Sun Shines on EGTRRA
Rev. 08/17/06, E-mail Alert 2006-17

Pension Protection Act of 2006 (PPA) Keeps the EGTRRA Sun Shining

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) overhauled many retirement plan and Individual Retirement Account (IRA) rules. Thanks to PPA, the EGTRRA rules became permanent and will not sunset on the last day of December 2010. Some of the rules that EGTRRA brought us that are here to stay follow:

Greater Participant Contribution Opportunities

• Higher maximum annual salary deferrals to 401(k) salary deferral plans, 403(b) tax sheltered annuity plans, and 457 deferred compensation plans;
  
• Increased IRA contribution limits;
  
• Allowance of Roth-type contributions to 401(k) and 403(b) plans;
  
• Additional qualified plan and IRA contributions (“catch-up contributions”) for those individuals age 50 or older; and
  
• A tax credit for lower-income individuals who save for retirement (the so-called “Saver’s Credit”), now made permanent by PPA instead of expiring at the end of 2006.
  

General Retirement Plan Improvements

• Exclusion of elective deferrals from the deduction limit, which resulted in
  an increase of the percentage level of deferrals that may be made to a 401(k) plan;
  the creation of the solo-401(k);
  creating the demand for the Defined Benefit and 401(k) combination plan authorized by PPA.


• Compensation cap increase for qualified plans starting at $200,000 with COLA rather than $150,000 with COLA.


• Profit sharing plan deduction limit increase to 25%; eliminating the need to also have a money purchase plan.


• Exemption of safe harbor 401(k) plans with only permitted safe harbor contributions from the top-heavy rules.


• Reduction of the look back period for a top-heavy plan test to one-year.


• Authorization of participant loans for sole proprietors and partners.


• Waiver of user fees for new plans for entities with less than 100 employees.


• Direct rollover of after tax and increased portability between retirement plans, which permitted:
  traditional IRAs to be rolled into qualified plans.
  the direct rollover of after tax contributions.
  portability among qualified plans, 403(b) plans and 457(b) plans


• Substitution of the severance from employment rules for the same desk rule, which eased distributions due to corporate reorganizations.


• Elimination of the aggregate limit (aka multiple use test) for ADP/ACP testing.


• Elimination of the maximum exclusion allowance (MEA) calculation for 403(b) plans.
  

Bill Grossman, QPA