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Maximum Exclusion Allowance (MEA) is theoretically gone
Theoretically meaning in 10 years the sunset provisions will return the MEA calculation unless Congress passes a law to repeal the sunset provision. Providers of §403(b) recordkeeping services may want to consider if it wouldn't be better to do the MEA each year now, rather than 10 years from now trying to calculate the effect of the 10 MEA calculations all at once. Hopefully, like with funding for defined benefit plans, the IRS will issue guidance allowing us to disregard the MEA calculation.
Increase in elective deferral limit
The increase in the elective
deferral limit to $11,000 for 2002, $12,000 for 2003, $13,000 for 2004,
$14,000 for 2005,and $15,000 for 2006. Thereafter, the limit is subject to
COLA indexing in $500 increments.
Catch-Up Provisions
Pre-EGTRRA, only certain 403(b) participants with at least 15 years of service who had not been able to maximize their contributions could make a catch-up of up to $3000 a year with a lifetime maximum of $15,000. This provision still exists. In addition, catch up contributions for employees age 50 and older may be made as follows: $1,000 for 2002, $2,000 for 2003, $3,000 for 2004, $4,000 for 2005, $5,000 for 2006 with indexed COLA increases in $500 increments thereafter. The catch-up contribution is available only if it is allowed by the plan document or annuity contract.
Participants may make catch-up contributions throughout the year, even before hitting a statutory or plan limit. However, the regulations state that contributions are not characterized as catch-up contributions until the end of the year. Thus, a contribution could be designated as a catch-up contribution when initially made because it exceeded a limit as applied on a payroll basis, but it may ultimately be characterized as normal elective deferral at year-end, because no limit was actually exceeded. The IRS has also provided guidance on how to report elective deferral catch-up contributions. For 2002, employers will report participants' elective pension deferrals, including catch up amounts, on Form W-2 in box 12 using Codes D through H and S.
In order for all participants to have “Universal Availability” of the catch up provision, the IRS proposed regulations have stated that for 2002 catch-ups, all plans of the employer, which allow for pre-tax deferrals, must adopt catch up provisions by 10/01/02. There is only one $1000 catch up per individual for 2002, regardless of whether they participate in one or more plans.
The catch up provisions can be an attractive, valuable benefit especially as it grows in later years. In 2003 the catch up limit increases to $2,000, and it grows by an additional $1,000 each year until it reaches $5,000 in 2006.
The catch up limit is aggregated where an employer maintains two or more plans. Thus, if an employee participates in more than one plan maintained by the same employer, he or she can only make a maximum catch up contribution of $1,000 for 2002. Considering that EGTRRA contains a sunset provision that takes effect in ten years, plan sponsors should make a decision whether to permit catch-ups as soon as possible.
EGTRRA “Catch-Up” Provisions and State Tax Laws: Imperfect Together
At the time we were writing this newsletter considerable differences exist between the federal tax laws as amended by EGTRRA and state tax laws in the following states: Alabama, Arizona, Arkansas, California, Georgia, Hawaii, Idaho, Indiana, Iowa, Kentucky, Maine, Massachusetts, Minnesota, New Jersey, North Carolina, Pennsylvania, South Carolina, West Virginia and Wisconsin. Unless the non-conforming states amend their laws to coordinate with the federal law, catch-up contributions will be taxed as income at the state level. Employers, especially those operating in more than one state, may be unwilling to take on the increased administrative and record keeping burdens that will result. While it is hoped that these differences will eventually be reconciled, this may not happen immediately especially in light of current economic conditions. To the extent that an employer may have employees in any of the above states, the employer may want to delay amending their plans to permit catch up contributions because retirement plans must make catch-up contributions available on a uniform basis to all employees. Thus, it is not possible to offer a catch-up election only to employees in those states where the state and federal tax treatment is the same. Before implementing a catch-up provision it is essential to thoroughly evaluate its impact from both a tax and administrative perspective. It is important to note that a plan is not required to permit catch-up contributions.
Repeal of the Coordination of Participant Limits For Both 403(b) and a 457 Plans Was Intentional
Until 2002, individuals who participated in both a 403(b) arrangement and a Code Section 457 Plan deferred compensation plan were not allowed to make pre-tax contributions in excess of the lower Code Section 457 Plan limit ($8500 in 2001). EGTRRA changed federal law to discontinue coordination of the limits on pre-tax contributions to 403(b) and Code Section 457 Plans. Now an individual who simultaneously participates in both a 403(b) arrangement and a 457plan may contribute up to $11,000 to each plan this year. In a previous newsletter, we opined that it appeared that this appeared to be a drafting mistake that would require a technical correction to the tax law. We have since learned that the repeal of coordination was intentional and will not be the subject of a technical correction.
60 Day Rollover Rule Exceptions
In the past the IRS would offer sympathy, but little else to a taxpayer who was unable to affect a rollover within 60 days of a distribution from a retirement plan, even if the delay was not the fault of the taxpayer. The IRS contended that Congress had not provided the IRS to authority to grant relief in such situations. EGTRRA has come to the rescue, and the IRS is now empowered to grant exceptions to the 60-day rollover rule where events beyond the reasonable control of the individual, such as cases of casualty and disaster, caused the failure to meet the 60-day deadline.
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