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EGTRRA Legislative Changes: Side-by-Side Comparison Modifications to Limits on IRAs
Current IRA contribution limit is $2,000.
It is not indexed for inflation. There is no
additional contribution permitted for
individuals age 50 or older. In addition,
there are no rules for allowing employers
to facilitate IRA contributions by
employees as an add-on to the
employer-sponsored retirement plan.
IRA contribution limit increased to
$3,000 in 2002 through 2004; $4,000 in
2005 through 2007; and $5,000 in 2008;
and then indexed thereafter in $500
increments.
For individuals age 50 or older, limit
increased by $500 in 2002 through 2005;
and by $1,000 in 2006 and thereafter.
This amount is not indexed.
Effective in 2003, qualified retirement
plans and 403(b) annuities will be
permitted to facilitate IRA contributions
by those employees eligible as an
add-on to their qualified retirement
plan or 403(b) annuity.
Modifications to Limits on
Retirement Plan Contributions
and Benefits
Current law limits:
401(a)(17): annual compensation taken
into account limited to $170,000.
402(g): elective deferrals limited to
$10,500 per year.
415(b): maximum annual benefits are
the lesser of 100 percent of three-year
high salary or $140,000 (or less for pre-
65 retirees).
415(c): maximum defined contribution
plan contribution is the lesser of
$35,000 or 25 percent of compensation.
457(b): contribution limit is generally
$8,500 per year.
SIMPLE: maximum elective deferral is
$6,500 per year.
Beginning in 2002, the Act raises all of the
significant dollar limits as follows:
401(a)(17) compensation limit to
$200,000; and then indexed in $5000
increments.
402(g) elective deferral limit to $11,000
in 2002; then increased $1,000 each
year until $15,000 in 2006; and then
indexed in $500 increments.
415(b) annual benefit limit to $160,000;
and then indexed in $5,000 increments.
Note that this provision applies to years
ending after December 31, 2001.
415(b) annual benefit limit will no
longer have to be reduced for
retirements ages 62 through 65. Note
that this provision applies to years
ending after December 31, 2001.
415(c) contribution limit to $40,000,
and then indexed in $1,000 increments.
457 elective deferral limit to $11,000 in
2000, then increased $1,000 each year
until $15,000 in 2006; and then indexed
in $500 increments.
SIMPLE elective deferral limit to $7,000
in 2002, then increased $1,000 each
year until $10,000 in 2005; and then
indexed in $500 increments.
EGTRRA Legislative Changes:
Side-by-Side Comparison
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W E U N D E R S T A N D W H A T Y O U R E W O R K I N G F O R
S M
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Black text = Current Law
Blue text = EGTRRA Participant Loans for Small
Business Owners
Generally, plans may make loans to
participants. But, prohibited transaction
rules prevent sole proprietors, partners,
and Subchapter S corporation
shareholders from taking participant
loans.
The prohibited transaction rules are
modified to allow for participant loans to
sole proprietors, partners, and Subchapter
S corporation shareholders. The provision
also applies prospectively to pre-existing
loans.
Modifications of Top Heavy Rules
A plan is generally considered top
heavy if more than 60 percent of plan
assets are held on behalf of key
employees. Due to the design of this test,
top heavy rules essentially affect only
small businesses. Key employees generally
include officers earning over half the
Section 415 defined benefit plan dollar
limit ($70,000 in 2001), 5 percent owners,
1 percent owners earning over $150,000,
and the 10 employees with the largest
ownership interest in the business (as long
as they earn more than $30,000). Further,
family members of 5 percent owners are
deemed to be key employees under family
attribution rules.
Top heavy plans must meet a special
vesting schedule and make minimum
contributions to all non-key employees to
the extent contributions are made on
behalf of key employees.
A number of changes have been made
here:
The definition of key employee is
modified to delete the top 10 owner
rule, provided that an employee will not
be treated as a key employee based on
his/her officer status unless the employee
earns more than $130,000, and to
eliminate the 4-year lookback rule for
identifying key employees.
Matching contributions will now count
toward satisfying the top heavy
minimums.
The matching contribution 401(k) plan
safe harbor will be deemed to satisfy the
top heavy rules. This does not mean
that an accompanying profit sharing
contribution automatically satisfies the
top heavy rules, although the matching
contributions will count toward
otherwise satisfying the minimum.
The 5-year look-back rule applicable to
distributions will be shortened to one
year. However, the 5-year look-back rule
will continue to apply to in-service
distributions.
A frozen top heavy defined benefit plan
will no longer be required to make
minimum accruals on behalf of non-key
employees.
Exclusion of Elective Deferrals
from Deduction Limit
Generally, employer contributions
(including employees elective deferrals) to
a qualified plan are deductible, subject to
certain limits. For example, elective
deferrals are generally not deductible to
the extent that, in the aggregate, they
exceed 15 percent of the total
compensation of covered employees.
Elective deferrals will no longer be
considered employer contributions for
purposes of the Section 404 deduction
limits.
Repeal of Coordination
Requirements for Section
457(b) Plans
A maximum of $8,500 in deferred
compensation may be put away per year
in a 457(b) plan. This limit is generally
reduced by elective deferrals under other
types of arrangements.
The Section 457 limit on deferred
compensation will not be reduced by
elective deferrals under other types of
arrangements.
Continued from previous page
Continued on next page Deduction Limits
A sponsor of a profit sharing plan cannot
deduct contributions to the plan in excess
of 15 percent of aggregate employees
compensation. In the case of a stand-alone
money purchase plan, the deduction limit
is the minimum funding requirement for
the plan.
The deduction limit for profit sharing
plans is increased to 25 percent of
aggregate employees compensation.
Money purchase plans will be treated as
profit sharing plans for purpose of the
404 deduction limit and thus will be
subject to the 25 percent limit.
Definition of Compensation
For purposes of the contribution limits
under Section 415, compensation includes
elective deferrals. However, for purposes
of the deduction limits under Section 404,
compensation does not include elective
deferrals.
For purposes of the deduction limits under
Section 404, the definition of compensation
will now include elective deferrals.
Roth 401(k) and 403(b) Plans
Defined contribution plans are generally
allowed to receive after-tax contributions.
However, allocable income on such
contributions is subject to income tax
when distributed. There is no current
provision in the law exempting such
income amounts from taxation, like
distributions from a Roth IRA.
Beginning in 2006, 401(k) and 403(b)
plans can permit participants to elect a tax
treatment for their deferrals similar to
Roth IRA contributions. Such after-tax
contributions will be tested along with
pre-tax deferrals as part of the ADP test.
The 402(g) limit will apply to the
combined amount of pre-tax and after-tax
Roth 401(k) or 403(b) contributions.
Because of their special tax treatment (i.e.,
distributions, including earnings, exempt
from tax), these contributions will have to
be accounted for separately. Further, like
Roth IRAs, in order to receive this special
tax treatment 5 years must elapse from
when a participant first makes a Roth
401(k) or 403 (b) contribution to when a
distribution is made. Roth 401(k) and
403(b) contributions (and earnings) can be
rolled over to a Roth IRA.
Tax Credits for
Lower Income Savers
Currently there is no tax credit for low
and moderate income savers.
Eligible persons will receive a
non-refundable tax credit of up to 50
percent on up to $2,000 in contributions
to an IRA, 401(k), 403(b), SIMPLE, SEP
or 457 plan. This credit