The following is a report on the pension and benefit provisions contained in the new tax cut bill, known as the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA").

The maximum limit on annual benefits from a defined benefit pension plan, which is currently $140,000 ($90,000 adjusted for inflation) will be increased to $160,000 per year, adjusted annually thereafter for inflation. It is important for participants to keep in mind that the applicable limitation is the one in effect on the date benefits commence.

Under current law, a defined benefit pension plan may not provide a benefit that exceeds more than 100% of a participant’s average salary for his or her three highest compensated years. Moreover, if a participant retires before reaching age 62, the amount of the “100% of Compensation” benefit limitation is even lower, reduced to the participant’s actual retirement age. In a move long advocated by organized labor, the new law repeals the 100% of Compensation benefit limitation for multiemployer defined benefit pension plans.

The maximum annual employer contribution to a defined contribution plan will increase from its current $35,000 ($30,000 adjusted for inflation) to $40,000, adjusted annually thereafter for inflation. In addition, the existing 25% annual cap on employer contributions is increased to 100% of annual compensation.

The maximum deductible voluntary employee contribution to a Section 401(k) Plan, 403(b) Plan, or 457 Plan will be increased from its current $10,500 ($7,000 adjusted for inflation) to the following:

Year	Annual Limit
2002	$11,000
2003	$12,000
2004	$13,000
2005	$14,000
2006	$15,000
2007 and thereafter	$15,000 adjusted for inflation

For Simple Retirement Accounts, the limits for voluntary employee contributions are increased as follows:

Year	Annual Limit
2002	$7,000
2003	$8,000
2004	$9,000
2005	$10,000
2006 and thereafter	$10,000 adjusted for inflation

In addition to the overall increase in the limits for voluntary contributions, participants who are at least age 50 by the end of a year may make additional “catch-up” contributions. For plans other than SIMPLE plans, the amount of the permitted catch-up contribution is as follows:

Year	“Catch-Up” Limit
2002	$1,000
2003	$2,000
2004	$3,000
2005	$4,000
2006	$5,000
2007 and thereafter	$5,000 adjusted for inflation

Year	Annual Limit
2002	$500
2003	$1,000
2004	$1,500
2005	$2,000
2006	$2,500
2006 and thereafter	$2,500 adjusted for inflation

As long as all age 50 or older participants in the plan (as well as in all other plans maintained by the employer) are provided the same opportunity to make catch-up contributions, these contributions are free from all other limitations and discrimination tests.

Entities that maintain Section 457 Plans (generally limited to governments and certain non-profit organizations) will no longer have to coordinate maximum benefit limitations under those plans with those of other plans maintained by the employer.

Under current law, if an employee participates in more than one multiemployer plan, the employee need not aggregate the benefits from the various multiemployer plans to determine his or her maximum benefit. However, a participant in more than one single employer plan or in a multiemployer plan and one or more single employer plans has been required to aggregate benefits to determine the whether the overall benefits exceed the statutory maximum benefit limitations. Under the new law, participants in multiemployer pension plans will no longer have to aggregate their maximum benefit limitations with their benefits in single employer pension plans.

The maximum amount of annual income that can be taken into account by an employee pension plan for purposes of calculating benefits is increased from its current $170,000 ($150,000 adjusted for inflation) to $200,000, adjusted annually thereafter for inflation.

Current law imposes a number of maximum funding limitations on defined benefit pension plans. Among the limitations that produce the most peculiar results is the “160% rule,” because it frequently bears little relationship to a pension plan’s actual funding requirements. This limit prohibits additional contributions once a plan’s assets reach 160% of its accrued liability (on a termination basis). Under the new law, the percentage is increased to 165% for 2002, 170% for 2003, and is eliminated altogether thereafter.

Similarly, although current law permits employers sponsoring large non-multiemployer plans to make deductible contributions of at least 100% of the plan’s remaining unfunded current liability even if those contributions would otherwise exceed the plan’s maximum contribution limit for the year, multiemployer plans have not been permitted the same flexibility. This rule is now applicable to multiemployer plans as well as to small single employer plans (albeit with certain exceptions and qualifications).

Also, an important timing rule previously limited to single employer plans will become applicable to multiemployer plans. Under the new rule, an employer contributing to a multiemployer plan will be permitted to attribute contributions paid after the close of its fiscal year to the prior year provided it is paid within the time for filing its taxes, even if the employer operates on a cash basis.

Current law generally imposes a 10% excise tax on pension contributions in excess of deductibility limits. Under the new laws, the 10% excise tax will not be imposed on contributions to a defined benefit plan unless the contributions exceed the Plan’s actuarial full funding limitation.

Under current law, the maximum deductible contribution by an employer to a profit sharing plan is 15% of compensation, including both employer contributions and (in the case of Section 401(k) Plans) voluntary employee contributions. This cap has now been increased to 25%. In addition, employers no longer have to include voluntary employee contributions in their calculation of their maximum contribution.

In determining whether a vested benefit falls below the $5,000 threshold permitted for involuntary cash-outs, a plan is no longer required to count the amount of any rollovers, and the earnings on those rollovers. Thus, only the benefits actually earned in the plan need be taken into account.

Under current law, employer matching contributions are required to fully vest after five years, or to begin vesting after 3 years and become fully vested after seven years. The new law shortens these periods. In the future, participants will have to vest in employer matching contributions either in full after no more than 3 years, or to vest at least 20% after two years, with an additional 20% per year, until are fully vested after 6 years. Vesting rules for other plan contributions and benefits remain unchanged.

Under current law, non-collectively bargained Section 401(k) Plans with matching employer contributions are subject to the so-called “multiple use test.” This test is now eliminated, effectively increasing the amount that employers can pay as matching contributions for highly compensated employees.

Current law requires minimum benefits for “non-key” employees who participate in “top-heavy” employer plans. A “top-heavy” plan is generally defined as a plan in which at least 60% of the plan’s assets are held for “key employees.” Under the new law, a plan that passes the “Actual Deferral Percentage” or “ADP” test is deemed to not be top-heavy. Moreover, the new law limits the employees who will be considered “key employees” to officers earning more than $130,000, indexed for inflation, five-percent owners, and one-percent owners earning more than $150,000.

Previously, individuals have been able to establish so-called “Roth IRAs” into which they could pay after-tax contributions. Depending upon how the plan balance is used, the earnings on the Roth IRA may never be taxed. However, the amount an individual can contribute to a Roth IRA is limited to a maximum of $2,000 per year, and even less (or nothing at all) depending on the individual’s earnings. The new law creates a new concept known as a “Roth Account” that forms a part of a Section 401(k) or 403(b) plan. If an employer-sponsored Section 401(k) or 403(b) plan permits “Roth” contributions, the employees can designate the amount of his or her after-tax “Roth” contributions. Similar to a Roth IRA, the contribution itself is not pre-tax, but the earnings are either tax-deferred or tax-free. However, for purposes of determining maximum contribution amount to the Section 401(k) or 403(b) plan, the “Roth” contributions are added to any pre-tax contributions made by the Employee. In other words, each dollar designated as an after-tax “Roth” contribution, reduces the amount the employee can designate as a pre-tax contribution by a dollar. This provision does not become effective until plan years beginning after December 31, 2005.

These new Roth accounts are also subject to new Rollover rules. Roth IRA balances may be rolled into or out of a designated Roth account, just like they can between a standard IRA and a qualified pension plan.

Although distributions from a tax qualified pension plan pursuant to a Qualified Domestic Relations Order are not subject to the 10% excise tax for early distributions, the same has not been true under Section 457 Plans. These plans, which are typically maintained by certain non-profit organizations for their highest paid employees, as well as by certain state and local governments, are now subject to the same early distribution tax exclusion.

Under current law, an individual who makes a hardship withdrawal from a Section 401(k) or 403(b) Plan is prohibited from making any additional contributions for a year. This period will now be reduced to just six months.

The law has long required 15-day notice to participants of material reductions in the rate of future pension accruals. However, the law has never been clear what the sanctions are for failure to provide the required notice. The new law expands the notice requirement, and imposes excise taxes for failure to comply. The 15-day requirement was eliminated, in favor of a general requirement that the notice be provided a reasonable time before the change becomes effective, leaving the issue of timing for the IRS regulations.

An employer (in the case of a single employer plan) or the plan itself (in the case of a multiemployer plan) is liable for an excise tax of $100 per day for failure to comply. However, the excise tax will not apply if the IRS is satisfied that the person subject to the excise tax did not know about the failure to provide notice, and that that person had exercised due diligence in attempting to meet the notice requirement. Moreover, if the failure is corrected within 30 days after discovery (or the date it would have been discovered with the exercise of due diligence), no excise tax is applied. Finally, where reasonable diligence was exercised, the liability is capped at $500,000 for the plan year. Furthermore, the tax may be waived where the IRS determines that it is excessive or otherwise inequitable.

In addition, in the case of an “egregious failure” to provide notice, anyone affected by the amendment (including anyone receiving benefits under a Qualified Domestic Relations Order) is entitled to the larger, original benefit. A failure to provide the required notice is considered “egregious” if the failure was intentional (including an intentional failure to cure an unintentional failure to provide notice), the failure is a failure to provide most of the individuals with most of the information they are entitled to receive; and the failure meets any other requirements established in future Treasury regulations.

The notice requirement is only applicable to defined benefit plans and to “money purchase” defined contribution plans. It is not applicable to defined contribution “profit sharing” plans (including Section 401(k) Plans).

The new law permits plans to provide the notice through the use of “new technologies,” as provided in yet-to-be-issued regulations. Unlike most of the other provisions of the tax bill, this one becomes effective immediately for all benefit reductions occurring on or after April 25, 2001.

The Tax Bill requires the IRS to revise the life expectancy tables that it uses to determine the minimum payouts under pension plans. By revising these tables to reflect the population’s increased life expectancy, required minimum distributions will now have to be calculated to a later age, reducing the amount that must be distributed in a level payout over a participant’s lifetime.

Under existing law, if a benefit was transferred from one plan to another (such as through a plan-to-plan transfer, but other than as a rollover), the recipient plan was required to provide all of the same “valuable benefit forms” previously provided by the transferor plan. Under the new law, when a benefit is transferred from one defined contribution plan to another, the recipient plan does not need to provide all of the “valuable benefit forms” of the prior plan if the transfer was the result of a voluntary election by the participant or beneficiary following adequate notice and the recipient plan offers the option of single sum distribution.

In general, as long as a defined contribution plan offers a single-sum benefit, the Plan is free to eliminate other benefit forms. However, a benefit form that is subsidized or otherwise provides significant additional rights or benefits may not be eliminated. The IRS is expected to issue regulations to further refine this new exception.

Under the old law, rollovers were not permitted from Section 457 Plans. Moreover, rollovers were prohibited between so-called Section 401(a) (“qualified”) plans and Section 403(b) plans. The rules have now been relaxed, so that rollovers are now permitted from Section 457 Plans, as well as between and among Section 401(a) (including 401(k)) plans, 403(b) plans and 457 Plans.

In addition, in the past, a surviving spouse could only roll over a deceased participant’s benefit into an IRA. Under the new law, the spouse will have the additional option of rolling the survivors benefit into a qualified pension plan as well.

The new bill expands the amount of information that is required to be provided in a notice prior to an eligible rollover distribution. However, the precise content of such notice will be detailed in IRS regulations.

The new rules provide that a plan that provides a mandatory cash-out of benefits upon separation from service for small benefits must automatically roll the distribution over into an IRA unless either the participant elects to receive the distribution in cash or the amount of the distribution is less than $1,000. Moreover, if the participant does not designate an IRA to receive the distribution, the Plan is obligated to select a default IRA on the participant’s behalf. In the event the balance is rolled over into a default IRA, the employer retains fiduciary responsibility over the selection of the investment for a period of one year, unless the participant moves it to a different IRA before then. As under current law, if the distribution is eligible for rollover treatment, but is not rolled-over into an IRA or other plan, it is subject to 20% mandatory withholding

Small employers–employers with up to 100 employees–are now entitled to a tax credit of up to 50% of the cost of establishing a new pension plan. The credit is capped at $500 in any tax year, and may only be claimed in each of the three years beginning with the effective date of the plan. In order to be eligible for the credit, the plan must cover at least one non-highly compensated employee. Moreover, the employer must not have maintained a plan at any time during the three tax-year period prior to the date the new plan is established. To the extent an employer takes the 50% credit, those costs are not deductible.

During a window period from the beginning of 2002 to the end of 2006, low and middle-income tax payers will receive a tax credit of up to 50% of their elective contributions (including 401(k) contributions) and IRA contributions (including contributions to a Roth IRA). The credit is capped at $2,000 per person per year, and is phased out at higher incomes, disappearing entirely, in accordance with the following table:

The credit is not available to anyone who is under age 18, is a full-time student, or who can be claimed as a dependent someone else’s taxes.

In an effort to further reduce the administrative expense of new, small employer plans, the Tax Bill eliminates the fee ordinarily charged by the IRS for a determination of qualified status in certain circumstances. This exclusion applies to employers with fewer than 100 employees, and only applies to requests for qualification made within the first five years of the plan’s existence. Finally, the plan must cover at least one non-highly compensated employee. The IRS is also granted some limited discretion to reduce other user fees as well.

IRA annual contribution limits have been increased from $2,000 per person per year to $3,000 per person per year for years 2002 - 2004, $4,000 for 2005 - 2007 and $5000 for year 2008, and $5,000 for years thereafter indexed for inflation. In addition, for individuals who are at least 50 before the end of the year, there is a special catch-up provision, allowing additional contributions of $500 for years 2002 - 2005 and $1,000 per year thereafter.

A new concept known as a “deemed IRA” is created for certain employer plans permitting employee contributions. A deemed IRA is, in essence, a voluntary savings plan established by an employer that allows employees to voluntarily contribute (through payroll deductions or otherwise) moneys to IRA accounts. These IRAs must otherwise satisfy the requirements of an IRA, and may be either a standard IRA (permitting pre-tax contributions) or a Roth IRA.

In addition, the maximum amount an individual can contribute to an “education IRA” has been increased from $500 per year to $2,000 per year. Also, the proceeds of an education IRA may now be used for primary and secondary education, in addition to higher education. Finally, the maximum income that can be earned by a married couple in order to contribute to an education IRA has been significantly increased so that it is now double the amount applicable to a single tax payer.

The on-again-off-again tax breaks provided for educational assistance programs are on-again. Under its most recent incarnation, this break was set to expire at the end of this year. That expiration date has been eliminated, and the break is now only limited to the Tax Bill’s overall sunset provision. (See Section 14.) In addition, benefits may now be provided for graduate-level programs.

Under prior law, an individual who employed household help was subject to a 10% excise tax for any pension contributions made for the benefit of the employee. This excise tax has been eliminated.

Unless otherwise noted, the changes made by the Tax Bill are generally effective in 2002. On the other end, the changes made by the Tax Bill are subject to its general “sunset provision,” and will expire for plan years beginning after the end of 2010.

Adjusted Gross Income (AGI)						Rate of Credit
Joint Return		Head of Household		All Others
If Your AGI is Over	But Not Over	If Your AGI is Over	But Not Over	If Your AGI is Over	But Not Over
$0	$30,000	$0	$22,500	$0	$15,000	50¢ For Each $1
$30,000	$32,500	$22,500	$24,375	$15,000	$16,250	20¢ For Each $1
$32,500	$50,000	$24,375	$37,500	$16,250	$25,000	10¢ For Each $1
$50,000		$37,500		$25,000		0

Mooney, Green, Baker & Saindon, P.C.