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EMPLOYEE BENEFIT PROVISIONS OF THE NEW TAX LAW OFFER OPPORTUNITIES TO EMPLOYERS




















June 1, 2001


EMPLOYEE BENEFIT PROVISIONS OF THE NEW TAX LAW
OFFER OPPORTUNITIES TO EMPLOYERS


The recently-passed tax bill offers employers significant opportunities to improve their
employee benefit plans, particularly their § 401(k), pension, and profit-sharing plans. The bill,
entitled the Economic Growth and Tax Relief Reconciliation Act of 2001 (the Act), should be
signed by the President shortly.


Although some changes are phased in, most provisions become effective next year. As a
result, employers will need to move quickly to determine how to respond to the Acts employee
benefit provisions.


In addition, while many of the Acts provisions offer opportunities, some provisions
impose new requirements. For example, the Act creates new disclosure rules for amendments
that reduce future pension benefits. Any employer contemplating amendments to its pension
plan will need to give attention to the new disclosure requirements.


All provisions of the Act, including
the employee benefit provisions, expire on
December 31, 2010.


In this memorandum, we identify the
employee benefit provisions likely to be of
greatest interest to most private-sector
employers. The Act also includes a number
of employee benefit provisions that are not
identified in this memorandum, including
provisions relating to governmental and tax-
exempt employers, ESOPs maintained by S
corporations, and multiemployer plans.

We will be pleased to help our
clients address any questions they have
about any of the Acts employee benefit
provisions.


HIGHLIGHTS


Higher limits on contributions, benefits,
and includible compensation

Catch-up contributions

IRA accounts within qualified plans

Greater benefit portability

Repeal of the same desk rule

Liberalization of ESOP dividend deduction

New disclosure requirements for plan
amendments

Faster vesting of matching contributions

New hardship withdrawal rules

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Higher Plan Limits


Qualified Defined Benefit Plan Limits: The Act increases the dollar limit on annual
benefits from $140,000 to $160,000, subject to future indexing in $5,000 increments, in
accordance with current law. The limits for early and late retirement are also made more
generous: the dollar limit is reduced only if benefits start before age 62, while the limit is
increased if benefits start after age 65. Effective for years ending after December 31, 2001.

Qualified Defined Contribution Plan Dollar Limit: The dollar limit on annual
contributions is increased from $35,000 to $40,000, with more rapid future indexing (in
$1,000 increments rather than the current $5,000 increments). Effective for years beginning
after December 31, 2001.

Qualified Defined Contribution Plan Percentage Limit: The Act increases from 25% to
100% the percentage-of-compensation limit on annual contributions. Effective for years
beginning after December 31, 2001.

Qualified Plan Compensation Limit: The limit on eligible compensation is increased from
$170,000 to $200,000, with future indexing in $5,000 increments (rather than the current
$10,000 increments). Effective for years beginning after December 31, 2001.

§ 401(k) Dollar Limit: The limit on § 401(k) contributions is increased from $10,500 to
$11,000 in 2002. Beginning in 2003, the limit is increased in $1,000 annual increments until
the limit reaches $15,000 in 2006, with future indexing in $500 increments. Similar changes
are made to the limits on contributions to § 403(b) annuities, § 457(b) plans, and other
elective plans.

Catch-Up Contributions to Qualified Plans: An additional increase in the dollar limit on
§ 401(k) contributions and other pre-tax elective contributions allows individuals age 50 or
older to make catch-up contributions. For § 401(k) plans, the increase in the dollar limit
starts at $1,000 in 2002 and increases by $1,000 for each subsequent year until it reaches
$5,000 for 2006, with future indexing in $500 increments. Catch-up contributions are not
subject to any other contribution limits and are not subject to nondiscrimination testing.
However, the plan must allow all eligible participants to make the same catch-up contribution
election; all plans of related employers are treated as a single plan for this purpose.

Multiple Use Test: The Act repeals the multiple use test, which applies to highly
compensated employees who participate in plans that allow both § 401(k) contributions and
after-tax or matching contributions. Effective for years beginning after December 31, 2001.

IRA Contribution Limits: The IRA contribution limits are increased gradually, to $3,000
for 20022004, $4,000 for 20052007, and $5,000 for 2008 and later years, subject to future
indexing in $500 increments. Catch-up IRA contributions are permitted for individuals age
50 or older in annual amounts starting at $500 in 20022005 and increasing to $1,000 in
2006 and thereafter.

Deemed IRAs under Qualified Plans: Employers may permit employees to make voluntary
contributions to deemed traditional IRA accounts and deemed Roth IRA accounts under
qualified plans. Effective in years beginning after December 31, 2002.

- 3 -
Portability

More Rollover Options: Eligible rollover distributions from qualified plans, § 403(b)
annuities, and governmental § 457(b) plans can be rolled over to any of such plans as well as
to an IRA. IRA distributions can be rolled over into a qualified plan, § 403(b) annuity,
governmental § 457(b) plan, or another IRA. A distribution to an individual from a qualified
plan will not be eligible for capital gain or averaging treatment, however, if the same
individual previously made a rollover to the plan that would not have been permitted under
prior law. Employers must revise the rollover notice to reflect the new rules. Effective for
distributions after December 31, 2001.

Rollover of After-Tax Contributions: Employee after-tax contributions may be rolled over
into another qualified plan or a traditional IRA. Effective for distributions after December
31, 2001.

Waiver of 60-Day Rollover Rule: The Treasury may waive the 60-day rollover period if the
failure to waive the 60-day period would be against equity or good conscience. Effective for
distributions after December 31, 2001.

Elimination of Optional Forms of Distribution under Defined Contribution Plans: If a
participant or beneficiary makes a voluntary election to transfer an account from one defined
contribution plan to another, and if certain other requirements are satisfied, the receiving plan
is no longer required to provide all of the forms of distribution previously available under the
transferor plan. In addition, an employer may amend a defined contribution plan to eliminate
a form of distribution, provided that (1) a single sum distribution is available at the same time
or times as the eliminated form of distribution, and (2) the single sum distribution applies to a
portion of the participants account at least as great as the portion that was eligible for the
eliminated form of distribution. (The new rules permitting the elimination of distribution
options are less restrictive in certain respects than similar rules recently included in Treasury
regulations.) Effective for years beginning after December 31, 2001.

Elimination of Optional Forms of Distribution under Defined Benefit and Defined
Contribution Plans: The Treasury is directed to issue regulations providing that the
prohibitions against eliminating or reducing an early retirement benefit, a retirement-type
subsidy, or an optional form of benefit do not apply to amendments that eliminate benefits,
subsidies, or optional forms that create significant burdens and complexities for the plan and
its participants, but only if the amendment does not adversely affect the rights of any
participant in more than a de minimis manner. (An example in the Joint Explanatory
Statement indicates that this rule could be used to eliminate one of two similar benefits after
a plan merger.) The Treasury is directed to issue final regulations by December 31, 2003.

Repeal of the Same Desk Rule: The Act repeals the same desk rule, which generally
prohibited a § 401(k) plan from distributing an employees account when the employee
continued in the same job for a successor employer after a business sale. (The Act uses the
term severance from employment to describe changes in employment status that may
trigger distributions under the new rule.) The repeal is effective for distributions after
December 31, 2001, even if the severance from employment occurred many years earlier. A
plan may provide, however, that specified types of severance from employment are not
distributable events. If a portion of the employees benefit is transferred