FIS Relius
EGTRRA Technical Corrections 3/13/2002
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The Economic Stimulus Bill, officially titled the Job Creation and Worker Assistance Act of 2002 (JCWAA), signed by the President on March 9, 2002, included some temporary funding relief for defined benefit plans and technical corrections to EGTRRA.

Disregarding rollover contributions. EGTRRA included a provision that permits plans to disregard rollover contributions in applying the $5,000 threshold for cash-out distributions. However, the provision did not include a corresponding change to the joint and survivor annuity requirements. JCWAA extends the rule to plans subject to the joint and survivor annuity requirements. For example, assume an employee participating in a plan subject to the J&S requirements terminated employment with a vested account balance of $7,000 ($3,000 attributable to a rollover contribution). The plan could force out the distribution (however, the plan would have to provide the direct rollover notice) without the participant's or spouse's consent in a lump sum. Note: The IRS sample good faith EGTRRA amendment applied the provisions disregarding rollovers only to plans not subject to the J&S requirements.

SEPs. JCWAA made the following changes to SEPs: (1) increased the employee exclusion limit under Code §402(h) from 15% to 25%, thus permitting an employee to take advantage of the larger deduction and 415 limits enacted by EGTRRA (effective for 2002); (2) amended Code §404 to provide that employers sponsoring SEPs may use compensation grossed up for elective deferrals and that elective deferrals under SARSEPs are deductible without regard to the 25% limit; and (3) increased the $300 eligibility condition to $450. Because JCWAA was passed quickly Congress did not have time to develop a conference report. Accordingly, Senator Baucus, Chairman of the Senate Finance Committee, included with the bill a letter to the President expressing Congress's recommendation that the IRS use its authority under Code §408(l)(1) to require an annual report for SEPs. The reason for the recommendation is because of congressional and IRS concerns that some SEP plan sponsors are not complying with the contribution requirements for their employees.

Rollovers of after-tax employee contributions. JCWAA added an ordering rule for rollovers from a plan that includes after-tax employee contributions. Under this rule, if the participant rolls over a portion of a distribution that includes basis, either to an IRA or to a qualified plan (by a direct rollover) that separately accounts for the after-tax dollars, the participant and the receiving plan or IRA must treat the rollover as first consisting of the pre-tax dollars. The effect of this provision will permit an employee to strip out from the plan the after-tax employee contributions and roll over the pre-tax dollars. The rule minimizes the employee's income inclusion where there is a partial rollover of a distribution that includes after-tax dollars.

Catch-up contributions. The JWCAA added several provisions and made several clarifications to Code §414(v) to reflect positions taken in the proposed regulations: (1) catch-up contributions are excludible from an employee's gross income; (2) an employer aggregates plans of controlled group members in applying the limits; (3) the coverage transition period is applicable for purposes of the universal availability rule; (4) a plan determines whether an employee is age 50 or older on the basis of the taxable year and not the plan year; and (5) amendment to Code §457 to prevent an employee from taking advantage of the catch-up rule under Code §414(v) and the special 457 plan catch-up contribution rule.

Overlapping deduction limit. JCWAA clarifies that an employer maintaining a defined benefit plan and a 401(k) plan with elective deferrals only does not need to apply the overlapping plan limitation of Code §404(a)(7).

Anticutback relief for "pop-up" benefits. EGTRRA increased the 415 limits for defined benefit plans for limitation year ending after December 31, 2001. For some plans that incorporated Code §415 by reference, the increase in limits created unintended benefit increases ("pop-up" benefits) before the employer was able to amend the plan. JCWAA included an anticutback exception that permits an employer to amend its plan to reduce benefits to the pre-EGTRRA limit. The anticutback exception only applies if: (1) the employer adopts the amendment no later than June 30, 2002; (2) the plan incorporates the 415 limits by reference; and (3) the amendment may not be effective earlier than the EGTRRA effective date. Note: Plans that did not incorporate the 415 limits by reference can freeze benefits before adopting the EGTRRA 415 increases. Rev. Rul. 2001-51.

Defined benefit plan funding relief. JCWAA included a provision providing temporary relief for the additional funding requirements for large defined benefit plans with a funded current liability that is less than 90%. Small plans (plans with 100 or fewer participants on each day of the preceding year) are exempt from the additional fund requirements. The legislation was necessary because of Treasury's decision to cease issuing 30-year Treasury bonds. A defined benefit plan determines its current unfunded liability by using an interest rate within a range of a four-year weighted average of the 30-year Treasury bond rates. The current range is 90% to 105% of the weighted average. The rate has decreased because of Treasury's decision to stop issuing 30-year Treasury bonds. For 2002 and 2003, JCWAA increases temporarily the upper end of the range to 120%. The use of the larger interest rate will have the effect of reducing the plan's current liability. The change will not apply for purposes of calculating lump sum distributions or for purposes of determining the Code §415(b) limits for lump sum distributions. However, the temporary relief applies for purposes of calculating the PBGC variable premium rate. A plan may use 100% of the 30-year Treasury bond rate rather than 85%. This reduction will decrease the value of benefits, and therefore the premium.

Miscellaneous changes. JCWAA also made the following technical corrections to EGTRRA: (1) clarified that an employee could make an IRA contribution to an eligible governmental 457 plan; (2) amended ERISA to apply the administration and enforcement provisions to IRA contributions to retirement plans; (3) the DOL will apply ERISA to retirement plan IRA contributions in the same manner as it applies the rules to SEPs; (4) increased the ESOP distribution dollar thresholds; (5) the top heavy lookback rule is based on severance from employment rather than separation from service; (6) the tax credit for employee contributions is reduced for certain types of distributions; (7) the time period limitation for the tax credit for start-up costs is determined as of the effective date of the plan and not the establishment date; (8) clarified the special 415 limits for church plans; (9) amended the includible compensation definition for 457 plans to gross-up for elective deferrals; (10) clarified that the ERISA §204(h) notice does not have to be a written notice; (11) eliminated Code §403(b)(6) (this rule provided that amounts subject to vesting schedules were not treated as contributed until the amounts became vested); and (12) limiting the time period for determining 403(b) includible compensation for the most recent one year of service to the preceding five years.