Pension Reform

E

conomic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) P.L. 107-16

Summary
    On May 26, Congress approvedthe EGTRRA, and President Bush signed the bill into law on June 7, 2001. Thislaw represents the largest individual tax rate reduction measure passed by Congresssince the Economic Recovery Tax Act of 1981. But in addition to the individualtax rates, the new law also contains more than 50 changes to the rules for employeebenefits, including qualified retirement plans, Section 403(b) tax-sheltered annuities,Section 457 plans, and Individual Retirement Accounts (IRAs). The employee benefitchanges represent the most comprehensive legislation since the Tax Reform Actof 1986. It is important to note, however, that all of the provisions in the newlaw are set to expire in 2011 unless they are extended or made permanent.

    Theemployee benefit changes in the law are similar to legislation thatRepresentativesPortman (R-OH) and Cardin (D-MD) and Senators Grassley (R-IA) and Baucus (D-MT)introduced earlier this year. This group, especially Portmanand Cardin have been working on enactment of these changes for the last severalyears.

    Belowis a very brief summary of some key employee benefit plan changes that weremade in P.L. 107-16.

• Increases the 401(k),403(b), and 457 deferred compensation plan limits to $11,000 in 2002, andthen increases by $1,000 per year until the limit reaches $15,000 in 2006,indexed thereafter.

• Increases the consideredcompensation limit to $200,000.

• Eliminates the Section415(c) 25 percent of annual pay limit.

• Increases the Section415 defined contribution limit to $40,000.

• Increases the Section415 defined benefit limit to $160,000.

• Gradually increasesthe IRA contribution limits to $5,000.

• Allows employees whoattain age 50 before the end of the plan year to make an additional pre-tax”catch-up” contribution to their 401(k), 403(b), or 457 plans.

• Allows defined contributionplans to offer a new after-tax Roth 401(k) contribution, similar to a RothIRA, with a tax-exempt payout after the holding period is met.

• Repeals the maximumexclusion allowance for Section 403(b) plans.

• Requires an enhancednotice to affected participants if a defined benefit plan or a money purchaseplan is amended to significantly reduce the rate of future benefit accruals,including the elimination of any early retirement benefit or retirement-typesubsidy.

• Allows rollovers between401(k), 403(b), 457 plans and IRAs.

• Allows a deductionfor all dividends on ESOP shares that a participant either elects to receivein cash or to reinvest in the qualifying employer securities of a plan.

• Extends the Section127 exclusion for employer-provided educational reimbursement and expandsit to include graduate education for courses beginning in 2002 and after.

• Increases the tax exclusionfor employer-paid adoption assistance to $10,000 per child and increasesthe starting point of the income phaseout.

Status
    Although the changes are now law, there will be an effortin Congress to eliminate the sunset provision (December 31, 2010) and make thechanges permanent. Republicans in the House are hoping to try to address itbefore the July 4 recess.

Impact
    There are many changes to the law that will affect retirementplan sponsors. Some are mandatory and some are not, but many of the mandatorychanges are effective as of January 1, 2002 such as the limit increases. Thus,plan sponsors will want to review the changes to the law and determine whatthey need to do to comply with the law changes effective in January. The optionalchanges present new opportunities for both plan sponsors and participants tosave more money for retirement and take advantage of the new flexibility thelaw provides.

To Learn More

• Viewthis bill by entering the following bill number: HR 1836.

SOURCE: HewittAssociates LLC