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Technical Corrections
The economic stimulus bill includes several
technical corrections to Economic Growth and Tax Relief
Reconciliation Act of 2001. |
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| A summary of the stimulus bill said that for some plans that
incorporate benefit limits by reference and also use a plan year that is
not the calendar year, the increased benefit limits under EGTRRA became
effective under the plan immediately and may have caused unintended
benefit increases. Plans can now be amended by June 30, 2002, to reduce
benefits to the level that applied before enactment of EGTRRA without
violating the anti-cutback rules that generally apply to plan amendments. |
The technical corrections clarify, among other things, that:
• distributions made after a severance from employment are taken into
account for only one year in determining top-heavy status under the
modified top-heavy rules;
• elective deferrals to a simplified employer plan are not subject to new
deduction limits and not considered in applying limits to other SEP
contributions;
• the combined 25 percent deduction limit for plans does not apply if the
only contributions are elective deferrals (as opposed to matching
contributions); and
• the amount of contributions taken into account in determining the
elective deferrals and individual retirement arrangement contributions is
reduced by the amount of a distribution from a qualified plan, eligible
deferred compensation plan, or traditional IRA that is included in income
or that consists of after-tax contributions.
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| *TAX TECHNICAL CORRECTIONS (secs. 411-418 of the bill)
From
TECHNICAL EXPLANATION OF THE "JOB CREATION AND WORKER ASSISTANCE ACT OF
2002"
Prepared by the Staff of the
JOINT COMMITTEE ON TAXATION
March 6, 2002
JCX-12-02 16
Except as otherwise provided, the technical corrections contained in
the bill generally are effective as if included in the originally enacted
related legislation. Amendments to the Economic Growth and Tax Relief
Reconciliation Act of 2001.
Pension-Related Amendments to the Economic Growth and Tax Relief
Reconciliation Act of 2001 |
| Individual Retirement Arrangements ("IRAs").--Under
the Act, a qualified employer plan may provide for voluntary employee
contributions to a separate account that is deemed to be an IRA. The
provision clarifies that, for purposes of deemed IRAs, the term "qualified
employer plan" includes the following types of plans maintained by a
governmental employer: a qualified retirement plan under section 401(a), a
qualified annuity plan under section 403(a), a tax-sheltered annuity plan
under section 403(b), and an eligible deferred compensation plan under
section 457(b). The provision also clarifies that the Employee Retirement
Income Security Act ("ERISA") is intended to apply to a deemed IRA in a
manner similar to a simplified employee pension ("SEP").
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Increase in benefit and contribution limits.--Under the Act,
the benefit and contribution limits that apply to qualified retirement
plans are increased. These increases are generally effective for years
beginning after December 31, 2001, but the increase in the limit on
benefits under a defined benefit plan is effective for years ending after
December 31, 2001. In the case of some plans that incorporate the benefit
limits by reference and that use a plan year other than the calendar year,
the increased benefit limits became effective under the plan
automatically, causing unintended benefit increases. The provision permits
an employer to amend such a plan by June 30, 2002, to reduce benefits to
the level that applied before enactment of the Act without violating the
anticutback rules that generally apply to plan amendments.
In connection with the increases in the benefit and contribution limits
under the Act, a new base period applies in indexing the 2002 dollar
amounts for future cost-of-living adjustments. The same indexing method
applies to the dollar amounts used to determine eligibility to participate
in a SEP and to determine the proper period for distributions from an
employee stock ownership plan (" ESOP"). The provision changes these
dollar amounts to the 2002 indexed amounts so that future indexing will
operate properly.
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| Modification of top-heavy rules.--Under the Act, in determining
whether a plan is top-heavy, distributions made because of separation from
service, death, or disability are taken into account for one year after
distribution. Other distributions are taken into account for five years.
The Act also permits distributions from a section 401(k) plan, a
tax-sheltered annuity plan, or an eligible deferred compensation plan to
be made when the participant has a severance from employment (rather than
separation from service). The provision clarifies that distributions made
after severance from employment (rather than separation from service) are
taken into account for only one year in determining top-heavy status.
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| Elective deferrals not taken into account for deduction limits.--The
provision clarifies that elective deferrals to a SEP are not subject to
the deduction limits and are not taken into account in applying the limits
to other SEP contributions. The provision also clarifies that the combined
deduction limit of 25 percent of compensation for qualified defined
benefit and defined contribution plans does not apply if the only amounts
contributed to the defined contribution plan are elective deferrals.
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| Deduction limits.--Under present law, contributions to a SEP
are included in an employee's income to the extent they exceed the lesser
of 15 percent of compensation or $40,000 (for 2002), subject to a
reduction in some cases. Under prior law, the annual limitation on the
amount of deductible contributions to a SEP was 15 percent of
compensation. Under the Act, the annual limitation on the amount of
deductible contributions that can be made to a SEP is increased from 15
percent of compensation to 25 percent of compensation. The provision makes
a conforming change to the rule that limits the amount of SEP
contributions that may be made for a particular employee. Under the
provision, contributions are included in an employee's income to the
extent they exceed the lesser of 25 percent of compensation or $40,000
(for 2002), subject to a reduction in some cases.
Under present law, the Secretary of the Treasury has the authority to
require an employer who makes contributions to a SEP to provide simplified
reports with respect to such contributions. Consistent with present law
and the provision, such reports could appropriately include information as
to compliance with the requirements that apply to SEPs, including the
contribution limits.
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| Nonrefundable credit for certain individuals for elective deferrals
and IRA contributions.--The provision clarifies that the amount of
contributions taken into account in determining the credit for elective
deferrals and IRA contributions is reduced by the amount of a distribution
from a qualified retirement plan, an eligible deferred compensation plan,
or a traditional IRA that is includible in income or that consists of
after-tax contributions. The provision retains the rule that distributions
that are rolled over to another retirement plan do not affect the credit.
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| Small business tax credit for new retirement plan expenses.--The
provision clarifies that the small business tax credit for new retirement
plan expenses applies in the case of a plan first effective after December
31, 2001, even if adopted on or before that date.
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Additional salary reduction catch-up contributions.--Under the
Act, an individual aged 50 or over may make additional elective deferrals
("catch-up contributions") to certain retirement plans, up to a specified
limit. A plan may not permit catch-up deferrals in excess of this limit.
The provision clarifies that, for this purpose, the limit applies to all
qualified retirement plans, tax-sheltered annuity plans, SEPs and SIMPLE
plans maintained by the same employer on an aggregated basis, as if all
plans were a single plan. The limit applies also to all eligible deferred
compensation plans of a government employer on an aggregated basis.
Under the Act, catch-up contributions up to the specified limit are
excluded from an individual's income. The provision also clarifies that
the total amount that an individual may exclude from income as catch-up
contributions for a year cannot exceed the catch-up contribution limit for
that year (and for that type of plan), without regard to whether the
individual made catch-up contributions under plans maintained by the more
than one employer.
The provision clarifies that an individual who will attain age 50 by
the end of the taxable year is an eligible participant as of the beginning
of the taxable year rather than only at the attainment of age 50. The
provision also clarifies that a participant in an eligible deferred
compensation plan of a government employer may make catch-up contributions
in an amount equal to the greater of the amount permitted under the new
catch-up rule and the amount permitted under the special catch-up rule for
eligible deferred compensation plans. The provision revises the lists of
requirements that do not apply to catch-up contributions to reflect other
statutory amendments made by the Act and to reflect the fact that catch-up
contributions can be made only to a qualified defined contribution plan,
not to a qualified defined benefit plan. The provision also clarifies that
the special nondiscrimination rule for mergers and acquisitions applies
for purposes of the nondiscrimination requirement applicable to catch-up
contributions.
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Equitable treatment for contributions of employees to defined
contribution plans.--Under prior law, the limits on contributions to a
tax-sheltered annuity plan applied at the time contributions became
vested. Under the Act, tax-sheltered annuity plans are generally subject
to the same contribution limits as qualified defined contribution plans,
but certain special rules were retained.
The provision clarifies that the limits apply to contributions to a
tax-sheltered annuity plan in the year the contributions are made without
regard to when the contributions become vested. The provision also
clarifies that contributions may be made for an employee for up to five
years after retirement, based on includible compensation for the last year
of service before retirement. The provision also restores special rules
for ministers and lay employees of churches and for foreign missionaries
that were inadvertently eliminated.
Under the Act, amounts deferred under an eligible deferred compensation
plan are generally subject to the same contribution limits as qualified
defined contribution plans. The provision conforms the definition of
compensation used in applying the limits to an eligible deferred
compensation plan to the definition used for defined contribution plans.
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| Rollovers of retirement plan and IRA distributions.--Under
prior law and under the Act, a qualified retirement plan must provide for
the rollover of certain distributions directly to a qualified defined
contribution plan, a qualified annuity plan, a tax-sheltered annuity plan,
a governmental eligible deferred compensation plan, or a traditional IRA,
if the participant elects a direct rollover. The provision clarifies that
a qualified retirement plan must provide for the direct rollover of
after-tax contributions only to a qualified defined contribution plan or a
traditional IRA. The provision also clarifies that, if a distribution
includes both pretax and after-tax amounts, the portion of the
distribution that is rolled over is treated as consisting first of pretax
amounts.
Employers may disregard rollovers for purposes of cash-out amounts.--Under
prior and present law, if a participant in a qualified retirement plan
ceases to be employed with the employer maintaining the plan, the plan may
distribute the participant's nonforfeitable accrued benefit without the
consent of the participant and, if applicable, the participant's spouse,
if the present value of the benefit does not exceed $5,000. Under the Act,
a plan may provide that the present value of the benefit is determined
without regard to the portion of the benefit that is attributable to
rollover contributions (and any earnings allocable thereto) for purposes
of determining whether the participant must consent to the cash-out of the
benefit. The provision clarifies that rollover amounts may be disregarded
also in determining whether a spouse must consent to the cash-out of the
benefit.
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| Notice of significant reduction in plan benefit accruals.--Under
the Act, notice must be provided to participants if a defined benefit plan
is amended to provide for a significant reduction in the future rate of
benefit accrual, including any elimination or reduction of an early
retirement benefit or retirement-type subsidy. The provision clarifies
that the notice requirement applies to a defined benefit plan only if the
plan is qualified. The provision further clarifies that, in the case of an
amendment that eliminates an early retirement benefit or retirement-type
subsidy, notice is required only if the early retirement benefit or
retirement-type subsidy is significant. The provision also eliminates
inconsistencies in the statutory language.
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| Modification of timing of plan valuations.--Under the Act, a
plan valuation may be made as of any date in the immediately preceding
plan year if, as of such date, plan assets are not less than 100 percent
of the plan's current liability. Under the Act, a change in funding method
to use a valuation date in the prior year generally may not be made
unless, as of such date, plan assets are not less than 125 percent of the
plan's current liability. The provision conforms the statutory language to
Congressional intent as reflected in the Statement of Managers.
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ESOP dividends may be reinvested without loss of dividend
deduction.--Under prior and present law, a deduction is permitted for
a dividend paid with respect to employer stock held in an ESOP if the
dividend is (1) paid in cash directly to participants or (2) paid to the
plan and subsequently distributed to the participants in cash no later
than 90 days after the close of the plan year in which the dividend is
paid to the plan. The deduction is allowable for the taxable year of the
corporation in which the dividend is paid or distributed to the
participants.
Under the Act, in addition to the deductions permitted under present law,
a deduction is permitted for a dividend paid with respect to employer
stock that, at the election of the participants, is payable in cash
directly to participants or paid to the plan and subsequently distributed
to the participants in cash no later than 90 days after the close of the
plan year in which the dividend is paid to the plan, or paid to the plan
and reinvested in qualifying employer securities. Under the provision, the
deduction for dividends that are reinvested in qualifying employer
securities at the election of participants is allowable for the taxable
year in which the later of the reinvestment or the election occurs. The
provision also clarifies that a dividend that is reinvested in qualifying
employer securities at the participant's election must be nonforfeitable.
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| *Job Creation and Worker Assistance Act of 2002, Public Law No.
107-147: Text and Joint Committee Explanation of Plan Funding and EGTRRA
Technical Corrections Provisions - Text and Joint Committee on Taxation
explanation of provisions of H. R. 3090, Job Creation and Worker
Assistance Act of 2002 (also referred to as the 'economic stimulus
legislation'), which has now become Public Law No. 107-147, dealing with
pension funding and technical corrections of provisions of the Economic
Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Public Law
107-16 |
Always consult with a professional tax advisor to determine your
potential tax consequences. |
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