EGTRRA Restatement Frequently Asked Questions
What is EGTRRA?
EGTRRA is an acronym for the Economic Growth and Tax Relief Reconciliation Act which was signed in to law by President Bush on June 7, 2001. EGTRRA included a large number of changes to qualified retirement plans.
What changes to my qualified plan document does EGTRRA require?
Following is a list of changes from the IRS that are to be included in the EGTRRA document. Most items apply equally to 403(b) plans as well as to qualified retirement plans:
- Code §72(p) Final Loan Regulations of 12-3-02.
- Code §401(a)(4) Amendments to 1.401(a)(4)-8 relating to new comp plans 6-29-01.
- Code §401(a)(9) Final RMD Regulations of 4-17-02 and 6-15-04.
- Code §401(a)(17) Compensation limit change to $200,000 subject to COLA from EGTRRA.
- Code §401(a)(31) Direct Rollover rule changes:
- after-tax rollovers in certain situations.
- automatic rollover of certain mandatory distributions effective 3-28-05.
- 403(b) and 457(b) are added to the definition of eligible retirement plan.
- hardships are excluded from definition of eligible rollover definition.
- Code §401(k)
- Severance from employment is a distributable event for elective deferrals.
- Safe harbor hardship distribution suspension from making further elective or employee contributions is limited to 6 months.
- EGTRRA increases in 402(g) and SIMPLE deferral limits.
- Deferrals on post-severance compensation.
- Multiple use test eliminated.
- Final 401(k) and (m) Regulations, issued at the end of 2004.
- Code §402A Roth 401(k) deferrals, as applicable.
- Code §408(q) Deemed IRAs, Final Regulations 7-22-04.
- Code §411(a) Faster vesting of matching contributions.
- Code §411(a)(11) Rollover contributions disregarded from determining involuntary cash-out balance.
- Code §414(v) Catch-up contributions.
- Code §415(c) lesser of 100% of compensation or $40,000 with COLA adjustments.
- Code §416, safe harbor exemption from top-heavy rules.
- Code §4975 plan loans for Subchapter S shareholder-employees.
- Miscellaneous
- Money purchase merger into a profit sharing plan (Rev Rul 2002-42).
- PEO defined contribution plan guidance (Rev Proc 2002-21 and 2003-86).
- Charging administrative expenses to former or current employees (Rev. Rul. 2004-10).
- Deemed 125 compensation.
- Post-severance compensation.
Why do we have to restate our qualified plan document?
When Congress enacts significant changes to the law, the IRS requires retirement plan sponsors to re-write their plan documents to reflect the regulatory and legislative changes. This is commonly known as “restating” your plan. The last restatement that took place was in 2001 to conform to the changes required by GUST.
Going forward, the IRS has developed a new system to help control their workflow. Under this system individually designed plan sponsors are required to restate their qualified plans every five years and every 6 years prototype and volume submitter plan sponsors (“pre-approved plans”) are required to restate their qualified plans.
We’ve already adopted EGTRRA amendments, why do we have to restate our plan documents?
When new regulations are issued or new legislation is enacted, the Treasury Department requires plan sponsors to quickly amend their plan documents to reflect these changes as “good faith” compliance with the law. During the restatement cycle, the IRS requires plan sponsors to fully incorporate all regulatory and voluntary plan amendments into the qualified plan document itself.
Once you have several tack-on amendments, your qualified plan document becomes more confusing to interpret. The IRS has stated that the more amendments you have, the more complex your qualified plan becomes, and the likelihood of mistakes increases dramatically. For these reasons, treasury Department requires that all qualified plans be restated for EGTRRA.
What types of qualified plans must be restated due to EGTRRA?
All qualified plans must be restated. This includes prototype plans, volume submitter plans, and individually designed plans.
What happens if we do not restate our qualified plan for EGTRRA?
If you do not restate your plan it will no longer be a “qualified” plan. Since your plan would no longer be in compliance with the law, it would lose its tax-favored status, causing the following repercussions:
- You would lose the deductibility of employer contributions to the plan;
- Your employee’s vested account balances would become immediately taxable; and
- The trust would lose its tax-exempt status and become a taxable trust.
All of these events are unacceptable and can be avoided by restating your plan document as required by the Treasury Department.
Can the cost of the EGTRRA Restatement be paid by the Plan?
Yes, although services provided in connection with establishing the plan, terminating the Plan, and other Plan design functions would not properly be paid out of the Plan; reasonable expenses incurred in connection with implementing those decisions would generally be payable by the Plan. Services with respect to obtaining an IRS determination letter, to amend the Plan to comply with changes in the law, for routine nondiscrimination testing, to comply with ERISA disclosure requirements, and to communicate Plan information to participants normally can be paid from the Plan. Questions concerning expenses that may properly be paid from a Plan may be directed to:
Office of Regulations and Interpretations
Employee Benefits Security
Administration Room N-5669
200 Constitution Ave. Washington, DC 20210
How can expenses paid out of Plan assets be allocated?
DOL has issued guidance addressing the allocation of Plan expenses among participants in a defined contribution plan. The guidance states that Plan sponsors and fiduciaries have significant flexibility in establishing rules for allocating expenses among participants in defined contribution plans, including whether plan expenses are allocated on a pro rata or per capita basis when charged to the Plan as a whole, or whether expenses will be charged to individual participants.
