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EGTRRA - Pension Reform Act of 2001 -
May 26, 2001: After almost five years of work, at around 1:00 p.m. today, the Congress finally passed pension reform. The title of this legislation is the "Economic Growth and Tax Relief Reconciliation Act of 2001 and is affectionately known as EGTRRA.."
Believe it or not, unless Congress makes it permanent, after December 31, 2010 the entire tax bill reverts to prior law. At this point no one is precisely sure how this will work as it has never happened before. This will certainly be the subject of some debate as time goes on. Therefore, our recommendation is to take advantage of it while you can.
Below is a quick summary of what this pension reform law will provide at least for the next nine years.
IRA Provisions:
1) IRA contribution limit is increased to $3,000 in 2002 through 2004; $4,000 in 2005 through 2007; and $5,000 in 2008, and then indexed in $500 increments.
2) IRA catch-up contribution for people age 50 and older. An additional contribution of $500 will be allowed in 2002 through 2005, and thereafter an additional $1,000.
3) The provision allowing tax-free rollovers from IRAs to charities was dropped.
4) Beginning in 2003, 401(k) plans will be permitted to facilitate IRA contributions on top of 401(k) contributions for those eligible employees.
Low Income Saver Credit:
The bill includes a tax credit for low income taxpayers who contribute to an IRA, 401(k), 403(b), or 457 plan. The tax credit can be as much as 50% on up to $2,000 of contributions. The contributions remain tax deductible even though a credit is also provided. This credit is effective in 2002 and sunsets at the end of 2006.
Qualified Plan Provisions:
1) Elective deferral limits in 401(k), 403(b), and 457 plans are increased to $11,000 in 2002, then increased $1,000 each year until $15,000 is reached in 2006. Thereafter, increases will be indexed in $500 increments.
2) SIMPLE plan limit is increased $1,000 each year beginning in 2002 until $10,000 is reached in 2005. Thereafter, increases will be indexed in $500 increments.
3) The annual compensation limit under 401(a)(17) (currently $170,000) is increased to $200,000 in 2002, and then indexed in $5,000 increments.
4) The Defined Benefit Plan maximum limit under 415(b) is increased to $160,000 in 2002 and then indexed in $5,000 increments.
5) There are no actuarial reductions in the limit in #3 for early retirements between ages 62 to 65.
#4 and #5 Example: Consider a 52 year old owner with an average compensation of over $160,000. Under current limits, his maximum lump sum at age 62 would be $1,173,812 with a contribution at 7% interest of $84,958. Under the new law, his maximum lump sum would be $1,788,667 with a contribution of $129,459.
6) The Defined Contribution Plan maximum annual additions limit under 415(c) is increased to $40,000 in 2002, and then indexed in $1,000 increments. (currently at $35,000 and was $30,000 in 2000.)
7) The 25% of compensation limit is increased to 100% of compensation in 2002.
#6 & #7 explained: currently, in a defined contribution plan such as a profit sharing or 401(k) plan, the maximum annual amount that a participant can receive in contributions (including employee deferrals and all employer contributions) and forfeitures is the lesser of $35,000 or 25% of his or her wages. Starting in 2002, this is increased to the lesser of $40,000 or 100% of his or her wages).
8) Plan loans for partners and Sub-S shareholders will be allowed beginning in 2002.
9) Beginning in 2002, the profit-sharing deduction limit will be increased to 25% (currently is 15%).
10) Beginning in 2002, elective deferrals can be excluded from the deduction limit.
#9 and #10 explained: currently, the employer's deduction limit is based on 15% of TAXABLE wages. Taxable wages are gross wages minus elective deferral contributions under a 401(k) plan and minus cafeteria plan contributions under a Section 125 plan. Starting in 2002, the limit will be based on gross wages with no offset for elective deferrals. It is not clear yet whether cafeteria plan contributions will be included in this change as well.
11) A qualified plan catch-up contribution for people age 50 and older. An additional contribution of $1,000 will be allowed in 2002. This amount is then increased each year by $1,000 until it reaches $5,000 in 2006. Thereafter, it will be indexed in $500 increments. These catch-up contributions are exempt from nondiscrimination testing.
12) A SIMPLE plan catch-up contribution for people age 50 and older. An additional contribution equal to 50% of the qualified plan provision in #11.
13) Top Heavy Provisions:
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5-year look back rule repealed; |
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the dollar threshold for officers is increased to $130,000; |
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matching contributions COUNT toward satisfying the top heavy minimum; |
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the matching safe harbor contribution will be deemed to satisfy top heavy; |
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frozen Defined Benefit plans will not have to make top heavy minimum contributions; |
14) Effective in 2002, portability provisions allowing rollovers between defined contribution vehicles without restrictions and allowing rollovers from IRAs to workplace retirement plans.
15) Roth 401(k) plans will be permitted beginning in 2006.
16) The maximum exclusion allowance for 403(b) plans is repealed in 2002.
17) The deferral limits between 401(k) plans and 457 plans are no longer coordinated beginning 2002.
18) New small employer plans (under 100 employees) will be exempt from having to pay a user fee for a determination letter.
19) The multiple use test in a 401(k) plan is repealed in 2002.
20) A tax credit of $500 for the start-up costs in a new small business retirement plan was added. It applies for the first three years of the plan.
21) The vesting schedule for matching contributions in a 401(k) plan must be at least as favorable as the 6-year graded schedule or the 3-year cliff schedule.
We have the expertise to determine the impact these new rules will have on your Plan
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