The recently passed tax bill, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), made many sweeping changes to the tax laws. In addition to lowering marginal tax rates, repealing the estate tax, and making many other important tax law changes, the bill made very significant modifications to the rules affecting qualified plans and IRAs. These retirement law amendments are particularly noteworthy because most take effect in 2002, unlike many other tax law changes in EGTRRA that have delayed effective dates. As a result, retirement plan professionals need to immediately acquaint themselves with the new rules to properly advise their clients in the weeks and months ahead.

What follows is a brief summary highlighting the most important pension and retirement arrangement changes.

Increased Contribution and Benefit Limits

• 401(k) contribution limit will be increased to $15,000 beginning with a $500 jump next year and $1,000 increases for each of the next four years.

• Defined Contribution 415 limit will be increased to the lesser of $40,000 or 100% of compensation, effective next year.

• Defined Benefit 415 limit will be increased to $160,000 for limitation years ENDING after December 31, 2001, and the dollar limit need only be actuarially reduced for benefits commencing before age 62 (rather than the Social Security retirement age).

• 401(a)(17) Compensation limit will be increased to $200,000, effective next year.

• Simple 401(k) limit will be increased by $1,000 per year, beginning next year and continuing until it reaches $10,000 in 2005.

• Individual Retirement Account contribution limit will be increased to $3,000 per year for 2002-2004, $4,000 for 2005-2007, and $5,000 per year for 2008 and thereafter.

• "Catch-up" Contributions: Individuals age 50 and older will be permitted to make additional contributions (above the normal limits) to 401(k) plans and IRAs as follows:

  YEAR	401(k) CATCH-UP	IRA CATCH-UP
  2002	$1,000	$500
  2003	$2,000	$500
  2004	$3,000	$500
  2005	$4,000	$500
  2006 and thereafter	$5,000	$1,000

• Profit sharing plans (including 401(k) plans) will have an increased deduction limit for employer contributions equal to 25% of compensation.

• Employee elective deferrals to a 401(k) plan will be deductible in addition to the employer contribution 25% limit.

• Compensation for deduction purposes will no longer be reduced for employee elective deferrals to a 401(k) plan or Section 125 cafeteria plan.

• The "Multiple Use Test" applicable to 401(k) plans with matching contributions is repealed.

• The "Same Desk Rule" is repealed and replaced with a "severance from employment" standard.

• The IRS is directed to the rewrite 401(k) safe harbor hardship distribution regulations to require only a six-month suspension of participation for employees who receive hardship distributions.

• Matching contributions will be required to vest under a faster vesting schedule (i.e., either 3-year cliff or 6-year graded).

• Participants may elect "Roth IRA" treatment for elective contributions so that if certain requirements are satisfied, elective contributions may be made on an after-tax basis, and as a result, allocable earnings (and contributions) may be withdrawn tax free. This change is effective in 2006.

• "Key Employee" status will be based on the determination year without regard to the four-year look-back period applicable under present law.

• The "Officer" category of "Key Employee" will require minimum compensation of $130,000 (rather than the current $70,000 threshold) and the top ten owner rule will be repealed.

• The add-back of distributions made within five years of the determination date will be shortened to a one year add back, except for in-service distributions.

• A 401(k)(12) safe harbor plan which consists solely of contributions which satisfy the design-based safe harbors for matching and/or nonelective contributions will be deemed to be a non-top heavy plan.

• Matching contributions may be used to satisfy the top heavy minimum contribution obligation for non-key employees and still be treated as matching contributions which are tested under the ACP test of IRC 401(m).

• "Frozen" defined benefit plans will not be required to provide minimum accruals for non-key employees.

• Rollovers among the various types of retirement arrangements (i.e., qualified retirement plans, Section 403(b) annuities, and governmental Section 457 plans) will now be permitted, subject, in some cases, to new special rules.

• After-tax employee contributions will also be permitted to be included in a rollover.

• The IRS will be given greater authority to waive the 60-day rollover period requirement if the failure to waive would be against equity and good conscience.

• For purposes of the involuntary cash-out rules, a plan will be permitted to disregard rollover contributions (and allocable earnings) in determining whether a participant's nonforfeitable accrued benefit equals or exceeds $5,000.

• Involuntary cash-outs that exceed $1,000 and are eligible rollover distributions will be required to be rolled over automatically to an employer-designated IRA, unless the participant affirmatively elects cash or a different recipient for a direct transfer. The DOL is to issue regulations (within three years) allowing for safe harbor IRA investments which will satisfy the fiduciary duty rules of ERISA, and thereby relieve plan officials from any further responsibility. These mandatory IRA rollovers will only be required after the DOL has adopted final regulations.

• IRS User Fees for determination letter requests will be waived for plan sponsors with 100 or fewer employees, but only during the first five plan years (or the end of the then applicable remedial amendment period, if longer). This is effective for determination letter applications submitted after December 31, 2001.

• For a new plan, a tax credit equal to 50% of the administrative and retirement education expenses incurred by a small employer (i.e., 100 or fewer employees who had compensation in excess of $5,000 in the preceding year). The credit of 50% applies to the first $1,000 in expenses for each of the first three plan years. The credit is available for expenses paid or incurred in tax years beginning after December 31, 2001 with respect to plans established after that date.

For greater detail on these changes, and practical advice on how to apply them, join Craig Hoffman and Stephen Forbes for our Web seminar on the new law.