On June 7, 2001, President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. 107-16) ("EGTRRA"). This new Act is in addition to the relatively new "GUST" provisions that must be amended into all plans. (GUST collectively refers to the Uruguay Round Agreements Act enacted in 1994 ("GATT"); the Uniformed Services Employment and Reemployment Rights Act of 1994 ("USERRA"); the Small Business Job Protection Act of 1996 ("SBJPA"); the Taxpayer Relief Act of 1997 ("TRA '97"); and the Internal Revenue Service Restructuring and Reform Act of 1998 ("RRA '98'). More on GUST follows below.)

Included in the new law are many very favorable improvements to the existing pension law, especially regarding the maximum limits and tax deductions available to individuals and businesses that maintain tax-qualified retirement plans.

Many of these increased limits are effective next year (2002) and will greatly enhance savings and tax planning opportunities for small and medium-size businesses and their owners.

For example, the 401(k) deferral limit is increased from the present maximum of $10,500 to $11,000 next year, and then it increases each year by an additional $1,000, until it reaches $15,000 in 2006. Also, there is a new "catch-up", additional contribution available for individuals age 50 and over, equal to $1,000 for 2002, and increasing by $1,000 per year until it reaches $5,000 in 2006.

The maximum defined contribution plan "annual addition", presently 25% of compensation, not to exceed $35,000 is increased in 2002 to 100% of compensation, not to exceed $40,000. The corresponding limit for defined benefit plans is dramatically improved, too: from the present $140,000 to $160,000 in 2002. Importantly for business owners who desire to increase the funding of their defined benefit plans, the early retirement reduction (from age 62-65) is eliminated. (There are also other provisions in the new law that encourage plan sponsors to fund their defined benefit plans. And, recall that GUST previously eliminated the prior DB/DC combined plan limit (IRC 415(e)), so the planning opportunities for small business owners have never been better.

Other significant changes brought by EGTRRA are the increase of the permissible plan compensation amount from $170,000 to $200,000, and a change from 15% of compensation to 25% of compensation as the allowable profit sharing (and 401(k)) plan tax deduction, both effective in 2002.

In an effort to encourage smaller employers (100 or fewer employees) to set up retirement plans, the new law adds a tax credit (i.e., better than a tax deduction!) for certain costs of setting up a new plan. Moreover, employers of that size will also qualify for a waiver of the IRS user fees when they submit certain plans for IRS determination (approval) letters.

Several 401(k) plan rules have been relaxed or eliminated, making such qualified plans even more attractive, such as the so-called "same desk" rule, the "multiple use" test, and the hardship withdrawal conditions. Top-heavy rules have also been improved. Also, the prohibition on owner employees, partners and S-corporation shareholders from taking participant loans has been repealed.

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Comparison of EGTRRA's Retirement Plan Provisions

If you would like more information regarding EGTRRA please contact your NRS representative.