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The "Economic Growth and Tax Relief Reconciliation Act of 2001" Makes Significant











Update on the Issues
New Legislation
June 2001*



* Republished December 2004 to reflect Prudential Financials acquisition of CIGNA's retirement business.


©2004, The Prudential Insurance Company of America, all rights reserved.

The "Economic Growth and Tax Relief
Reconciliation Act of 2001" Makes Significant
Changes to Retirement Plans and IRAs



WHO'S AFFECTED The new law affects participants in and sponsors of qualified defined
contribution and defined benefit plans, including governmental plans. It also affects participants in
and sponsors of tax-sheltered annuity (403(b)) plans and section 457 plans, as well as holders of
individual retirement accounts and annuities (IRAs).

BACKGROUND AND SUMMARY On June 7, 2001, President Bush signed into law the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This legislation
contains major pension reform provisions. The new law enhances the retirement security of
American workers and their families by increasing the contribution and benefit limits under
employer-provided retirement plans and IRAs. In addition, it helps to expand pension coverage to
more employees, increases the portability of pension assets to meet the needs of a mobile
workforce, strengthens pension security and enforcement, and reduces regulatory burdens for plan
sponsors.

Key changes include the addition of "catch-up contributions" for individuals age 50 and older to
retirement plans and IRAs, increased deduction limits for employers, the repeal of the multiple use
test, simplified top heavy rules, and the elimination of the "same desk rule" applicable to certain
corporate transactions.

ACTION AND NEXT STEPS The provisions of EGTRRA are generally effective for years
beginning after December 31, 2001. Many of the contribution and benefit limit increases have
staggered effective dates. All of the changes will expire after December 31, 2010, unless Congress
takes steps to extend the provisions. The new law does not contain a special remedial amendment
period in which plans must be amended to reflect the new provisions. We expect that the IRS will
provide an extended time period for plan sponsors to amend their plans for EGTRRA.


IN THIS ISSUE
Increasing Contributions and Benefits for Employees

Changes to IRA Contribution Limits

IRA Contributions to Retirement Plans

Increased Limits for Retirement Plans

Roth 401(k) and 403(b) Plans

Income Tax Credit for Lower Income Savers




Faster Vesting for Matching Contributions

Hardship Withdrawal Changes

Expanding Pension Coverage to More Employees

Employer Deduction Limit Changes

Tax Credit for Small Employers

Top Heavy Rule Changes

Loans to Owner-Employees

Determination Letter Fee Eliminated for Small Employers

Increasing the Portability of Pension Assets to Meet the Needs of a Mobile Workforce

New Rollover Provisions

Default IRAs

Repeal of the Same Desk Rule

Forms of Payment

Changes to Cash-Out Provision

Strengthening Pension Security and Enforcement

Modifications to ERISA 204(h) Requirements

Defined Benefit Plan Funding Changes

Prohibited Allocations of Stock in S Corporation ESOP

Reducing Regulatory Burdens for Plan Sponsors

Repeal of Multiple Use Test

Coverage Rule Change for Tax-Exempt Entities Offering 401(k) Plans

Investment of ESOP Dividends

Timing Changes for Defined Benefit Plan Valuations

Miscellaneous Provisions

Minimum Required Distributions

Investment of Elective Deferrals in Employer Stock

Employer-Provided Retirement Advice

Changes Affecting Section 457 Plans

Sample Participant Communication



Increasing Contributions and Benefits for Employees

The new law allows employees to save more for retirement by increasing contribution and benefit
limits under retirement plans and individual retirement accounts (IRAs). In addition, it provides
added assistance to older workers so they can "catch-up" in their retirement savings.

Changes to IRA Contribution Limits

The maximum annual contribution limit for IRA contributions is raised to $5,000 by the year 2008.
The limit is increased to $3,000 in 2002 through 2004, $4,000 in 2005 through 2007, and $5,000 in
2008 and thereafter. For tax years beginning after 2008, the $5,000 limit will be adjusted for
inflation in $500 increments.

A special exception applies to individuals age 50 and older. These individuals are permitted to
contribute an additional $500 to an IRA in the 2002 through 2005 tax years and an additional
$1,000 in 2006 and thereafter. This limit will not be adjusted for inflation.


©2004, The Prudential Insurance Company of America, all rights reserved. Page 2





Tax Year
Standard IRA Limit
Limit for Employees Age
50 and Over
2002
$ 3,000
$ 3,500
2003
$ 3,000
$ 3,500
2004
$ 3,000
$ 3,500
2005
$ 4,000
$ 4,500
2006
$ 4,000
$ 5,000
2007
$ 4,000
$ 5,000
2008
$ 5,000
$ 6,000

IRA Contributions to Retirement Plans

Other IRA related changes include the addition of a "deemed IRA" to a qualified plan, a tax-
sheltered annuity (403(b)) plan, or a governmental section 457 plan. For plan years beginning after
December 31, 2002, plan sponsors may allow employees to make voluntary employee
contributions to an account under the plan that meets the IRA requirements. These contributions
may be treated as either traditional or Roth IRA contributions and would not be subject to standard
plan rules.

Increased Limits for Retirement Plans

Under the new law, the annual deferral limits for 401(k), 403(b) and section 457 plans are raised to
$15,000 by the year 2006. After 2006, the limits will be adjusted for inflation in $500 increments.
The following table shows the annual deferral limits for employee tax years beginning in 2002
through 2006.

Tax Year
Deferral Limit
2002
$ 11,000
2003
$ 12,000
2004
$ 13,000
2005
$ 14,000
2006
$ 15,000


The requirement to coordinate the section 457 deferral limit with elective deferral contributions
made to other types of plans has been repealed by the new law effective in 2002.

In addition, employees who are age 50 or older may make "catch-up" contributions to 401(k),
403(b), and governmental section 457 plans. These would be additional deferral contributions in
excess of the standard annual deferral limit. Catch-up contributions are limited to $1,000 in 2002,
$2,000 in 2003, $3,000 in 2004, $4,000 in 2005, and $5,000 in 2006. This limit will be adjusted for
inflation in $500 increments. Catch-up contributions are not subject to nondiscrimination testing
provided that all employees age 50 and older are allowed to make catch-up contributions.

The elective deferral limit for SIMPLE IRAs and SIMPLE 401(k) plans has also been increased
under the new law. The limit is $7,000 for 2002, $8,000 for 2003, $9,000 for 2004, and $10,000


©2004, The Prudential Insurance Company of America, all rights reserved. Page 3




for 2005. The limit will be adjusted for inflation in $500 increments. Catch-up contributions to
SIMPLE plans are also allowed. The catch-up contribution limit for SIMPLE plans is equal to 50%
of the catch-up limit applicable to section 401(k), 403(b) and governmental section 457 plans.

EGTRRA also revises the annual contribution limitations applicable to defined contribution plans.
Under current law, annual contributions to a defined contribution plan are limited to the lesser of:
(i) $35,000, or (ii) 25% of a participant's compensation. The $35,000 limit is adjusted for inflation
in $5,000 increments. Effective for limitation years beginning in 2002, the dollar limit is increased
to $40,000 and will be adjusted for inflation in $1,000 increments. The 25% of compensation
limitation is increased to 100% of compensation.

Likewise, the maximum exclusion allowance applicable to 403(b) plans is repealed and the 33-
1/3% of compensation limit applicable to contributions under a section 457 plan is increased to
100% of compensation. These changes are also effective in 2002.

The maximum annual dollar limit applicable to defined benefit plans is also increased. Currently,
the maximum annual benefit under a defined benefit plan is limited to the lesser of: (i) $140,000,
or (ii) 100% of a participant's average compensation over his highest paid three years. Beginning
in 2002, the $140,000 dollar limit is increased to $160,000 and will be adjusted for inflation in
$5,000 increments. For purposes of applying this limit, the early retirement and normal retirement
ages are reduced to 62 and 65, respectively. Under the new law, multiemployer plans are also
exempt from the 100% of compensation limit; however, the dollar limitation still applies.
Multiemployer plans cannot be combined with single employer plans for purposes of applying the
100% of compensation limit.

Finally, the annual compensation limit that is applied when determining contributions or benefits
under a qualified plan is increased from $170,000