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EBP Retirement Plan Administration

EGTRRA AND OTHER IMPORTANT LEGISLATION
IMPACTING QUALIFIED PLANS BEGINNING IN 2002

Almost all of the EGTRRA changes are effective for years beginning after December 31, 2001. While many of the changes are not mandatory, if you choose to implement an optional provision of EGTRRA, you will have to amend your Plan to conform plan provisions to plan operation.

EGTRRA made numerous beneficial changes for plan sponsors to take advantage of in redesigning their retirement plans. The following changes: increased compensation limit, less restrictive top-heavy rules, more liberal vesting of the employer match, increased 415 limits; could have a dramatic impact on your plan design. However, in order to take advantage of these changes without violating the anti-cutback rules, "EGTRRA" must be adopted before a participant has accrued a benefit or met the conditions for sharing in an allocation.

When should EGTRRA be adopted?

How could increasing the Compensation Limit, or faster Vesting cause a cutback in benefits?

If I have a Defined Benefit Plan, how will EGTRRA impact my plan?

What are Catch-up Contributions and how do they apply to my Plan?

What is the Saverís Credit?

What are the new rules regarding the minimum Fidelity Bond requirements for Plan Years beginning after 4/17/2001?

How Will the New Minimum Required Distributions Rules Impact My Plan?



When should EGTRRA be adopted?
In order to avoid an inadvertent cutback in benefits, plans choosing to adopt these provisions should adopt an amendment:

PRIOR TO 1/1/2002: If your plan has no hours requirement

PRIOR TO PARTICIPANTS ACCRUING 501 HOURS: If your a plan has a 501 hours of service/ termination prior to the last day of the plan year condition,

PRIOR TO PARTICIPANTS ACCRUING 1000 HOURS: For a plan with a 1000 hours but not a last day of employment condition.

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How could increasing the Compensation Limit, or faster Vesting cause a cutback in benefits?

INCREASING THE COMPENSATION LIMIT: If a Profit Sharing/ 401(k) Plan is amended to take into account the increase in the annual compensation limit to $200,000, then depending upon the plan, itís possible some participants will receive a smaller share of any employer contribution. For example, if a profit sharing plan allocates contributions pro-rata based on compensation, then increasing the amount of compensation taken into account for some participants will reduce the share of the contribution allocated to the other participants. If the amendment to increase the compensation limit is made after some participants have earned the right to share under the allocation formula, then the informal IRS position is that the amendment cannot be made for that year.

401(K) PLANS - FASTER VESTING FOR MATCHING CONTRIBUTIONS: Changing your current employer matching vesting schedule in addition to the vesting that must be applied to 2002 employer matching contributions may result in a cutback of benefits. For example, changing to a more liberal vesting schedule (e.g., from a 7 year graded schedule to a 6 year graded schedule) will reduce the amount of forfeitures to be allocated for a year. Reducing the amount of forfeitures to be allocated after a participant has earned the right to share in those forfeitures could be construed as a prohibited cutback of benefits.

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If I have a Defined Benefit Plan, how will EGTRRA impact my plan?

Yes. If you have previously been limited by the old compensation or maximum benefit limits, then adopting the new limits may provide you with increased benefits and funding, which may or may not be desired. Furthermore, if you are currently at the maximum limits and you have other employees participating in your Plan, it may be possible to redesign the formula to lower benefits to those employees while still providing you with the same level of benefits ADDITIONALLY, EFFECTIVE FOR PLAN YEARS BEGINNING AFTER DECEMBER 31, 2001, THE COMPENSATION LIMIT MAY BE INCREASED FROM THE PRESENT LIMIT OF $170,000 TO $200,000 IF YOUR PLAN IS AMENDED FOR EGTRRA.

Finally, EGTRRA made numerous changes to the top-heavy rules. If your Plan is no longer top-heavy under the new rules, you may want to amend your Plan for the new top-heavy rules before a Participant accrues a top-heavy benefit under the defined benefit plan.

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What are Catch-up Contributions and how do they apply to my Plan?

Participants who are otherwise eligible to defer under a plan and who are at least age 50 by the end of the year can make catch-up contributions. Catch-up contributions are defined as elective contributions that exceed an "applicable limit," are designated as catch-up contributions by the plan, and do not exceed the catch-up contribution limit ($1000 for tax years beginning in 2002, increased by $1000 each year to $5,000 in 2006.) The applicable limits are the 402(g), maximum annual additions and to reduce the distribution amount due to a failed ADP test (if they have not already made a catch-up contribution. These catch-up contributions are not included in the ADP test. The employer is permitted but not required to make matching contributions on the catch-up contributions although they will be included in the ACP test. These contributions are permitted in 401(k) plans, 403(b) annuities, SIMPLE plans, SAR-SEPs and 457 plans. All plans of the controlled group must elect the catch-up contribution. WE WILL ASSUME THAT THIS PROVISION BE STIPULATED IN YOUR PLAN RESTATEMENT, UNLESS YOU TELL US OTHERWISE.

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What is the Saverís Credit?

For tax years starting after 2001 and before 2007, a new law provides a nonrefundable tax credit (i.e., a direct offset against tax) for a portion of contributions made to qualifying retirement accounts by eligible individuals age 18 or older (except full-time students or dependents claimed on anotherís return).

Qualifying contributions include elective contributions to 401(k), 403(b), and 457 plans, SIMPLE and salary reduction Simplified Employee Pension (SAR-SEP) plans, and contributions to traditional or Roth IRAís, as well as voluntary after-tax contributions to tax-qualified plans. The credit is allowed in addition to any deduction or exclusion that otherwise applies to the contribution.

The maximum annual contribution eligible for the credit is $2,000. The credit percentage rate ranges from 0% to 50% and depends on the adjusted gross income of the taxpayer.

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What are the new rules regarding the minimum Fidelity Bond requirements for Plan Years beginning after 4/17/2001?

Almost all plans have had Fidelity Bond Requirements, however, the new rules require additional coverage for some plans before, January 1, 2002, in order to avoid an independent accountant to audit the plan. Not many plans will be affected, however read this to see if your plan must obtain the additional coverage:

For plan years that begin after 4/17/2001, small plans (fewer than 100 participants at the beginning of the plan year) are required to engage an independent accountant to audit the plan. This new regulation is intended to increase the security of assets in small pension plans. The audit requirement is waived for a plan year when at least 95% of the assets of the plan are "qualifying", OR so long as any person who handles assets that are not "Qualifying" are covered by an increased fidelity bond. The increased bond amount must be at least 10% of the value of the qualifying assets + the full value of the non-qualifying assets. Another requirement for the waiver is that additional bond and asset information needs to be disclosed on the Summary Annual Report.

Qualifying assets include employer securities, participant loans, assets held by banks, insurance companies, broker-dealers, and mutual funds, and assets in an individual account which the participant has the opportunity to exercise control and in which the participant gets at least 1 statement a year.

The increased bond MUST be in place before January 1, 2002 for calendar year plans. Please call your consultant if you do not have a bond, or you feel your plan will need the increased bond to waive the plan audit requirement.

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How Will the New Minimum Required Distributions Rules Impact My Plan?

New proposed Minimum Required Distribution Regulations under IRC ß401(a)(9) appear to make these distributions simpler and more favorable to the participant. Under the new rules, the beneficiary designation is irrelevant during the participantís life. Starting in 2001, a plan may elect to apply the new rules in these proposed regulations, even for years beginning before the publication of final regulations. However, to use these rules, a plan must adopt a model amendment, which is set forth in the proposed regulations. The model amendment may be effective as of January 1, 2001, or as of any later January 1. If the model amendment is not adopted, the plan must continue to follow the rules in the 1987 proposed regulations.

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Friday, July 03, 2015 05:21 PM

 

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