Tax Reform - EGTRRA Pension Provisions Highlights

IRA Limits

Act 601

Current IRA contribution limit is $2,000. The phase-out range for joint filers for contributions to a Roth IRA is $150,000-$160,000. Conversions from a traditional IRA to a Roth IRA can only be made by joint filers with less than $100,000.

IRA Contribution Limit

IRA Catch Up

Act 601

No provision

IRA Catch Up

IRA Cost of Living

Act 601

No provision

Moved up in $500 increments effective 2008.

Deemed IRAs

Act 602

No provision

408(q) effective 2003. Non-ERISA IRA Payroll Deduction Plans.

Contribution and Benefit Limits

Act 611

401(a)(17): annual compensation taken into account limited to $170,000.

401(a)(17) compensation limit to $200,000, and then indexed in $5,000 increments.  

402(g): elective deferrals limited to $10,500 per year.

402(g) Elective Deferral Limits

415(b): maximum annual benefits are the lesser of 100% of three-year high salary or $140,000 (or less for pre-65 retirees).

415(b) annual benefit limit to $160,000, and then indexed in $5,000 increments. 

Age at which dollar limit applies without reduction; SSRA is age 65 - 67

Age at which dollar limit applies without reduction; the new SSRA is age 62 - 65.  Effective: limitation years that end in 2002.

415(c): maximum defined contribution plan contribution is the lesser of $35,000 or 25% of compensation.

415(c) contribution limit to $40,000, and then indexed in $1,000 increments.

457(b) contribution limit is generally $8,500 per year.

457 elective deferral limit to $15,000 over 5 years in $1000 increments and then indexed in $500 increments.

SIMPLE: maximum elective deferral is $6,500 per year.

SIMPLE Elective Deferral 

Participant Loans for Shareholder-Employees

Act 612

Prohibited

Prohibited transaction rules modified to allow for participant loans to sole proprietors, partners, and subchapter S corporation shareholders. Applies prospectively to preexisting loans.

Modification of Top-Heavy Rules

Act 613

A plan is generally considered "top heavy" if more than 60% of plan assets are held on behalf of "key employees."  Key employees generally are: officers earning over half the section 415 defined benefit plan dollar limit ($70,000 in 2001), 5% owners, 1% owners earning over $150,000, and the 10 employees with the largest ownership interest in the business (as long as they earn more than $30,000.)  Family members of 5% owners are deemed to be key employees.

Top-heavy plans must meet a special vesting schedule and make minimum contributions to all non-key employees to the extent contributions are made on behalf of key employees.

The “top 10 owner” rule

• Officer status requires the employee to earn more than $130,000. Eliminate the 4-year look back rule for identifying “key employees.”

• Matching contributions now count toward satisfying the top‑heavy minimums.

• The matching contribution 401(k) plan safe harbor now satisfies the top-heavy rules.

• The 5-year look-back rule applicable to distributions is shortened to one year. However, the 5-year look-back rule applies to in-service distributions.

• Frozen top-heavy defined benefit plans are no longer required to make minimum accruals on behalf of non-key employees.

Elective Deferrals and Deduction Limit

Act 614

Elective deferrals count against 404 deduction limits.

Elective deferrals are no longer considered employer contributions for purposes of section 404 deduction limits.

Repeal of Coordination Requirements for Section 457(b) Plans

Act 615

A maximum of $8,500 in compensation may be deferred per year in a 457(b) plan. This limit is generally reduced by elective deferrals under other types of arrangements. 

The section 457 limit on deferred compensation is not reduced by elective deferrals under other types of arrangements.

Elimination of IRS User Fee for Determination Letters

Act 620

Plan sponsors pay a user fee to the IRS to obtain a determination letter.

The IRS user fee is waived for any retirement plan maintained by an employer with 100 or less employees. 

Deduction Limits

Act 616

Profit-sharing plan cannot deduct contributions to the plan in excess of 15% of compensation. 

Deduction limit for profit-sharing plans increased to 25% of compensation.

Definition of Compensation

Act 616

For purposes of the deduction limits under section 404, compensation does not include elective deferrals.

For purposes of deduction limits under section 404, the definition of compensation includes elective deferrals. 

Roth 401(k) and 403(b) Plans

Act 617

No provision

Effective 2006, 401(k) and 403(b) plans can permit participants to elect a tax treatment for their deferrals similar to Roth IRA contributions. 

Tax Credits for Small Employer Plan Start Up Costs

Act 619

Employer costs related to the establishment and maintenance of a retirement plan are generally deductible as business expenses. 

Up to $500 credit for first 3 years of a new plan. Small Employer is defined by the SIMPLE IRA definition for small employer.

Tax Credit for Low Income Savers

Act 618

No provision

Tax credit of up to $2,000 (Section 25B) for IRA, 401(k), 403(b) & 457 plans.

Catch-up Contributions for Workers Age 50 and Older

Act 631

No provision

Plans may allow individuals who are age 50 or older would be allowed to make additional contributions to a 401(k), 403(b), 457 or SIMPLE. The catch-up contribution is not subject to nondiscrimination testing or deduction limits.

Repeal of 25% of Compensation Limitation

Act 632

Annual contributions to a defined contribution plan may not exceed the lesser of 25% of compensation or $35,000.

The 25% of compensation limitation under 415 (c)(1) replaced with 100% of compensation

Faster Vesting of Employer Matching Contributions

Act 633

Employer matching contributions must be fully vested after the employee has completed 5 years of service, or must become vested in increments of 20% for each year beginning with the third year of service, with full vesting after the employee has completed seven years of service.

Employer matching contributions have to be vested under a maximum 3-year cliff or 6-year graded vesting schedule. 

Simplification of Minimum Distribution Rules

Act 634

Section 401(a)(9) requires minimum distributions from retirement plans and IRAs at the later of age 70 ½ or retirement (except that deferral until retirement is not permitted with respect to IRAs and 5% owners).

Secretary of Treasury will modify life expectancy tables to reflect current life expectancy.

Clarification of Tax Treatment of Section 457 Plan Benefits Upon Divorce

Act 635

An active employee's benefit under a qualified plan may be paid to a former spouse.  QDRO rules do not apply to section 457(b) plans.

Distributions of section 457 plan benefits pursuant to a QDRO will now be taxed under the same rules applicable to qualified plans.

Safe Harbor 401(k) Plan Hardship Withdrawals

Act 636

To qualify for this safe harbor, a participant receiving a hardship distribution must be prohibited from making elective contributions to the plan for the 12 months following the date of distribution.

The 12 month period is reduced to 6 months.

Rollovers Between Difference Types of  Retirement Plans and IRAs

Act 641

An eligible rollover from a 401 plan may be rolled over by the employee into an eligible retirement plan within 60 days or directly rolled over to another 401 plan or an IRA.

An eligible rollover from a 403 plan may be rolled over by the employee into an eligible retirement plan within 60 days or directly rolled over to another 403 plan or an IRA.

Amounts rolled over from a 401 or 403(a) plan to a conduit IRA may later be rolled back to a 401 or 403(a) plan.

Please click here for a comprehensive chart which highlights the new rollover requirements.

Treatment of Forms of Distribution

Act 645

If a participant's benefits are transferred from one plan to another, the transferee plan must preserve all forms of distribution that were available under the transferor plan.

An employee may elect to transfer benefits from one plan to another without requiring the transferee plan to preserve optional forms of benefits if the following requirements are met:

• The transfer was a direct transfer.

• The transfer was authorized under the terms of both plans.

• The transfer was pursuant to a voluntary election by the participant.

• Spousal consent for the transfer, if required, was obtained.

• The participant could have elected a lump sum distribution.

Repeal of "Same Desk Rule"

Act 646

Under the "same desk rule", a distribution to a terminated employee is not allowed if the employee continues performing the same functions for a successor employer.  

The same desk rule is eliminated by replacing "separation from service" with "severance from employment."  

Purchase of Service Credit in Governmental Defined Benefit Plans

Act 647

State and local employees cannot use the money in their 403(b) or 457 plans to purchase service credits.

State and local government employees are able to use funds from their 403(b) arrangements or section 457 plans to purchase service credits under their defined benefit plans.

Employers May Disregard Rollovers for Purposes of Cash-Out Amounts

Act 648

Terminated participants benefits may be cashed out if the nonforfeitable account does not exceed $5,000.

Plans can ignore amounts attributable to rollovers when determining the cash-out amount.

Time of Inclusion of Benefits Under Section 457 Plans

Act 649

Amounts deferred under an eligible section 457 plan are includible in income when the amounts are paid or made available.  

Amounts deferred under 457 plan are includible in income when paid. Minimum distribution rules are satisfied as long as it satisfies the rules of section 401(a)(9).

Complete Repeal of 150% of Current Liability Funding Limit

Act 651

Contributions to a defined benefit plan that exceed 150% of current liability are not tax deductible.  This limit will phase up to 170% by 2005. 

The limit is phased-up in 5% increments beginning with the 2001 plan year. For plan years beginning after December 31, 2003, the current liability full funding limit would be completely repealed. Code section 404(a)(1)(D) will allow funding up to unfunded termination liability rather than unfunded current liability, and would be available to all plans regardless of size, provided the plan is covered by the PBGC. 

401(k) Investment in Employer Stock and Employer Real Property

Act 655

Section 1524 of the Taxpayer Relief Act of 1997 places limits on investment of salary deferrals in employer stock or employer real property

Provision is clarified as not applying to elective deferrals invested in real property before January 1, 1999. 

ESOP Dividends May be Reinvested Without Loss of Dividend Deductions

Act 662

Dividend deductions are allowed on dividends paid on employer stock to an unleveraged ESOP only if the dividends are paid to employees in cash.

Employer can deduct dividends paid to an ESOP when its employees are allowed to elect to take the dividends in cash or leave them in the plan for reinvestment in employer stock.

Repeal of Unnecessary Transition Rule

Act 663

The Tax Reform Act of 1986 modified the definition of highly compensated employee, but provided limited grandfather relief from these changes.  1996 legislation substantially changed the definition of HCE.

The special 1986 Act grandfather applicable to the definition of HCE is repealed.

Clarification of Employer-Provided Retirement Education

Act 665

Employer-provided retirement advice is not generally considered income to the employees, although some uncertainty exists.

Clarifies that retirement advice provided to employees on an individual basis would be a nontaxable fringe benefit to the extent such services are made available on substantially equivalent terms.

Repeal of the Multiple Use Test

Act 666

In addition to the ADP and ACP tests, 401(k) plans must also satisfy the multiple use test. 

The multiple use test is repealed.