, as Well as Other Eligible Deferred Compensation Plans (certain 457 Plans) Now Subject to QDRO Rules.[146]

12.1(a) EGTRRA Changes to 414(p).

The QDRO rules now apply to “eligible” 457 plans, as well as to all governmental and church plans. If the decree is not a QDRO, then the discussion above regarding preemption and anti-alienation may become meaningful.

IRC §414(p)(11)-(12) as amended by EGTRRA §635(c) now provides:

(11) Application of rules to certain other plans. For purposes of this title, a distribution or payment from a governmental plan (as defined in subsection (d)[147]) or a church plan (as described in subsection (e)) or an eligible deferred compensation plan (within the meaning of section 457(b)[148]) shall be treated as made pursuant to a qualified domestic relations order if it is made pursuant to a domestic relations order which meets the requirement of clause (i) of paragraph (1)(A).

(12) Tax treatment of payments from a section 457 plan. If a distribution or payment from an eligible deferred compensation plan described in section 457(b) is made pursuant to a qualified domestic relations order, rules similar to the rules of section 402(e)(1)(A) shall apply to such distribution or payment.

By making 402(e)(1)(A) apply, the statute makes the spouse the distributee for tax purposes. This may be a main purpose of the statutory change.

12.2 Separate Deemed IRA Accounts Maintained by Qualified Plans, 403(b) Plans and Trusteed 457 Plans.[149]

Under EGTRRA, Qualified plans, 403(b) Plans, and trusteed (i.e., governmental) 457 Plans can elect to maintain deemed IRAs on behalf of the participants in the plan. The IRA can be either a Roth IRA or a Traditional IRA and will be treated under all of the usual rules (and limitations) applicable to Roth and Traditional IRAs, except that the account may be commingled with the qualified plan trust assets.

Under pre-EGTRRA law, an employer that gets actively involved in maintaining IRAs for its employees can find itself subject to Title I of ERISA. However, the new deemed IRAs are explicitly exempted from most of Title I,[150] although, the fiduciary responsibility requirements of ERISA §404, the prohibited inurnment rule of ERISA §403(c), and the co-fiduciary liability rules of ERISA §405 will apply to deemed IRAs.

These deemed IRA rules are effective for plan years beginning after 2002.[151]

12.3 401(k) and 403(b) Plans Can Allow After-Tax Roth IRA Contributions After 2005.[152]

After 2005, 401(k) and 403(b) plans can establish “qualified Roth contribution programs,” which will (with some exceptions) treat certain after-tax elective deferrals as if they had been contributed to a Roth IRA.

12.4 Certain Individuals Get $2000 Tax Credit for Elective Deferrals and IRA Contributions.[153]

Individuals with modified AGI of less than $50,000, head of household returns with modified AGI of less than $37,500, and single return filers and married taxpayers filing separately with modified AGI less than $25,000 may qualify for a tax credit of up to $2000, beginning 2002 and ending after 2006 for certain contributions to various retirement plans and IRAs.

12.5 IRS Directed to Revise Life Expectancy Tables For Use Under the MRD Rules.[154]

As we know, certain minimum required distributions (MRDs) must be made from qualified plans, 403(b) plans, IRAs, etc., beginning on the required beginning date (RBD), which is usually April 1 of the year after a person reaches 70½ or retires, or shortly after death if sooner. The MRDs are currently based upon life expectancy tables found in Tables V and VI of Treas. Reg. §1.72-9. These tables have been in use for quite a while, and as a consequence are somewhat out of date. EGTRRA §634 directs the IRS to revise them.

12.6 Automatic Rollover For Certain Involuntary Cash-outs.[155]

If a distribution is less than $5000 but more than $1000, and the distributee does not elect to receive the distribution directly or to pay it directly to another plan or IRA in the form of a direct rollover, then “the plan administrator shall make such transfer to an individual retirement plan of a designated trustee or issuer and shall notify the distributee in writing (either separately or as part of the notice under section 402(f)) that the distribution may be transferred to another individual retirement plan.”[156]

These new rules are not effective until final regulations are promulgated implementing fiduciary responsibility safe-harbors.[157]

12.7 $500 Credit for Pension Startup Costs of Small Employers.

Effective with respect to “qualified employer plans” established after 2001,[158] certain “eligible employers” who sponsor an “eligible employer plan” will be entitled to a general business credit (not to exceed $500 a year for three years) of 50% of “qualified startup costs”.[159] An “eligible employer” is an employer that employs 100 or fewer employees each of whom received $5,000 or more of “compensation” from the employer for the preceding year,[160] and at least one of whom is nonhighly compensated.[161] The definition is the same one used in IRC §408(p)(2)(C)(i) to define employers eligible to adopt SIMPLE IRAs. “Qualified startup costs” are any ordinary and necessary expenses paid or incurred in connection with: the establishment or administration of an eligible employer plan, or the education of employees with respect to the plan.[162] An “eligible employer plan” includes any qualified pension, profit-sharing, or stock bonus plan which includes an exempt trust, a 403(b) plan, a SEP, or any SIMPLE IRA. The credit is up to $500 for the first year, and for each of the next two years.[163]

12.8 Multiple Use Test Eliminated.[164]

The ADP and ACP tests are now independent of each other. Congress has removed the direction formerly found in 401(m)(9) to the IRS to promulgate regulations to prohibit the multiple use of the 200% limitation. I have purposely avoided explaining the test that was eliminated in celebration of the fact that I (and you) no longer need to know it.

12.9 Plan Loans to Owner-Employees, Sole Proprietors and S-Corporation Shareholders Now Permitted.[165]

Effective in 2002,[166] plan loans to owner-employees (certain partners), sole proprietors, and S-corporation shareholders are exempted from the prohibited transaction rules, if otherwise in compliance with the general exemptions allowed other types of employees. (Loans to an IRA owner are still prohibited and would disqualify the IRA.)

12.10 Changes to Multi-Employer Plan Rules.[167]

Reserved.

12.11 Employers Sponsoring 403(b) Plans Can Exclude Eligible Employees For Purposes of 401(k) Testing.[168]

In TRA ’86, nongovernmental tax-exempt employers were prohibited from sponsoring 401(k) plans. The 1996 SBJPA repealed this rule under a scheme that forced the employer to choose between a TSA (403(b) Plan) and a 401(k) plan. However, Treas. Reg. §1.410(b)-6(g) provided that, in testing under the nondiscrimination rules to a 401(k) & (m) plans, the employer could exclude employees who could not participate because of the prohibition against maintaining a 401(k) plan by tax-exempt employers, if over 95% of the employees who were eligible to participate in the 401(k) plan actually benefited from the plan for the plan year.

Effective for plan years beginning after December 31, 1996,[169] EGTRRA directs the IRS to modify Treas. Reg. §1.410(b)-6(g) to provide that employees of tax-exempt charitable organization who are eligible to make elective deferrals under a 403(b) plan (TSA) may be treated as excludable under 401(k) or (m), if—

“(1) no employee of an organization described in section 403(b)(1)(A)(i) of such Code is eligible to participate in such section 401(k) plan or section 401(m) plan; and

“(2) 95 percent of the employees who are not employees of an organization described in section 403(b)(1)(A)(i) of such Code [i.e., who are not employees of the tax exempt charity] are eligible to participate in such plan under such section 401(k) or (m).”[170]

12.12 IRC §402(f) Notice Expanded.

IRC §402(f) required the plan administrator of “eligible retirement plans” to provide a written explanation to the recipient, before making an eligible rollover distribution from an eligible retirement plan, of certain rights and tax consequences which attend the distribution, such as the right to make a rollover, and the tax consequences of failing to do so. Since EGTRRA changes many of the distribution rules, §402(f)(1)(E) was amended as well.[171]

The IRS has issued (post-EGTRRA) Notice 2000-11, 2000-6 IRB, which gives plan administrators a form of safe harbor form to satisfy the amended 402(f).

12.13 ERISA §204(h) Notice Provisions Amended.[172]

ERISA §204(h) presently requires notice of significant reductions in future benefit accruals. If the notice is not given within the strict guidelines provided by the statute, any amendment that purports to reduce future accruals will be ineffective. Effective for plan amendments made after June 7, 2001, EGTRRA 659(c)(1) replaces this harsh rule with an excise tax, but it also expands the notice provisions.

Under prior law, there was no penalty for failing to give the 204(h) notice, other than the fact that the amendment for which the notice was not given would be ineffective, which was penalty enough, in my opinion. The new law adds a $100 per day penalty for failure to give the notice.

The old law was found only in ERISA, and not in the IRC. EGTRRA not only amended 204(h) but added new §4980F:

Code Sec. 4980F. Failure of applicable plans reducing benefit accruals to satisfy notice requirements.

(a) Imposition of tax. There is hereby imposed a tax on the failure of any applicable pension plan to meet the requirements of subsection (e) with respect to any applicable individual.

(b) Amount of tax.

(1) In general. The amount of the tax imposed by subsection (a) on any failure with respect to any applicable individual shall be $100 for each day in the noncompliance period with respect to such failure.

(2) Noncompliance period. For purposes of this section, the term “noncompliance period” means, with respect to any failure, the period beginning on the date the failure first occurs and ending on the date the notice to which the failure relates is provided or the failure is otherwise corrected.

(c) Limitations on amount of tax.

(1) Tax not to apply where failure not discovered and reasonable diligence exercised. No tax shall be imposed by subsection (a) on any failure during any period for which it is established to the satisfaction of the Secretary that any person subject to liability for the tax under subsection (d) did not know that the failure existed and exercised reasonable diligence to meet the requirements of subsection (e).

(2) Tax not to apply to failures corrected within 30 days. No tax shall be imposed by subsection (a) on any failure if—

(A) any person subject to liability for the tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), and

(B) such person provides the notice described in subsection (e) during the 30-day period beginning on the first date such person knew, or exercising reasonable diligence would have known, that such failure existed.

(3) Overall limitation for unintentional failures.

(A) In general. If the person subject to liability for tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), the tax imposed by subsection (a) for failures during the taxable year of the employer (or, in the case of a multiemployer plan, the taxable year of the trust forming part of the plan) shall not exceed $500,000. For purposes of the preceding sentence, all multiemployer plans of which the same trust forms a part shall be treated as 1 plan.

(B) Taxable years in the case of certain controlled groups. For purposes of this paragraph, if all persons who are treated as a single employer for purposes of this section do not have the same taxable year, the taxable years taken into account shall be determined under principles similar to the principles of section 1561.

(4) Waiver by Secretary. In the case of a failure which is due to reasonable cause and not to willful neglect, the Secretary may waive part or all of the tax imposed by subsection (a) to the extent that the payment of such tax would be excessive or otherwise inequitable relative to the failure involved.

(d) Liability for tax. The following shall be liable for the tax imposed by subsection (a):

(1) In the case of a plan other than a multiemployer plan, the employer.

(2) In the case of a multiemployer plan, the plan.

(e) Notice requirements for plans significantly reducing benefit accruals.

(1) In general. If an applicable pension plan is amended to provide for a significant reduction in the rate of future benefit accrual, the plan administrator shall provide written notice to each applicable individual (and to each employee organization representing applicable individuals).

(2) Notice. The notice required by paragraph (1) shall be written in a manner calculated to be understood by the average plan participant and shall provide sufficient information (as determined in accordance with regulations prescribed by the Secretary) to allow applicable individuals to understand the effect of the plan amendment. The Secretary may provide a simplified form of notice for, or exempt from any notice requirement, a plan—

(A) which has fewer than 100 participants who have accrued a benefit under the plan, or

(B) which offers participants the option to choose between the new benefit formula and the old benefit formula.

(3) Timing of notice. Except as provided in regulations, the notice required by paragraph (1) shall be provided within a reasonable time before the effective date of the plan amendment.

(4) Designees. Any notice under paragraph (1) may be provided to a person designated, in writing, by the person to which it would otherwise be provided.

(5) Notice before adoption of amendment. A plan shall not be treated as failing to meet the requirements of paragraph (1) merely because notice is provided before the adoption of the plan amendment if no material modification of the amendment occurs before the amendment is adopted.

(f) Definitions and special rules. For purposes of this section—

(1) Applicable individual. The term “applicable individual” means, with respect to any plan amendment—

(A) each participant in the plan, and

(B) any beneficiary who is an alternate payee (within the meaning of section 414(p)(8)) under an applicable qualified domestic relations order (within the meaning of section 414(p)(1)(A)), whose rate of future benefit accrual under the plan may reasonably be expected to be significantly reduced by such plan amendment.

(2) Applicable pension plan. The term “applicable pension plan” means—

(A) any defined benefit plan, or

(B) an individual account plan which is subject to the funding standards of section 412.

Such term shall not include a governmental plan (within the meaning of section 414(d)) or a church plan (within the meaning of section 414(e)) with respect to which the election provided by section 410(d) has not been made.

(3) Early retirement. A plan amendment which eliminates or significantly reduces any early retirement benefit or retirement-type subsidy (within the meaning of section 411(d)(6)(B)(i)) shall be treated as having the effect of significantly reducing the rate of future benefit accrual.

(g) New technologies. The Secretary may by regulations allow any notice under subsection (e) to be provided by using new technologies.

12.14 User Fees Waived For The First Five Years For Small Employers.[173]

Effective in 2002,[174] EGTRRA prohibits the IRS from charging user fees for determination letters applied for by certain small employers who seek a ruling that a pension benefit plan is tax qualified during the first five years of a plan’s existence.

12.15 Self Employment Income is Taken Into Account Even if Religious Exemption Elected.[175]

Net earnings from self employment are used to determine allowable contributions and benefits under qualified and SIMPLE plans for the self-employed. IRC §1402(c)(6) has a special rule in this connection for self-employed members of certain religious sects (cults?) conscientiously opposed to social security benefits. The cross-reference scheme of prior law operated to exclude self-employment income for plan purposes in this one bizarre instance. EGTRRA fixes this problem, effective 2002.

ARTICLE 13
EGTRRA Model Amendments

In Notice 2001-57,[176] issued August 31, 2001, the IRS offered model amendments which an employer can adopt (if suitably modified and tailored) to conform a plan to some of the more important provisions of EGTRRA. This Notice, and Notice 2001-56 also offers guidance regarding the EGTRRA effective dates.

If an employer adopts the model amendments, or other “good faith” EGTRRA amendments, then the employer will be able to utilize a special remedial amendment period through 2004.

ARTICLE 14
Sunset [177]

Oh, by the way, everything mentioned above is designed to sunset automatically in 2011.

Sec. 901. SUNSET OF PROVISIONS OF ACT.

(a) IN GENERAL. All provisions of, and amendments made by, this Act shall not apply—

(1) to taxable, plan, or limitation years beginning after December 31, 2010, or

(2) in the case of title V, to estates of decedents dying, gifts made, or generation skipping transfers, after December 31, 2010.

(b) APPLICATION OF CERTAIN LAWS. The Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted. And the Senate agree to the same.[178]

[2] EGTRRA §§601(c), 611(i)(1), 615(b) and 632.

[5] All references herein to the “IRC” are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated.

[7] IRC §415(d)(4)(D). July 1, 2001 is the base quarter.

[10] IRC §404(h)(1)(C). EGTRRA §616(a)(1)(B).

[13] Under 415(b)(11), the percentage limit does not apply to governmental plans, and governmental and tax-exempt plans have a special form of the dollar limit, found in IRC §415(b)(2)(F).

[14]§415(d). EGTRRA §611(h). July 1, 2001 is the base quarter.

[20] EGTRRA §611(a)(5)(A). IRC §415(b)(2)(F).

[30] EGTRRA §611(f). IRC §408(p)(2)(A)(ii).

[36] IRC 415(h) has long provided: “For purposes of applying subsections (b) and (c) of section 414 to this section, the phrase “more than 50 percent” shall be substituted for the phrase “at least 80 percent” each place it appears in section 1563(a)(1).”

[39] IRC §219(b), as amended. EGTRRA §601(a).

[42] EGTRRA §632(a). IRC §§415(c)(4) and (c)(7).

[43] EGTRRA §632(b)(2)(A), effective for limitation years beginning after 1999.

[44] EGTRRA §632(a)(3)(E)). IRC §415(c)(4).

[49] IRC §404(a)(3)(A)(i)(I). EGTRRA §616(a)(1)(A).

[50] IRC §404(h)(1)(C). EGTRRA §616(a)(1)(B).

[65] IRC §411(a)(2), as amended by EGTRRA §633(a)(1). IRC §411(a)(12), as amended by EGTRRA §633(a)(2). ERISA §203(a)(4). All references herein to “ERISA” are to The Employee Retirement Income Security Act of 1974. ERISA as codified at 29 U.S.C. §1001, et seq., as amended, unless otherwise indicated.

[73] EGTRRA §644(a); IRC §402(c)(3). EGTRRA §644(b); IRC §408(d)(3).

[76] IRC §416(i)(1)(A). EGTRRA §613(a)(1)(A).

[83] IRC §416(g)(3)&(4). EGTRRA §613(c)(1)&(2).

[84] IRC §416(g)(3), as amended by 2001 Act §613(c)(1).

[87] IRC §412(c)(9). ERISA§302(c)(9). EGTRRA §661(a)&(b).

ARTICLE 1 Benefit and contribution Limits increased

1.1 Effective Dates Are For Years Beginning After 2001.[2]

1.2 415 Limits Increased.

1.2(a) Limitations Applicable Under 415(c) to Defined Contribution Plans.

1.2(a)(1) The 415(c)(1)(A) Dollar Limit is Now $40,000.[6]

1.2(a)(2) The 415(c) Defined Contribution Percentage Limit is Now 100%.[8]

1.2(a)(3) Contributions to SEP-IRAs Are Still Limited to 15% of Compensation.

1.2(b) The 415(b)(1)(A) Defined Benefit Dollar Limit is Now $160,000.[12]

1.2(b)(1) Changes Linked to Social Security Retirement Age.

1.2(b)(2) Guidance.

1.2(b)(3) Special Effective Date.

1.2(c) Special Rules Affecting Collectively Bargained Plans, Employees of Government and Tax Exempt Plans, etc.

1.3 Compensation Considered Under 401(a)(17) is Increased to $200,000.

1.4 Elective Deferral Limits Under 402(g) Increased.[28]

1.5 Increase in Allowable Benefits Under 457 Plans (Nonqualified Plans Maintained by Certain Tax Exempt and Governmental Entities).[31]

1.6 403(b) Plans.

1.6(a) Special Definition of Compensation.

1.6(b) 403(b) Annuity is Treated as a Defined Contribution Plan (DCP) Maintained by Employer Controlled by the Participant.

1.6(c) Contributions to a SEP Are Treated As an Employer Contribution to a Defined Contribution Plan (DCP).[37]

1.6(d) 403(b) Participants Participating in Defined Benefit Plans (DBPs).[38]

1.7 Changes Affecting Roth and Traditional IRAs.[39]

1.8 Changes Affecting Church Plans.[42]

1.9 Changes Affecting ESOPS.[46]

ARTICLE 2 Deduction Limits For Defined Contribution Plans Changed[47]

2.1 Effective Date is For Years Beginning After 2001.[48]

2.2 Overview and Comparison Between the Deduction Limits of 404 and the Limitation on Annual Additions Under 415(c).

2.3 Profit Sharing and Stock Bonus Plan Deduction Increased to 25% of Total Participant Compensation.

2.4 The Deduction For SEPs.

2.5 Money Purchase Plans No Longer Necessary to Reach 415 Limit.

2.6 All DCPs Are Now Subject to a Deduction Limit of 25% of Compensation.

2.7 Elective Deferrals Added to Compensation For Purposes of Computing Deduction Limits—Elective Deferrals Always Deductible.[53]

2.8 Compensation For Deduction Purposes Now Includes Pre-Disability Compensation.[55]

ARTICLE 3 The Catch-Up Rules - increased elective contributions For the AGE 50 and Over[56]

3.1 Effective Date is For Years Beginning After 2001.[57]

3.2 “Eligible Participants” in “Applicable Employer Plans” Can Make Increased Elective Deferrals Up to the Adjusted “Applicable Dollar Amount” in Effect for the Year.

3.2(a) Eligible Participant Defined.[58]

3.2(b) Applicable Employer Plan Defined.

3.2(c) Applicable Dollar Amount Defined.

3.2(d) Adjusted Applicable Amount.

3.3 The Additional Elective Deferrals Are Ignored in Computing Other Contribution Limits and in Applying Most of the Nondiscrimination Rules.

3.4 If Catch-Up Contributions are Allowed to be Made by Some, They Must be Allowed to Made by All.[62]

3.5 Matching Contributions for Catch-Up Elective Deferrals Are Permitted, But They are Subject to 414(m).

3.6 Special Rules For Governmental 457 Plans.

3.7 Special Rules For Traditional and Roth IRAs.

ARTICLE 4 Faster vesting for Matching contributions[65]

4.1 Effective Date is For Years Beginning After 2001.[66]

4.2 Matching Contributions Must Vest 100% in 3 Years or Under a 6 Year Graded Vesting Schedule.

ARTICLE 5 Hardship Distributions

5.1 Hardship Distribution Ineligible For Rollover.[69]

5.2 12 Month Moratorium on Elective Deferrals Following a Hardship Distribution is Lowered to 6 Months.[71]

5.3 Hardship Exception to the 60-Day Rollover Rule.[73]

ARTICLE 6 Top-Heavy Rule Changes[74]

6.1 Effective Date Begins in 2002.[75]

6.2 Definition of Key-Employee Changed.

6.2(a) Four Year Look-back Period Replaced by One Year Period.[76]

6.2(b) The Compensation Test Simplified.[77]

6.3 Frozen Top-Heavy Plans Now Exempt From the Minimum Benefit Requirement.

6.4 Certain Safe-Harbor 401(k) and 401(m) Plans Exempt From Top-Heavy Rules.

6.5 Matching Contributions Count as Top-Heavy Minimum Contributions.

6.6 The Rules for Determining the Present Value of Accrued Benefits for Top-Heavy Purposes Changed.[83]

ARTICLE 7 Special Rules Affecting Plans Subject To Minimum Funding (Dbps and mpps)

7.1 Annual Actuarial Valuation Requirement for DBP and MPPs Can be Satisfied Using Prior Year’s Valuation.[87]

7.2 Excise Tax on Nondeductible Employer Contributions to DBPs Modified.[90]

7.3 Defined Benefit Plans Can Now Deduct Unfunded Current Liability.[92]

7.3(a) Small Plans.

7.3(b) Terminating Plans.

7.4 Unfunded Current Liability Definition Changed; the Current Liability Full Funding Limit is Accelerated in 2002 and 2003 and Repealed Thereafter.[102]

ARTICLE 8 ESOP CHANGES

8.1 401(k) Plans Investing in Qualified Employer Securities.

8.2 Employer Deduction for Dividends on Employer Securities in an ESOP Where Participants Can Elect to Have Dividends Reinvested in Employer Stock.[106]

8.3 Allocations of Employer Stock in S-Corporation ESOPs to Disqualified Persons Owning More than 50% of Shares Are Subject to 50% Excise Tax.[107]

ARTICLE 9 Same Desk Rule eliminated

ARTICLE 10 Rollovers and Transfers

10.1 Eligible Rollover Distributions Defined.

10.2 Distributions Which Otherwise Qualify as Eligible Rollover Distributions Can Now Be Rolled Both To and From a Variety of “Eligible Retirement Plans.”

10.3 IRAs Can Now Be Rolled Into All Sorts of Plans Other than 401(a) Qualified Plans.[114]

10.4 Eligible Rollover Distributions From 403(b) Plans Can Be Rolled Over to Any Eligible Retirement Plan.[116]

10.5 403(b) Plans Can Receive Eligible Rollover Distributions From Other Eligible Retirement Plans.[117]

10.6 Distributions From Governmental 457 Plans Now Can Qualify as Eligible Rollover Distributions.[118]

10.7 New Rules Governing the Taxation of Rollovers to Non-IRAs.

ARTICLE 1
Benefit and contribution Limits increased

ARTICLE 2
Deduction Limits For Defined Contribution Plans Changed [47]

ARTICLE 3
The Catch-Up Rules - increased elective contributions For the AGE 50 and Over [56]

ARTICLE 4
Faster vesting for Matching contributions [65]

ARTICLE 5
Hardship Distributions

ARTICLE 6
Top-Heavy Rule Changes [74]

ARTICLE 7
Special Rules Affecting Plans Subject To Minimum Funding (Dbps and mpps)

ARTICLE 8
ESOP CHANGES

ARTICLE 9
Same Desk Rule eliminated

ARTICLE 10
Rollovers and Transfers

ARTICLE 11
EGTRRA Changes Affecting Only 457 Plans

ARTICLE 12
Miscellaneous Provisions

ARTICLE 13
EGTRRA Model Amendments

ARTICLE 14
Sunset [177]