EGTRRA Spells Pension RELIEF
Rev. 06/07/01

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was signed into law by President Bush on June 7, 2001. The following is a brief description of a "baker’s dozen" of the most significant changes this law makes to retirement plans.

Increased Employee Contribution limits for 401(k), 457, 403(b), SIMPLE plans.
The elective deferral limit for 401(k), 457, and 403(b) plans will increase from its current $10,500 to $11,000 in 2002 and increase annually thereafter in $1,000 increments to $15,000 by 2006. COLA increases after 2006 will be in $500 increments. Employees deferring to a SIMPLE plan will be able to contribute $7,000 starting in 2002 and the limit will increase in $1,000 annual increments to $10,000 by 2005. COLA increases thereafter will be in $500 increments.

Employees over age 50 get to play "catch-up". Employers may grant participants age 50 and over the right on a nondiscriminatory basis to make additional plan contributions that do not count against any plan limits starting in 2002. For example, an employee who contributes the legal maximum of $11,000 to a 401(k), 403(b) or 457 plan in 2002 may contribute an additional $1,000 pre-tax. This additional contribution limit will increase by $1,000 annually to $5,000 in 2006. SIMPLE plans may also provide similar "catch-up" contributions that increase in $500 increments through 2006. Greater annual contributions allowed in defined contribution plans.

415 Limitation Increases
The current $35,000 dollar limit on annual contributions to defined contribution plans will grow next year to $40,000. COLA increases in $1,000 multiples going forward.

In addition, the individual contribution limit is increased from 25% to 100% of the participant’s compensation. Greater annual benefits allowed in defined benefit plans. The current $140,000 limit will increase to $160,000 for plan years ending after December 31, 2001. COLA increases in $1,000 multiples going forward.

More compensation taken into account for retirement plan purposes. The plan compensation limit will grow from the current $170,000 to $200,000 in 2002. COLA increases will be in $5,000 multiples.

Roth 401(k) and 403(b) contributions may start in 2006.

Employer may amend plans to permit after-tax Roth contributions to 401(k) and 403(b) plans beginning after December 31, 2005.

Distributions may be taken tax-free if retained in the plan for five years and not withdrawn before age 59½.

Top Heavy "lite".
Most top heavy calculations will be based on the immediate plan year and the five-year look back period is abandoned for most purposes. The key employee classifications have been made simpler and compensation factors have been adjusted upward. In addition, Safe Harbor 401(k) plans that provide the prescribed matching contribution will also be exempt from the top-heavy requirements under certain circumstances.

Accelerated vesting for matching contributions.
The maximum allowable vesting schedules for matching contributions will only be three-year cliff vesting or 6 year graded. There is a delayed implementation deadline for union employees.

Portability becomes more of a reality and default rollovers for small amounts required. Rollovers between 401(k), 403(b), and 457 plans will now be permitted. In addition, mandatory cash-outs of amounts over $1,000 must rollover to an IRA or annuity in absence of a participant’s instruction. Also, rollovers of after-tax amounts will be permissible if separately accounted for. The return of the QVEC.

Deemed IRA
Starting in 2003 qualified plans, 403(b)s and 457s can be amended to allow an IRA-like contribution similar to the old qualified voluntary employee contribution (QVEC) that was permitted between 1982 and 1986.

Modified "same-desk rule" facilitates rollovers to new employer plans and IRAs.
As long as the seller ceases receiving services from transferred employees (and the buyer is not maintaining the seller’s 401(k) or 403(b) plan), transferred employees will be permitted to receive distributions or request direct rollovers from their old employer’s plan.

Increased IRA contribution limits and catch-up contributions. IRA contribution limits will increase from $2,000 to $3,000 in 2002 and increase gradually to $5,000 by 2008.

COLA increases after 2006 will be in $500 increments.
Individuals over 50 will be able to make an annual $500 catch-up contribution for 2002 through 2005 and $1,000 in 2006 and later years. However, there was no change in the rules for deductibility of contributions.

Hardships no longer considered an eligible rollover distribution.
Any hardship distribution made after December 31, 2001 will not be eligible for rollover treatment and therefore will not be subject to the 20% required withholding rules.