The new Economic Growth and Tax Relief Reconciliation Act of 2001 makes some of the first significant efforts to simplify retirement savings plan administration in years.
EGTRRA has helped employers and their benefits advisors by strengthening the foundations of the entire retirement savings system, by increasing and eliminating many retirement savings limits.
EGTRRA has increased the maximum covered compensation to $200,000, from $170,000.
A few of the many other major changes include an increase in the limit on annual contributions to defined contribution plans to $40,000, from $35,000; elimination of a provision that capped contributions at 25% of compensation; and an increase in maximum annual benefits from defined benefit plans to $160,000, from $140,000.
But EGTRRA has also made many improvements in plan administrative requirementsthe wiring and floor plan for the retirement savings structure.
Sponsors can now eliminate payment and benefit options.
Generally the tax and ERISA vesting rules prohibit any reduction in a participants accrued benefit under a qualified plan.
Among other things, this “anti-cutback” rule protects optional forms of distributions or payments.
But, with plan mergers and design changes, a plan eventually can accumulate dozens of confusing and difficult-to-communicate distribution options, many of which participants never use.
The new law allows defined contribution plans to simplify their payment and benefit options by eliminating a form of distribution, as long as the receiving plan offers a lump-sum payment option available at the same time as, and based on the same or greater portion of the participants account as, the form of distribution being eliminated.
EGTRRA also requires new regulations permitting plan amendments that eliminate or reduce early-retirement benefits, retirement-type subsidies and optional forms of benefit that create significant burdens or complexities for the plan and plan participants, unless the amendment adversely affects the rights of any participant in a more than de minimis manner.
The rules for identifying “top heavy” plans are simpler.
The EGTRRA changes to the so-called “top-heavy” plan criteriaplans in which more than 60% of the contributions or benefits under the plan are provided to “key” employeeswill simplify administration of existing plans, eliminating many “look-back” rules and the need to keep detailed records of key-employee status.
These changes may also significantly reduce the number of top-heavy plans.
Consequently, these changes can expand the market for retirement plans, especially among medium and small employers that previously shunned retirement plans because of the top-heavy rules.
To meet the requirements for tax-qualified plans, top-heavy plans usually must provide faster vesting and enhanced benefits or contributions for non-key employees.
The definition of “key employee,” coupled with a four-year look-back to establish key employee status, made these plans extremely difficult and expensive to administer.
Under the old law, a key employee typically was one who was: in the current or past four years an officer earning more than $70,000 a year; a 5% owner; a 1% owner earning more than $150,000 a year; or one of the employees with the 10 largest ownership interests in the employer, and earning more than $35,000 a year.
Beginning with 2002 plan years, EGTRRA narrows the basic criterion used to determine top-heavy status: the definition of “key employee.”
The new definition includes only an individual in the current year who is an officer earning more than $130,000 for the year (adjusted for inflation), a 5% owner, or a 1% owner earning over $150,000 (not adjusted for inflation). For this purpose, the number of officers will never exceed 50 individuals.
Next, the top-heavy plan test will include both current year distributions and in-service distributions over the last five years in calculating an individuals benefits or accounts.