Source: http://stromata.tripod.com/id146.htm
Timestamp: 2013-05-22 03:17:07
Document Index: 800459846

Matched Legal Cases: ['§457', '§403', '§457', '§457', '§127', '§132', '§162', '§127', '§401', '§401', '§401', '§401', '§401', '§401', '§403', '§457', '§401', '§403', '§457', '§401', '§403', '§415', '§401', '§403', '§403', '§415', '§415', '§403', '§403', '§457', '§403', '§403', '§404', '§204', '§401', '§125', '§132', '§404', '§404', '§415', '§401', '§404', '§403', '§457', '§404', '§403', '§457', '§4979', '§512', '§401', '§410', '§401', '§401', '§401', '§401', '§403', '§410', '§401', '§417', '§411', '§457', '§457', '§457', '§415', '§415', '§415', '§403', '§415', '§403', '§415', '§415', '§403', '§403', '§415', '§403', '§415', '§415', '§403', '§415', '§401', '§416', '§79', '§125', '§419', '§401', '§401', '§404', '§481', '§457', '§457', '§457', '§402', '§457', '§457', '§401', '§403', '§457', '§457', '§457', '§401', '§403', '§457', '§457', '§402', '§403', '§457', '§457', '§402', '§457', '§457', '§403', '§4972', '§404', '§4972', '§204', '§204', '§204', '§415', '§415', '§402', '§402', '§401', '§457', '§457', '§457', '§457', '§457', '§408', '§219', '§415']

Summary of EGTRRA Employee Benefits Provisions Stromata Stromata Blog
Summary of EGTRRA Employee Benefits Provisions | "Following the Terms of the Plan" | Sales of Stock Options to Family Limited Partnerships: Caveats | Light Through the Glass | Section 410(b): A Cascading Case Study
Summary of EGTRRA Employee Benefits Provisions
Summary of Employee Benefits Provisions
Code Sec.
Act Sec.
What Needs to Be Done/Comments
25B [new]
Individuals with AGI of less than $25,000 ($50,000 for joint return filers, $37,500 for heads of household) receive a nonrefundable tax credit for elective deferrals or IRA contributions up to $2,000. The credit starts at 50% and phases out rapidly.
Effective for calendar years beginning after 12/31/01. Expires at the end of 2006.
Another petty income transfer that implicitly increases marginal tax rates for low-income households.
45E [new]
Companies with fewer than 100 employees receive a 50% tax credit (to a maximum of $500) for costs of establishing a qualified, SIMPLE or SEP plan. The credit is available for the year of startup and the next two years. The plan must have at least one NHCE participant.
Effective for tax years beginning after 12/31/01.
72(t)(9) [new]
641(a)
Premature distributions from rollover accounts under state and local government §457(b) plans are subject to excise tax if they would have been subject to tax upon direct distribution from the transferor plan.
Effective for distributions made after 12/31/01.
This technical change prevents participants in qualified and §403(b) plans from evading the excise tax on premature distributions by using a §457(b) plan as a conduit. Amounts accumulated under §457(b) plans remain exempt from the tax.
Exclusion of employer-provided tuition assistance is made permanent and extended to graduate level courses
Effective for expenses of courses that begin after 12/31/01
Amend §127 to include graduate course work.
Reimbursement of expenses of job-related courses is generally possible under §132/§162. The advantage of using a §127 plan is that it avoids need to delve into what is or is not job-related and can cover programs that qualify the employee for new profession (e. g., work toward law degree). Disadvantages are the $5,250 unindexed cap and �nondiscrimination� standards.
The value of retirement planning advice and information provided by employers on a nondiscriminatory basis is not includible in taxable income.
This clarifying provision removes a mostly theoretical concern. It may be possible to set up salary reduction programs under which employees can pay for individualized retirement counseling with pre-tax dollars, though nondiscrimination rules are an obstacle.
219(b)
IRA contribution limits are increased and indexed. Taxpayers over age 49 allowed to make additional contributions. See table of revised limitations for details.
Increase deductible, nondeductible or Roth IRA contributions.
The new limits apply to both traditional and Roth IRA�s.
The IRS is directed to adopt a new mortality table for minimum distribution and other purposes reflecting current life expectancy.
No effective date specified.
The IRS specifically declined to adopt an updated table when it issued the amended §401(a)(9) proposed regulations.
401(a)(11)
In determining whether the value of a participant�s benefit is $5,000 or less (and thus eligible for mandatory cashout), rollover accounts are disregarded.
Clarify plan documents to the extent necessary.
This change conforms the law to what has probably been the practice of most employers.
611(c)
The cap on compensation that plans may take into account is raised to $200,000, indexed in $5,000 increments (down from $10,000 increments).
Effective for plan years beginning after 12/31/01.
Amend plans to specify new limit if it is not incorporated by reference.
This increase indirectly liberalizes all �nondiscrimination� tests for plans with participants who earn over $160,000 a year.
401(a)(31)
The default form of distribution for mandatory cashouts in excess of $1,000 is a direct rollover to an IRA. In the absence of an election by the participant, the plan administrator is responsible for selecting the IRA custodian and dealing with the requisite paperwork.
Effective for distributions made after issuance of implementing regulations.
Amend plan documents and procedures.
Default direct rollovers, which the IRS already permits, are a useful option for distributing benefits to participants who cannot be located. Otherwise, this provision is an administrative nuisance.
401(k)(2)(B)
Distributions of §401(k) elective deferrals and attributable income may be made upon any �severance from employment�.
Although neither the statute nor the legislative history defines �severance from employment�, the evident intent is to allow distributions whenever employees leave the plan sponsor�s controlled group due to sale of assets or of a subsidiary. The best course of action in most cases will be to retain present plan language (stating that distributions will be made on �separation from service�) and to amend appropriately when distributions are desired in a particular transaction. Transferring account balances to the buyer�s plan is often preferable to making distributions merely because the employer has a new owner.
636(a)
The IRS is directed to amend the §401(k) safe harbor hardship distribution regulations to provide that recipients of hardship distributions are precluded from making elective deferrals for only 6, rather than the present 12, months.
The amended regulation is to be effective for distributions made after 12/31/01.
Begin operating plans in accordance with the rule stated in the statute. Plan amendments should be delayed until regulations are adopted.
Since plans are permitted to impose more stringent rules than the safe harbor, employers are not required to make this change.
The IRS�s authority to prescribe regulations preventing multiple use of the ADP and ACP test 2% corridors is withdrawn.
Revise §401(k)/(m) testing procedures.
Ironically, some confused recordkeepers have been treating the multiple use test as an additional way to satisfy §401(k) and (m) when the plan fails the regular tests, rather than as a further limitation to be applied when the regular tests are satisfied. These folks will be dismayed by the new law.
402(a)
641(f), 642(c)
Grandfathered 10-year averaging for participants born before 1/1/36 is denied to amounts that have been rolled into qualified plans from any vehicle other than a qualified plan.
Effective with the new rollover provisions.
This technical change prevents participants from gaining favorable tax treatment for accumulations under non-§401(a) plans by rolling them into a qualified plan. No attempt has been made to prevent participants from investing rollovers in employer stock and later taking advantage of the exclusion of net unrealized appreciation.
402(c)
641(a), 641(b)
Distributions from qualified plans may be rolled into §403(b) or state/local government §457( b) plans.
Amend plans to reflect new rules.
This and other provisions of the new law vastly expand rollover opportunities. As before, no plan ever has an obligation to accept rollovers.
402(c)(2)
After-tax contributions to qualified plans may be rolled into qualified defined contribution plans (via trustee-to-trustee transfer only) or IRA�s.
Due to recordkeeping burdens, many plans may prefer not to accept after-tax transfers.
A separate account within a defined benefit plan is a defined contribution plan.
There is no mechanism for rolling after-tax contributions that were transferred into an IRA back into a qualified plan.
402(c)(3)
644(a)
The IRS is given the authority to grant hardship waivers of the requirement that rollovers be made within 60 days after receipt of the distribution.
Taxpayers who wish to seek waivers should request private letter rulings.
402(c)(4)
636(b)
Distributions on account of hardship are not eligible rollover distributions.
Consider adding hardship withdrawal provisions to plans that currently permit in-service withdrawals.
Under prior law, hardship distributions from §401(k) plans were not eligible for rollover. Now hardship distributions from other types of plan will receive comparable treatment. The effect is to exempt distributions from mandatory withholding, so that funds needed to meet a hardship are not diminished by taxes taken off the top. Where a plan already allows elective in-service distributions (e. g., after age 59½), participants will benefit from an alternative hardship provision, particularly if they withdraw funds to meet very large medical expenses. On the other hand, hardship determinations are an additional administrative burden that many employers will not want to shoulder.
402(c)(9)
641(d)
Surviving spouses may roll distributions into qualified plans, §403(b) plans or state/local government §457(b) plans, as well as into IRA�s.
As before, death beneficiaries other than surviving spouses may not roll over distributions. Their only tax-saving opportunity is 10-year averaging, available if the deceased participant was born before 1/1/36. 402(f)
641(c)
The tax notice requirement for eligible rollover distributions is expanded to reflect the liberalized rollover rules.
Prepare notices for plans that have not been required to furnish them in the past.
The IRS will presumably issue a standard notice incorporating the new rules before they become effective.
611(d), 631
Limits on elective deferrals under §401(k) and §403(b) plans are increased. Taxpayers over age 49 are allowed to make additional contributions. See table of revised limitations for details.
Amend plans to permit catch-up contributions by older participants.
Plans do not have to provide for catch-ups, but they must allow them for all over-age-49 participants if they are allowed for anyone. Catch-up contributions are exempt from §415. They apparently are included in ADP testing if made by NHCE�s, excluded if made by HCE�s. (Thus accepting them cannot adversely affect ADP results.)
§401(k) plans may permit participants to make nonexcludible elective deferrals (�Roth deferrals�). Distributions of these deferrals and attributable income will be tax-free if the same conditions are met as apply to Roth IRA distributions.
Effective for calendar years beginning after 12/31/05.
Too far away to worry about.
While this option will be attractive to participants who make maximum deferrals, it will impose additional recordkeeping costs on plan sponsors and is not likely to be widely utilized by employees.
403(b)(2) [repealed]
632(a), 632(b)
The §403(b) maximum exclusion allowance is repealed. For years 1999 through 2001, the allowance may be computed without regard to defined benefit plan accruals.
Amend plans to delete exclusion allowance provisions.
In the past, the exclusion allowance limited employees� ability to take advantage of the nonaggregation of qualified plan and §403(b) plan limitations under §415.
403(b)(3)
632(a)
The definition of �includible compensation� is amended to exclude any amounts earned more than 5 years previously by an individual who has terminated employment.
Effective for limitation years beginning after 12/31/01.
Amend plans to reflect amended definition.
This change coordinates with the use of �includible compensation� in §415. Without it, a former employee could continue receiving §403(b) contributions forever.
403(b)(8)
641(b)
Distributions from §403(b) plans may be rolled into qualified plans and state/local government §457(b) plans. (Rollovers to other §403(b) plans and to IRA�s are already permitted.)
403(b)(13) [new]
647(a)
Trustee-to-trustee transfers from §403(b) plans to governmental defined benefit plans are excluded from taxable income if the transfer is used to purchase past service credit under the transferee plan.
Effective for transfers after 12/31/01.
IRS rulings allow similar transfers from qualified plans to governmental plans.
404(a)(1)(D)
Contributions to defined benefit plans are fully deductible up to the plan�s unfunded current liability, regardless of other limitations. If the plan terminates during the year and is subject to Title IV of ERISA, the deduction limit is the amount required to make plan assets sufficient for all benefit liabilities. In calculating unfunded or standard termination liability, a plan with 100 or fewer participants may not include benefits accrued by HCE�s under plan amendments adopted within the preceding two years.
The unfunded current liability limit was previously available only for plans with more than 100 participants, and it was possible for an employer to be required to make contributions to a terminating plan in excess of the §404(a)(1) limits (which then had to be deducted over the following 10 years).
The legislative history states that only plans with PBGC insurance coverage are to be entitled to the increased deduction limits, but the actual text applies that restriction only to the deduction of contributions to terminating plans. The omission from the unfunded current liability provision is probably a typographical error.
404(a)(3)
616(a)
The deduction limit for profit sharing and stock bonus plans is increased to 25% of participants� aggregate compensation and is made applicable to money purchase pension plans. (The IRS may by regulation increase the limit for money purchase plans.)
Money purchase pension plans should be converted into profit sharing plans (or stock bonus plans, in the case of money purchase ESOP�s).
Harmonizing deduction limits for all DC plans removes any rationale for adopting money purchase pension plans (which are burdened with minimum funding, QJSA and §204(h) requirements). It is scarcely conceivable that the IRS will provide a higher deduction limit for money purchase plans through regulations..
404(a)(12) [new]
616(b)
§401(k) elective deferrals and salary reduction contributions to §125 cafeteria and §132(f) pre-tax transit/parking plans are included in compensation when calculating §404 deduction limits.
This amendment reduces the disparity between the §404 and §415 compensation bases.
An employer may deduct dividends paid on employer stock held in its ESOP if participants are given a choice between receiving the dividends directly or having them retained by the plan and invested in employer stock.
Amend DC plans that hold large blocks of dividend-paying employer stock to place the stock into an ESOP set up within the plan.
A number of large companies have obtained results similar to those possible under the revised law by passing through dividends and allowing participants to make offsetting elective deferrals. That process will now be simpler and less constrained.
404(n) [new]
§401(k) elective deferrals are exempt from §404(a)(3), (7) and (9) deduction limits.
This liberalization will be useful to companies that contribute more than 25% of participants� compensation to defined benefit plans and to small firms where nonelective contributions press against the deduction limits.
408(d)(3)
Distributions from IRA�s may be rolled into qualified plans, §403(b) plans or state/local government §457(b) on same basis as into other IRA�s.
This provision does not permit rollovers of nondeductible IRA contributions or of distributions from IRA�s inherited by anyone other than a surviving spouse.
644(b)
The IRS is given the authority to grant hardship waivers of the requirement that rollovers of distributions from IRA�s be made within 60 days after receipt.
408(p)
611(f), 631
Limits on elective deferrals under SIMPLE plans are increased. Participants over age 49 are allowed to make additional contributions. See table of revised limitations for details.
Amend SIMPLE documents to permit catch-up contributions.
Because they are not subject to §404 deduction limits, SIMPLE�s are a good vehicle for individuals with small amounts of self-employment income.
408(q) [new]
Qualified, §403(b) and governmental §457(b) plans may be amended to include IRA�s within the plan. In-plan IRA�s are subject to normal IRA rules. ERISA fiduciary standards apply to their assets.
Effective for plan years beginning after 12/31/02.
The same idea was tried in the past and repealed because hardly anybody used it. Since then, it has become even simpler for individuals to set up IRA�s on their own, further reducing the market for in-plan vehicles.
409(p) [new]
Allocations of employer stock to accounts of participants in S corporation ESOP�s are treated as distributions (and are subject to a 50% excise tax under §4979A) if the participant�s account is deemed to own 10% or more of the employer stock held by the ESOP or he is part of a family whose accounts own 20% in the aggregate. This draconian provision comes into effect only if the individuals with large ESOP accounts collectively own at least 50% of all of the company's stock (with options, restricted stock and other "synthetic equity" counting for that purpose.
Generally effective for plan years beginning after 12/31/04. Effective immediately for ESOP�s established after 3/14/01 and for ESOP�s of corporations that made S elections after that date.
This section takes aim at ESOP�s set up by small, family-run S corporations. Congress rejected the option of eliminating the possibility of �schemes� in this area by treating ESOP�s like other qualified plans and subjecting their shares of S corporation income to tax as UBTI under §512(e). The "synthetic equity" rules means that this provision will have some impact on the original �ESOP tax holiday� scheme, involving the issuance of restricted stock to current shareholders and the sale of unrestricted shares to an ESOP, but its consequences can be avoided by keeping the beneficiaries of the scheme out of the ESOP. The IRS evidently did not believe that it needed legislative help on this front.
410(b)
The IRS is directed to reinstate the pre-1998 regulation that allowed a §401(k) plan established by a for-profit affiliate of a tax-exempt employer to satisfy §410(b) if 95% of all employees of for-profit affiliates were eligible. This special rule is to be available only if none of the tax-exempt affiliates has its own §401(k) plan.
The regulation is to be effective as of the expiration of the prior regulation.
Consider establishing §401(k) plans for for-profit affiliates for whom that has not been a practicable option.
The IRS believed that the repeal of the prohibition on exempt organization §401(k) plans made the prior regulation obsolete, but it did not take into account the reluctance of many exempt employers to extend §401(k) coverage to employees already covered by §403(b) plans. It is often impossible for a plan covering only for-profit affiliates to satisfy the normal §410(b) tests, because those units often include disproportionate numbers of highly compensated employees. 411(a)
The minimum vesting schedule for matching contributions is made the same as the top-heavy vesting schedule (either 3-year cliff vesting or 2-to-6-year graded vesting).
Effective for contributions for plan years beginning after 12/31/01.
Amend matching contribution vesting provisions that do not satisfy the new minimum standard.
The �improved� minimum vesting schedule is only slightly more liberal than the old one, and most plans probably satisfy it already. Where the vesting schedule must be modified, recordkeeping considerations will favor applying the new schedule to nonelective and pre-2002 matching contributions.
411(d)(6)
645(a)
Defined contribution plans may eliminate any optional form of distribution, so long as they retain a lump sum option. (The IRS may limit this right by regulation.)
When account balances are transferred from one DC plan to another, optional distribution forms not available under the transferee plan may be eliminated, provided that the participant consented to the transfer.
Eliminate non-lump sum options in DC plans unless there is some very good reason to keep them.
Money purchase pension plans cannot eliminate annuity options (independently required by §401(a)(11) and §417).
The transfer rule does not appear to be very important in light of the general authorization of the elimination of non-lump sum forms.
The statutory rules are more liberal than those in current IRS regulations. While the IRS has the authority to adopt stricter rules by regulation, the statute should override pre-existing regulations.
645(b)
The IRS is directed to amend the regulations under §411(d)(6) to permit the reduction or elimination of retirement-type subsidies and optional forms of distribution from defined benefit plans in cases where those benefits create significant burdens or complexities and their elimination would have no more than a de minimis adverse impact on participants.
Final regulations are to be issued no later than 12/31/03.
Nothing can be done until the mandated regulations appear.
412(c)(7)
The alternative full funding limitation for defined benefit plans (currently 160% of current liability) is phased out, increasing to 165% of current liability in 2002 and 170% in 2003. After that, it is repealed, and only the standard full funding limitation applies.
Reflect the new limitation in actuarial valuations.
The increase in the full funding limitation is of greatest importance to small employers that wish to make the largest possible contributions to their DB plans.
412(c)(9)
The actuarial valuation date for a defined benefit plan may be any date within the plan year or within the month preceding the plan year. For plans that are at least 125% funded for current liability, any date in the preceding plan year may be used.
Perhaps actuarial firms will be able to schedule valuations more efficiently, because they will not have to wait for beginning-of-year data before beginning work. Otherwise, greater freedom in choosing valuation dates is not significant.
414(p)
The rules for dividing plan benefits pursuant to a qualified domestic relations order are extended to §457(b) plans.
Effective for transfers, distributions and payments after 12/31/01.
Add QDRO provisions to §457(b) plans.
Courts can divide §457(b) plan interests without the benefit of the QDRO rules, so the use of a QDRO is optional with the parties. The advantage of using a QDRO is that distributions become taxable to the alternate payee rather and are eligible for rollover.
415(b)
611(a)
The §415 dollar limit for defined benefit plans is increased to $160,000. The limit is not reduced if distributions begin at or after age 62 and is actuarially increased for commencement after age 65. Indexing is unchanged ($5,000 increments).
Effective for limitation years ending after 12/31/01.
Amend plans to specify new limit if it is not incorporated by reference (as it ought to be).
For fiscal year plans, the increased limit is effective for the year that begins in 2001 (immediately for many plans).
415(c)
611(b)
The §415 dollar limit for defined contribution plans is increased to $40,000, indexed in $1,000 increments.
The §415 percentage limit for defined contribution plans is increased to 100% of compensation.
Amend plans to specify new limit if limit is not incorporated by reference.
Due to deduction limitations, this increase will be of limited use to most for-profit employers. Tax-exempt employers can greatly increase the generosity of their plans for rank-and-file and lower-paid HCE�s.
415(c)(3)(E) [new]
§403(b)(3) �includible compensation� is used as the §415 definition of �compensation� for §403(b) plans.
Amend plans to include new definition in place of any current definition.
The use of �includible compensation� as §415 compensation makes it possible to contribute on behalf of former employees, since includible compensation is based on the last full year of service, not the last limitation year. 415(c)(4) [repealed]
The alternative §415 limitations for employees of schools, hospitals, etc. who participate in §403(b) plans are eliminated.
Amend plans to eliminate these alternatives.
This change is a corollary to the repeal of the §403(b)(2) exclusion allowance. The increase in the §415 percentage limit to 100% of compensation removes any need for the old �A� and �B� elections, and the �C� election is meaningless without the exclusion allowance.
415(k)(4) [new]
632(b)
The rule that a §403(b) plan is treated as maintained by the participant for §415 purposes (inadvertently repealed along with §415(e)) is reinstated retroactively.
Effective for limitation years beginning after 12/31/99.
It is unlikely that any documents will need to be amended, since hardly anyone was aware of the repeal.
The effect of this rule is that annual additions to a qualified plan and a §403(b) plan are subject to separate §415 limits unless the participant owns more than 50% of the employer that maintains the qualified plan.
The top-heavy rules are liberalized by making it less likely that plans will be considered top-heavy and easing the minimum benefit/contribution requirements:
§401(k)(12) safe harbor plans are exempted from §416. If such a plan is part of a required or permissive aggregation group, all contributions, including elective deferrals, may be counted toward the minimum contribution requirement.
All matching contributions plan may be counted toward the minimum contribution requirement.
Frozen top-heavy DB plans are not required to provide minimum benefits to non-key employees for years in which none are accrued by key employees.
Only 5% shareholders, 1% shareholders who earn over $150,000 a year and officers who earn over $130,000 a year (indexed in $10,000 increments) are key employees. The lookback rule for key employee status is eliminated.
Only distributions during the 12-month period ending on the determination date are added back to the top-heavy test (except for in-service distributions, to which the prior law�s 5-year lookback applies).
Effective for plans years beginning after 12/31/01.
Amend plan top-heavy provisions to reflect statutory changes.
The change in the definition of �key employee� affects other sections where that term is used, e. g., §79 �nondiscrimination� testing, the §125 concentration test and the §419A(d) requirement that separate accounts be maintained for funded post-retirement life insurance and health benefits for key employees.
The use of matching contributions to meet minimum contribution requirements is voluntary and may not always be desirable, as it reduces the incentive for non-key employees to make elective deferrals. A technical correction at some point will presumably remove the conflict with the contingent benefit rule (§401(k)(4)(A)).
The top-heavy exemption may encourage small employers to adopt safe harbor §401(k) plans.
An uncodified provision states that an employer�s determination of the year in which a contribution to a multiemployer plan is deductible under §404(a)(6) is not a method of accounting.
This special interest provision protects employers that attempted to �accelerate� the deduction of contributions to multiemployer pension plans, using the technique disapproved in the Lucky Stores and American Stores cases, from §481(a) adjustments, thus overruling PLR 200110031.
457(a)
649(b)
The constructive receipt doctrine is made inapplicable to §457(b) plans maintained by state or local governments, thus conforming the tax treatment of those plans and qualified plans.
Amend distribution provisions of state/local government plans to eliminate anti-constructive receipt features.
Section 457(d) does not permit in-service withdrawals, except on account of hardship, before age 70½, so this change is of limited value to active employees. It will make it possible for former employees to leave their balances in the plan and withdraw them at will, though the availability of rollovers removes most of the need for such flexibility.
Nongovernmental §457(b) plans remain subject to constructive receipt principles and thus must avoid making distributions available to participants prematurely.
611(e), 631, 632(c)
The dollar limit on contributions to §457(b) plans is increased to conform to the §402(g) limit, and the percentage limit is increased from one-third to 100% of compensation. For state and local government plans only, additional contributions are allowed by employees over age 49. This new catch-up cannot be used in years in which the existing §457(b)(3) catch-up is available. See table of revised limitations for details.
Amend plans to increase contribution limits and permit catch-up contributions by older participants.
The catch-up option need not be extended to all participants, though there is little reason to discriminate.
Plan sponsors will have to decide which catch-up rule to apply to participants who are within 3 years of normal retirement age. The old one is more generous for most employees, but it may be possible to craft plan provisions to ensure that each participant has the better choice available.
457(c)
Contribution limits for §457(b) plans are no longer reduced by §401(k) elective deferrals and §403(b) contributions.
Amend plans to eliminate coordination provisions.
Establish eligible deferred compensation plans for executives of nongovernmental exempt organizations.
Eligible §457(b) plans have barely existed in the private sector, because the coordination rule effectively limited contributions to zero. Setting these plans up for nongovernmental exempt employers should now become routine.
Nongovernmental §457(b) plans are unfunded plans of deferred compensation and therefore must be limited to a select group of management or highly compensated employees in order to comply with ERISA.
457(d)
649(a)
The additional minimum distribution requirements for §457(b) plans are repealed. They are now subject to the same §401(a)(9) rules as qualified and §403(b) plans.
Effective for calendar years beginning after 12/31/01.
Amend plan documents to reflect the new law.
The repealed section limited the distribution period for nonspouse beneficiaries to 15 years.
State and local government §457(b) plans must allow direct rollovers.
457(e)
Distributions from state/local government §457(b) plans that fall within the §402(c) definition of �eligible rollover distribution� may be rolled over into IRA�s, qualified plans, §403(b) plans or other state/local government §457(b) plans.
Advise participants of rollover options.
Other provisions of the new law require §457(b) plans to issue §402(f) tax notices to distributees.
457(e)(16) [new]
Trustee-to-trustee transfers from state/local government §457(b) plans to governmental defined benefit plans are excluded from taxable income if the transfer is used to purchase past service credit under the transferee plan.
Effective for transfers made after 12/31/01.
The limitation to governmental plans is not stated directly in the statute but is implied by the fact that a trustee-to-trustee transfer is required, and only §457(b) plans of state and local governments have trustees. IRS rulings permit similar transfers by qualified plans, and another provision of the new law extends them to §403(b) plans. 4972
Nondeductible contributions to defined benefit plans are exempted from the §4972 excise tax, so long as they do not increase plan assets beyond the full funding limitation.
This change will primarily aid companies that make unusually large contributions to their DB plans, so that DB and DC contributions total more than 25% of compensation. In that case, the DB contributions are deductible only up to the greater of the ERISA minimum funding requirement or 25% of pay (§404(a)(7)). Under the new rule, the deduction limits do not change, but the excise tax applies only to DB contributions in excess of the full funding limitation or DC contributions in excess of 25% of compensation.
Contributions to SIMPLE plans for household employees are exempt from the excise tax on nondeductible contributions.
Whether the §4972 excise tax applies to contributions to plans for nonbusiness employees is a disputed question, and the new statute explicitly disclaims any intent to resolve it generally. The new provision assures individuals that they can set up SIMPLE plans for servants without being penalized but is silent on qualified plans.
4975(f)(6)
Plan loans to sole proprietors, 10% partners and 5% S corporations shareholders are allowed on the same basis as loans to other participants.
Effective for �years� (sc. plan years) beginning after 12/31/01.
Amend plans to eliminate prior restrictions on loans to these participants.
Loans to these participants previously were prohibited without an individual exemption from the Department of Labor. The conference report instructs the DoL to grant a retroactive class exemption for loans to partners and S corporation shareholders that were not prohibited when made (because the employer was then a C corporation) but became prohibited when the employer switched to partnership, LLC or S corporation status.
4980F [new]
An excise tax is imposed on sponsors of defined benefit and money purchase pension plans who fail to give participants advance notice of amendments that significantly reduce future benefit accruals. The tax is $100 per day per uninformed participant, capped at $500,000 a year. Notice must be given �within a reasonable period before the effective date of the amendment�, may be given before the amendment is adopted and must also be given for amendments that significantly reduce early retirement benefits or retirement-type subsidies. Governmental and church plans are exempt. ERISA, §204(h) is amended to conform to these notice provisions.
Effective immediately, but good faith compliance is sufficient until regulations are issued, and any notice given by 9/7/01 (three months after the enactment of the statute) will be considered timely.
The new requirement differs from the previous §204(h) notice requirement in these respects:
The content of the notice is more clearly specified. It must allow the recipients �to understand the effect of the amendment�.
There is no precise deadline for notices. Giving notice at least 15 days before the amendment�s effective date (the prior deadline) presumably is �within a reasonable period�.
The notice may be given before the amendment is formally adopted.
Notice must be given of reductions in early retirement subsidies and similar ancillary benefits. (Some case law required notice in these cases, but the regulations did not.)
The motive for this fatuous piece of legislation was know-nothing hysteria over cash balance conversions. Like the original §204(h), this new version serves no interests but those of providers of employee communications services.
IRS user fees are waived for determination letters and similar rulings requested during its first 5 years of existence (or during any remedial amendment period that begins within that period) for any plan that is maintained by an employer with 100 or fewer employees and covers at least one NHCE.
Effective for requests filed after 12/31/01.
Delay applications by eligible plans until after the end of this year if feasible.
Note that the provision is cleverly timed to miss the GUST remedial amendment period.
Revised Limitations, 2001 and later
§415(b) DB
Indexed in $5,000 increments (same as now)
§415(c) DC
Indexed in $1,000 increments (down from $5,000 increments)
§402(g) elective deferrals
Indexed in $500 increments (same as now)
§402(g) catch-up (over age 49)
Indexed in $500 increments
§401(a)(17) compensation limit
Indexed in $5,000 increments (down from $10,000 increments)
§457(b) contribution limit
§457(b) catch-up (except where §457(b)(3) applies)
Maximum §457(b)(3) catch-up for participants within 3 years of NRA
Twice standard §457(b) catch-up
§408(p) SIMPLE plan deferrals
SIMPLE catch-up (over age 49)
§219 IRA contributions
IRA catch-up (over age 49)
$1,000 (not indexed)
The limitations apply to plan years or limitation years, whichever is applicable, beginning in the indicated year, except that §415(b) limitations for defined benefit plans apply to years ending in the year.