TRI Pension Services/ Archives of Old "What's New" Summaries (July 1 through December 31, 2001)

The summaries below previously appeared on the "What's New/Current Developments" page of our website between July 1 and December 31, 2001). Each item includes the date it was originally posted. We provide these items for reference purposes. The items are organized in reverse chronological order (i.e., starting with the summaries posted last within this time period). Please note that some of the items may have been modified by subsequent guidance issued by Congress, one the governmental agencies, or a court.

Don't forget about some non-EGTRRA rules taking effect on January 1, 2002 (added December 17, 2001). There are 4 regulations that become effective on January 1, 2002. With the recent emphasis on EGTRRA, and the many changes enacted by that legislation that also are effective on January 1, 2002, these regulations may have gotten lost in the shuffle.

• "Gateway" rules for cross-tested defined contribution plans. Regulations issued in June 29, 2001, impose new conditions on being able to "cross-test" defined contribution plans (i.e., test for nondiscrimination compliance under IRC §401(a)(4) by converting allocations of employer contributions into "equivalent benefit rates"). These regulations apply for plan years beginning on or after January 1, 2002. Under the regulations, most cross-tested plans will have to ensure that the nonhighly compensated employees benefiting under the plan are receiving an allocation rate that is no less than a minimum percentage of compensation, as specified in the regulations (known as a "gateway" contribution). TRI Pension Services offers a Cross-Tested Profit Sharing Plans Package, which includes a summary of these regulations, sample contribution and allocation formulas that are designed to take advantage of cross-testing, and a discussion of the use of 401(k) plans with these arrangements. For ordering information CLICK HERE.
• Participant loan regulations. On July 31, 2000, the Treasury finalized the regulations under IRC §72(p). The regulations address the repayment periods for loans, consequences of default, maximum "cure" periods allowed for missed payments before a loan must be treated in default for §72(p) purposes, rules for loan offsets, and suspensions of payments for leaves of absence. The regulations must be satisfied with respect to loans made on or after January 1, 2002. Plan sponsors need to make sure the plan's administrative systems are ready to comply with these regulations for loans made next year. Subscribers to The ERISA Outline Book should refer to Section IX of Chapter 7 for detailed information about these regulations.
• Minimum distribution regulations. New rules for calculating minimum distributions were issued on January 17, 2001. Since the regulations are in proposed form, and final regulations have not been issued yet, the 2002 effective date for these regulations is not mandatory. However, plans may start using these regulations as early as for 2001. The 1987 regulations control for any year in which the 2001 regulations are not used. Note that if a qualified plan did not use these regulations in 2001, and intends to begin using these regulations in 2002, the plan must make the 2001 regulations effective as of January 1, 2002. This means that all minimum distributions for 2002 will be calculated under the new regulations. The year 2001 was the only year in which the plan could switch from the 1987 regulations to the 2001 regulations on a date other than January 1st. The 2001 regulations are discussed in detail in the 2002 Edition of The ERISA Outline Book in new Section VII of Chapter 6. Orders for the 2002 Edition are now being taken. For details CLICK HERE.
• Audit for small plans. Actually, these new regulations are effective for plan years beginning after April 17, 2001. However, for calendar year plans, the first plan year these rules are effective is the 2002 calendar year. The regulations, published on October 19, 2000, impose conditions that must be met in order for a small plan (i.e., fewer than 100 participants at the beginning of the plan year) is excused from having to get an audit and attaching a audit report to its Form 5500. To be exempt from the audit requirement, at least 95% of the plan's assets must be in "qualifying assets" or the plan must satisfy enhanced bonding rules. "Qualifying assets" are generally investments in mutual funds, insurance contracts, participant loans, employer securities, but also include other investments if they are held by a financial institution or by certain participant-directed accounts. The 95% "qualifying assets" test is generally determined as of the end of the prior year (e.g., December 31, 2001, for a plan year beginning January 1, 2002). Details on these regulations are provided in Chapter 13 (Section III, Part A.4.) of The ERISA Outline Book.

IRS guidance on user fee waiver for determination letter applications filed by certain small employers (added December 17, 2001). Notice 2002-1 provides guidance on EGTRRA §620, which grants certain small employer user fee relief for determination letter applications filed within the first five plan years of a plan (or, if later, by the end of a remedial amendment period that began within the first five years, such as the GUST remedial amendment period). The relief is available only if: 1) the employer has 100 or fewer employees in the preceding calendar year with at least $5,000 of compensation, 2) at least one nonhighly compensated employee is benefiting under the plan, and 3) the application is filed after December 31, 2001. Related employers are treated as a single employer to apply this 100-employee test. If an eligible employer participates in a multiple employer plan, the user fee relief applies to the multiple employer plan only if all of the participating employers are eligible for the user fee relief.

New applicable mortality table issued by IRS for section 415 determinations and calculating minimum present values under IRC §417 (added December 17, 2001). The applicable mortality table under Rev. Rul. 95-6 has been replaced with a new table in Rev. Rul. 2001-62. The table in Rev. Rul. 2001-62 reflects the 1994 Group Annuity Reserve Table (94 GAR), using blended male/female rates. The applicable mortality table is used by defined benefit plans to comply with the limits of IRC §415(b) and with the minimum present value rules under IRC §417(e). Defined benefit plans must use the Rev. Rul. 2001-62 table for annuity starting dates falling on or after December 31, 2002. However, an earlier effective date in 2002 is permitted. Model amendments are included with the ruling that may be used to comply. An M&P sponsor may adopt the model amendment on behalf of the adopting employers or adopting employers of the M&P plan may be allowed to adopt individually.

Highly compensated compensation test rises to $90,000 in 2002/other 2002 limits announced as well (added December 11, 2001). The IRS announced the various adjusted 2002 dollar limits affecting retirement plans. Many of the limits have been reset by EGTRRA. However, the compensation test for determining who is a highly compensated employee (HCE) was not affected by EGTRRA. The current compensation test is $85,000, which is in effect for lookback years beginning in 2001. For lookback years beginning in 2002, the compensation test rises to $90,000. Remember, this is the lookback year that begins in 2002. For calendar year plans, the $90,000 compensation test will apply to determining HCEs in the 2003 plan year (i.e., the plan year for which calendar year 2002 is the lookback year). For noncalendar year plans, the first plan year that will use the $90,000 test depends on whether the plan uses the calendar year election to determine HCEs. If the calendar year election is not used, then the $90,000 test will apply to the plan year that begins in 2003, which is the first plan year for which a lookback year begins in 2002. On the other hand, if the calendar year election is used, then the $90,000 test will apply to the plan year that begins in 2002 and ends in 2003, because calendar year 2002 will be the relevant lookback year for the HCE determination. The following other 2002 dollar amounts were announced by IRS (if "(EGTRRA)" follows the listed limitation, it means the new pension legislation determined the 2002 limit):

• Section 415 dollar limit - defined contribution plans: If the limitation year begins in 2002, the limit is increased to $40,000 (EGTRRA). However, if the limitation year begins in 2001 and ends in 2002, the pre-EGTRRA $35,000 limit still applies.
• Section 415 dollar limit - defined benefit plans: For limitation years ending after December 31, 2001, the limit is increased to $160,000 (EGTRRA). Also note that this increased dollar limit may be applied for commencements ages 62 through 65 rather than the pre-EGTRRA rule that applied the dollar limit to benefit commencement at the social security retirement age.
• 2002 factor for increasing 100% average compensation limit under IRC §415(b)(1)(B) - defined benefit plans: 1.0270. For a participant who separated from service prior to January 1, 2002, his annual benefit limit under IRC §415(b)(1)(B) (i.e., 100% of average compensation) may be increased by multiplying the participant's compensation limit, as adjusted through 2001, by this factor.
• Elective deferral limit under IRC §402(g) for 2002: $11,000 (EGTRRA). This limit applies to 401(k) plans, 403(b) plans, and SARSEPs. Elective deferrals made to SIMPLE plans are also included in determining whether an individual has exceeded the 402(g) limit, but an individuals annual elective deferrals to a SIMPLE plan are also subject to a lesser limit (see below).
• Compensation dollar limit under IRC §401(a)(17) for 2002: $200,000 (EGTRRA). Applies to plan years that begin in 2002. Also see Notice 2001-56 (summarized below - added September 2, 2001) for a clarification of the application of this increase to average compensation determinations.
• Compensation requirement for officer test under key employee determination: $130,000 (EGTRRA). Also see Notice 2001-56 (summarized below - added September 2, 2001) for a clarification of the effective date of the EGTRRA-amended key employee definition.
• SIMPLE plan elective contribution limit for 2002: $7,000.
• Catch-up limit under IRC §414(v) for 2002: $1,000 ($500 for SIMPLE plans). Also see the summary below on the catch-up regulations, added October 22, 2001.
• Deferral limit for 2002 for eligible deferred compensation plans under IRC §457(b): $11,000 (EGTRRA). The 2001 limit was only $8,500.
• Compensation needed to receive SEP contribution for 2002: $450 (same as for 2001). If a SEP participant fails to meet this minimum compensation requirement, the employer who maintains the SEP is not required to contribute on behalf of the participant.

GUST remedial amendment period extended to February 28, 2002; later for certain persons directly affected by terrorist attacks (added November 15, 2001). Rev. Proc. 2001-55 extends the GUST remedial amendment period under Rev. Proc. 2000-27 to February 28, 2002, for any plan whose amendment deadline otherwise would end before that date. Essentially, this affects calendar-year plans and January 31 year-end plans that normally would end the GUST remedial amendment at the end of the 2001 plan year (i.e., December 31, 2001, for the calendar year plan and January 31, 2002, for the January 31 plan). This extended deadline also is the latest date such a plan could certify with an M&P plan sponsor or volume submitter practitioner (or adopt an M&P plan or volume submitter plan) to qualify for the GUST remedial amendment period available under Rev. Proc. 2000-20 (which does not end before December 31, 2002). This limited extension applies to all plans that have a 2001 plan year ending prior to February 28, 2002, regardless of whether the plan is affected by the September 11, 2001, terrorist attacks.

• Terrorist attack. For plans "directly affected" by the September 11, 2001, terrorist attack, the GUST amendment deadline is extended to June 30, 2002,if the deadline otherwise would end earlier. The procedure provides a much narrower definition of who is directly affected by the terrorist attack than other guidance issued by IRS and DOL. A plan will be considered to be directly affected by the terrorist attack if any of the following were located at the time of the attack in the area of the New York City borough of Manhattan bounded on the north by 14th Street: 1) the principal place of business of any employer that maintains the plan, 2) the office of the plan or the plan administrator, 3) the office of the primary recordkeeper serving the plan, 4) or the office of an attorney, enrolled actuary, certified public accountant or other advisor retained by the plan (or by the employer with respect to issues involving the plan). A plan will also be considered to be directly affected by the terrorist attack if any individual required under the terms of the plan or corporate rules to approve plan amendments, the plan administrator, or an attorney, enrolled actuary, certified public accountant or other advisor retained by the plan (or by the employer with respect to issues involving the plan) was injured or killed or is missing as a result of the terrorist attack. This terrorist attack extension does not apply to the deadline for certifying with an M&P plan sponsor or volume submitter practitioner, or adopting an M&P plan or volume submitter plan, to qualify for the Rev. Proc. 2000-20 amendment period. Such certification or adoption must be completed before the end of the normal GUST remedial amendment period (as generally extended by Rev. Proc. 2001-55), i.e., the later of February 28, 2002, or the end of the 2001 plan year.
• Substantial hardship exception may be granted by IRS on case-by-case basis. A plan directly affected by the terrorist attack (as described in the prior paragraph) may apply for an additional extension, ending no later than December 31, 2002, due to substantial hardship incurred by having to amend for GUST by June 30, 2002 (or the last day of the 2001 plan year, if later). Such a request must be filed by the later of April 30, 2002, or the 60th day before the end of the 2001 plan year. If the request for a further extension is denied, the GUST remedial amendment period for the plan will end on the later of the date on which it would otherwise end (including the extension to June 30, 2002, deadline described in the prior paragraph) or the date that is one month after the date of the letter denying the request.
• Request for treatment as directly affected by terrorist attack.For those plans that do not meet the definition described above for being affected by the terrorist attack, may apply for a ruling from the IRS that the plan is directly affected and should be entitled to the June 30, 2002, deadline (or a later substantial hardship deadline, as described in the prior paragraph). The request must be submitted by the later of December 31, 2001, or the 60th day before the end of the 2001 plan year. If the request for a further extension is denied, the GUST remedial amendment period for the plan will end on the later of the date on which it would otherwise end (including the February 28, 2002, general extension granted by this Revenue Procedure) or the date that is one month after the date of the letter denying the request.

IRS publishes list of M&P and volume submitter sponsors who submitted for GUST approval by December 31, 2000 (added November 6, 2001). The IRS has posted at its website a list of those M&P plan sponsors and volume submitter practitioners who submitted their GUST documents by December 31, 2000. Submission by that date was necessary to obtain the special GUST remedial amendment period under Rev. Proc. 2000-20. The IRS will periodically update this list. The list includes the following information: 1) the name of the M&P plan sponsor or volume submitter practitioner, 2) the name of each M&P plan adoption agreement or volume submitter specimen plan submitted by December 31, 2000, by that sponsor or practitioner, 3) the IRS file folder number for each adoption agreement or specimen plan submitted, and 4) if applicable, the date the GUST opinion letter or GUST advisory letter is issued. To link to the list CLICK HERE. Employers who have adopted M&P plans or volume submitter plans of these sponsors, or any employers that execute a written certification with such M&P plan sponsor or volume submitter practitioner by the end of the 2001 plan year, are entitled to the Rev. Proc. 2000-20 amendment period. The GUST remedial amendment period under Rev. Proc. 2000-20 (as modified by Notice 2001-42) ends on the later of: 1) December 31, 2002, or 2) last day of the 12th month following the month in which the latest of the sponsor's GUST approval letters are issued.

Catch-up guidance provided in form of proposed regulations (added October 22, 2001). Proposed regulations (§1.414(v)-1)provides initial guidance on the catch-up contribution rules under IRC §414(v). Here are the highlights from this guidance. Subscribers to ERISA Views will receive a more thorough analysis as a special bonus section in the Fall 2001 Issue (Issue #23). The 2002 Edition of The ERISA Outline Book will feature the most complete discussion of the catch-up rules and associated Treasury/IRS guidance. For the complete text of these proposed regulations CLICK HERE.

• Age 50 rule.Only participants who are at least age 50 are eligible to make catch-up contributions. If a participant is projected to be at least 50 by the end of a calendar year, he or she is considered to be 50 as of January 1st of that year. This way, all participants who turn 50 in a calendar year are treated the same in that year regardless of whether they terminate or die during the year and regardless of the plan year of the plan. Thus, in a plan with a noncalendar year (e.g., June 30 year end), an employee who will reach 50 on November 10, 2002, is considered 50 as of January 1, 2002, and may make catch-up contributions for the plan year ending June 30, 2002.
• Definition of catch-up contributions.Catch-up contributions are those elective deferrals which: 1) exceed an applicable limit, 2) are treated by the plan as catch-up contributions, and 3) do not exceed the annual catch-up limit (e.g., $1,000 for 2002) (as modified by the regulation, in the case of an employer with multiple plans that allow for elective deferrals). An "applicable limit" means a statutory limit (i.e., IRC §401(a)(30), which incorporates the IRC §402(g) dollar limit, and IRC §415), an employer-provided limit (i.e., a limit imposed under the terms of the plan, such as plan provision which limits elective deferrals for a plan year to 10% of compensation for the plan year), or the ADP limit (applicable to HCEs only).
• ADP testing procedures/recharacterization of excess contributions as catch-up contributions As we anticipated, the guidance determines the portion of catch-up contributions that result from the "ADP limit" only after the ADP test is run. The ADP limit is the maximum amount an HCE could retain in the plan after the application of the corrective distribution calculation under IRC §401(k)(8)(C) (determined without regard to IRC §414(v)). The amount in excess of that is recharacterized as catch-up contributions, if the HCE is a catch-up eligible participant (or refunded, to the extent the catch-up limit has already been reached for that calendar year. When running the ADP test for any plan year in which catch-up contributions may be made to the plan, the deferral percentage for any catch-up eligible participant is calculated without regard to elective deferrals (up to the unused annual catch-up limit) that exceed any statutory limit or employer-provided limit. Then, after running the test, more of such an employee's elective deferrals are recharacterized as catch-up contributions to the extent they exceed the ADP limit, if the employee is an HCE, until the unused catch-up limit for the calendar year is reached or the total potential refund is recharacterized, whichever comes first.

Good news for recordkeepers on top heavy testing.For top heavy testing, catch-up contributions are disregarded only for the current plan year in applying IRC §416 for that plan year. Thus, the catch-up contributions of key employees are disregarded to determine what the top heavy minimum is under IRC §416(c). However, catch-up contributions made for prior plan years are taken into account in computing the top heavy ratio for a subsequent plan year. Thus, the account balance taken from the end of the prior year to determine if the plan is top heavy includes the catch-up contributions for that year. This prevents having to do a separate accounting of the earnings attributable to catch-up contributions!

Coverage testing.The average benefits test under IRC §410(b) is calculated by disregarding catch-up contributions for the current plan year. However, catch-up contributions for prior years are included where applicable (e.g., when accrued-to-date method is used). As with the top heavy rules, this approach avoids having to account separately for the earnings attributable to catch-up contributions.

Universal availability. If the employer allows catch-up contributions in any plan that permits elective deferrals, then all plans of the employer that permit elective deferrals must also allow catch-up contributions on a uniform basis. The regulation clarifies that a plan which doesn't otherwise provide for elective deferrals (e.g., a defined benefit plan or a profit sharing plan without a 401(k) arrangement) need not meet this universal availability rule, even if participants in that plan are not eligible for a 401(k) plan maintained by the employer which does allow for catch-up contributions.

• Aggregation rules. The regulations create aggregation rules, even though the statutory language did not clearly provide for such rules. (It is assumed technical corrections will be adopted to IRC §414(v) to conform to the position taken in the regulations.) Thus, an employee will not be able to exceed the annual catch-up limit (e.g., $1,000 in 2002) by participating in more than one elective deferral arrangement that is aggregated under a statutory rule (e.g., because of IRC §402(g), an individual's aggregate catch-up contributions to a 401(k) plan and a 403(b) plan during 2002 may not exceed $1,000).

2002 taxable wage base (added October 22, 2001). The 2002 taxable wage base will be $84,900, up from $80,400 for 2001. This will affect permitted disparity allocations under defined contribution plans in plan years beginning in 2002, as well as "imputing" permitted disparity for nondiscrimination testing under IRC §401(a)(4) that is performed in 2002 plan years. The "covered compensation" used for permitted disparity formulas under defined benefit plans also will be updated for 2002 plan years. The IRS should be issuing in the near future a revenue ruling with revised covered compensation figures.

Guidance issued on EGTRRA changes to IRC §415 limits; funding assumptions may ignore "sunset" provisions; plans with normal retirement ages before 65 may need to address potential conflict with IRC §411 (added October 18, 2001).Rev. Rul. 2001-51 provides guidance, in Q&A form, on the EGTRRA changes made to IRC §415. The bulk of the guidance is devoted to the changes made to the defined benefit plan limits under IRC §415(b) and the implementation of those changes. EGTRRA increased the defined benefit dollar limit from $140,000 to $160,000. It also provided that the maximum dollar limit applies to benefits commencing between ages 62 and 65, rather than the participant's social security retirement age. Actuarial reductions to the dollar limit are required to the maximum dollar limit only if benefits are paid before age 62 (rather than before social security retirement age), and actuarial increases to the dollar limit apply only if the benefits are paid after age 65 (rather than after social security retirement age). For defined contribution plans, EGTRRA raised the limit on annual additions to the lesser of 100% (rather than 25%) of IRC §415(c)(3) compensation or $40,000 (up from $35,000). The defined benefit plan changes are effective for limitation years ending after December 31, 2001. For example, if the limitation year ends June 30, the first year that the new limits apply is the limitation year beginning July 1, 2001, and ending June 30, 2002. See Q&A-1 of Rev. Rul. 2001-51. On the other hand, the defined contribution plan changes are effective for limitation years beginning after December 31, 2001. For example, if the limitation year ends June 30, the first year that the new limits apply is the limitation year beginning July 1, 2002, and ending June 30, 2003. For the year ending June 30, 2002, a defined contribution plan would continue to apply the 25%/$35,000 limit. See Q&A-9 and Q&A-10 of Rev. Rul. 2001-51. For the complete text of Rev. Rul. 2001-51 CLICK HERE.

• Is a plan amendment needed to make the EGTRRA changes effective? That depends on whether the plan incorporates IRC §415 by reference. If the §415 limits are incorporated by reference, then the new rules are automatically effective as of the effective date described in the prior paragraph, and no amendment is needed. If the §415 limits are not incorporated by reference, a plan amendment will need to be adopted. See Q&A-2 of Rev. Rul. 2001-51. These amendment rules are the same ones that applied to the repeal of the IRC §415(e) limit, effective for post-1999 limitation years, as explained in Notice 99-44.
• Good news: EGTRRA "sunset" provision may be ignored. Pursuant to EGTRRA §901, the EGTRRA provisions "sunset" for limitation years beginning after December 31, 2010. In spite of the fact that the EGTRRA limits may not be in effect after 2010, actuarial calculations for plan years in which EGTRRA is in effect should be performed as if the EGTRRA limits will continue indefinitely. See Q&A-17.
• Adjusting the §415(b) limit for benefits not payable in a single life annuity form. The methodology described in Q&A-7 and Q&A-9 of Rev. Rul. 98-1 continues to apply in determining whether a benefit payable in a form other than a single life annuity satisfies IRC §415(b). See Q&A-3 of Rev. Rul. 2001-51. However, for limitation years ending after December 31, 2001, the $160,000 limit is substituted for the $140,000 limit, actuarial reductions to the dollar limit under IRC §415(b)(2)(C) are applied only if the benefit commences before age 62, and actuarial increases to the dollar limit under IRC §415(b)(2)(D) are applied only if the benefit commences after 65. Guidance is also provided on how to adjust a benefit for the EGTRRA increase for a participant who has already commenced benefits. The guidance, which can be found in Q&A-5 through Q&A-7, is similar to the guidance in Notice 99-44, regarding adjustments allowed after the repeal of IRC§415(e).
• Plans with normal retirement ages less than 65 must address IRC §411 issues. If the plan's normal retirement age is less than 65, the plan must be designed so that the operation of the new IRC §415(b) will not cause a violation of the requirements under IRC §411 regarding nonforfeitability and actuarial increases for late retirement. This is explained in Q&A-4 of Rev. Rul. 2001-51. A potential conflict with IRC §411 arises because of the nonincreasing dollar limit for ages 62 through 65. For example, suppose the plan has a normal retirement age of 62, and a participant's accrued benefit at age 62 is the maximum dollar limit under EGTRRA (i.e., $160,000). If the participant does not commence benefits at age 62, IRC §411 requires an actuarial increase for late retirement. But at age 63, IRC §415(b) continues to limit the annual benefit to $160,000 (unless there has been a COLA increase on that dollar limit). To avoid a violation of IRC §411, the plan must do one of two things: 1) permit a participant who reaches normal retirement age to commence distributions, or 2) comply with the "suspension of benefit" rules under IRC §411(a)(3)(B) and DOL Reg. §2530.203-3. Many defined benefit plans, particularly those maintained by smaller employers, will allow for distributions at normal retirement age, even if the participant does not retire, satisfying option 1).
• Amending a defined benefit plan to limit the "pop up" of benefits due to EGTRRA limitation increases. Since EGTRRA does not provide anti-cutback relief under IRC §411(d)(6), an amendment to limit the effect of the EGTRRA changes on benefits already accrued under a defined benefit plan may need to be adopted before the effective date of the EGTRRA provisions. An employer might want to do this in order to prevent an accrued benefit from "popping up" or to reduce the "pop up" that would occur by reason of the EGTRRA amendment, at least until the employer has analyzed the effect of the "pop up" on funding. Whether there is time to prevent a "pop up" of benefits depends on how the plan document addresses IRC §415. These issues are addressed in Q&A-13 of Rev. Rul. 2001-51. For a plan that incorporates §415 by reference, such an amendment would have to be adopted before the first day of the first limitation year ending after December 31, 2001, because the EGTRRA increases automatically take effect under the plan as of such date. Unfortunately, for some plans, that date has passed (and might have occurred even before the EGTRRA enactment date). For example, a plan with a limitation year ending March 31, which incorporates §415 by reference, became subject to the EGTRRA limits as of April 1, 2001, which preceded the June 7, 2001, enactment date of EGTRRA. So, it is too late to adopt an amendment to prevent any "pop up" of benefits that might have occurred as of that date. However, if the first EGTRRA limitation year hasn't started, it is still possible to prevent the "pop up" by adopting an appropriate amendment before such EGTRRA effective date. For example, as of today (October 18, 2001), plans that have limitation years that start November 1, 2001, December 1, 2001, and January 1, 2002, still have time to address the "pop up" issue by delaying the effective date of the EGTRRA provisions. For a plan that incorporates the IRC §415 limits by reference, but with respect to which the effective date of the EGTRRA limits has not occurred, the employer may adopt a model amendment to continue the pre-EGTRRA limits until it determines when it wishes the EGTRRA limits to take effect. The model amendment is included in Q&A-13 of Rev. Rul. 2001-51. Note that in the case of a small employer defined benefit plan, the benefit formula is typically designed to produce the desired benefit for the target individual(s), taking into account the present limitations. Therefore, there is usually little room for a "pop up" in the accrued benefit due to an increase in the §415 limit. In other words, the accrued benefit of an individual under the plan's benefit formula, determined without regard to IRC §415(b), is typically not much different than the accrued benefit after the IRC §415 limit is applied. An increase in the IRC §415 limits, due to EGTRRA, will raise the benefit no higher than the actual accrued benefit, even if the EGTRRA limit might permit a larger accrued benefit.
• Qualification issues for defined contribution plans that delay effective date of EGTRRA. If the pre-EGTRRA limits continue to be applied under a defined contribution plan in limitation years beginning on or after January 1, 2002, the plan must be careful not to violate any qualification requirements for which the statutory IRC §415 limits must be used. See Q&A-14 of Rev. Rul. 2001-51. Under Treas. Reg. §1.415-6(b)(6), annual additions that exceed IRC §415(c) may be held in a suspense account for allocation in the next limitation year. If a plan treats allocations as excess annual additions in a post-2001 limitation year on the basis that such allocations exceed the pre-EGTRRA limits, such amounts may not be placed in a suspense account. A different method would need to be used to correct the "section 415 failure." For example, it would be permissible to reallocate the "excess" to other participants who have not reached the pre-EGTRRA limits. Similarly, a 401(k) plan may not distribute elective deferrals, pursuant to Treas. Reg. §1.415-6(b)(6)(iv), merely because the participant's annual additions in a post-2001 limitation year exceed the pre-EGTRRA limits. To distribute such deferrals would violate the distribution restrictions under IRC §401(k)(2). These are the same issues that arose with the repeal of IRC §415(e), effective on the first day of the 2000 limitation year, and were addressed in that context in Notice 99-44.

Reporting relief for short delays on minimum funding for calendar year 2000; more relief anticipated for those directly affected (added October 8, 2001). In the discussion below on various deadlines extended because of the Sept. 11 terrorist attack, we note that guidance is needed on several items, including minimum funding deadlines under IRC §412. IRS Announcement 2001-103 provides reporting relief, but no direct extension of the deadline. This reporting relief applies only if the plan year of a defined benefit plan or money purchase plan ends on or after December 27, 2000, and on or before January 8, 2001. For a Form 5500 that is required to be filed on or before October 15, 2001, for such a plan, the plan administrator is not treated as filing an inaccurate Form 5500, nor is the enrolled actuary treated as filing a proper Schedule B, merely because a contribution made by September 24, 2001, is treated as having been made timely for such plan year. This is not an actual extension of the filing deadline, but anticipates the probable extension that will apply. The problem is that Treasury/IRS lacks the authority to extend the minimum funding deadline beyond the date which is 8-1/2 months after the close of the plan year (e.g., September 15 for a calendar-year plan) without Congressional authority. That authority is expected to come but maybe not in time for the Form 5500 deadline. As indicated in Announcement 2001-103, the IRS is expecting that once it receives Congressional authority, the September 15, 2001, minimum funding deadline will be extended to September 24, 2001. Informal discussions with IRS also suggest that a longer extension will be announced for taxpayers who are directly affected by the attacks. We will keep you posted! For the complete text of Announcement 2001-103, CLICK HERE.

IRS provides sample language for certification under Rev. Proc. 2000-20 (added October 8, 2001). Under Rev. Proc. 2000-20, one way that an employer can obtain the extended GUST remedial amendment period is to execute a written certification with an M&P plan sponsor or volume submitter practitioner who filed for GUST opinion letters or advisory letters no later than December 31, 2000. The certification must be executed no later than the last day of the 2001 plan year (i.e., the plan year that begins in 2001), which is the date the GUST remedial amendment period would otherwise end, pursuant to Rev. Proc. 2000-27. The extended GUST amendment period for an employer who satisfies the conditions under Rev. Proc. 2000-20 is the later of: 1) December 31, 2002, or 2) 12 months after the latest opinion letter or advisory letter is issued to the M&P sponsor or volume submitter practitioner with respect to applications submitted by December 31, 2000 (see Rev. Proc. 2000-20, as modified by Announcement 2001-12 and Notice 2001-42). A certification is not required if the employer is already an adopter of an M&P plan or volume submitter plan sponsored by the firm that has filed for GUST opinion letters or advisory letters by December 31, 2000, even if the employer has adopted the pre-GUST reversion of the M&P plan or volume submitter plan. Questions have been raised whether the adoption of a prototype or volume submitter plan that has been modified by the employer (e.g., the employer has modified the allocation method to one that is not otherwise available under the pre-approved adoption agreement) can qualify for the Rev. Proc. 2000-20 amendment period if a timely certification is not executed. Although section 19.06 of Rev. Proc. 2000-20 provides that the plan is still treated as an adoption of the M&P plan or volume submitter plan, some practitioners are uncomfortable relying on that, particuarly if the amendments to the M&P plan or volume submitter plan are significant, and insist that the employer adopt a certification as well. Other practitioners are just having all clients, whether they are previous adopters of the M&P plan or volume submitter plan, to adopt a certification, to "be safe" and avoid having "anyone fall through the cracks." To assist those who prefer to have a client-employer adopt a certification to ensure that the Rev. Proc. 2000-20 amendment period has been obtained, we are providing a sample certification. In its Summer 2001 Issue of the Employee Plans News, the IRS published sample language for a certification. To access a Word document with this sample certification, CLICK HERE.

Various deadlines extended due to Sept. 11 terrorist attack (added September 18, 2001; amended September 20, 2001). The Treasury and DOL have quickly issued guidance regarding the extension of various deadlines due to the terrorist attack on September 11, 2001. The following have been issued: 1) Notice 2001-61 (extension of various tax code deadlines), 2) Notice 2001-63 (blanket short-term extension for all taxpayers with respect to certain tax code deadlines), and 3) PWBA News Release 01-36 (extension of Form 5500 deadlines). Details are these items are provided below.

Tax code extensions. Notice 2001-61 provides extended deadlines for filing income tax returns, paying estimated taxes, and performing certain acts required under the tax code, as described in Treas. Reg. §301.7508A-1(c)(1). For purposes of these extended deadlines, the "affected counties" are the following in New York - Bronx, Kings, New York (burroughs of Brooklyn and Manhattan), Queens, and Richmond - as well as Arlington County in Virginia. These counties are collectively referred to in Notice 2001-61 as the "covered disaster area." Under §301.7508A-1(c)(1), "affected taxpayers" include: 1) any individual whose principal residence, and any business entity whose principal place of business, is located in the covered disaster area, 2) any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in the covered disaster area, 3) any person not located in the covered disaster area but whose records necessary to meet a filing or paying deadline are maintained in the covered disaster area, 4) any estate or trust that has tax records necessary to meet a filing or paying deadline in the covered disaster area, and 5) any spouse of an affected taxpayer (solely with regard to a joint return). In Notice 2001-61, IRS expands the definition of affected taxpayers to include the following: 1) victims of the hijacked airplanes that crashed in Pennsylvania and in the covered disaster area, 2) all relief workers, regardless of whether they work for recognized government or philanthropic organizations, and 3) taxpayers whose place of employment is located within the covered disaster area. Any return or other document filed in reliance of this notice should be marked with "September 11, 2001 Terrorist Attack" in red ink on the top of the return or document. The following relief is granted with respect to the persons listed in this paragraph.

• Individual returns. Any individual who is an affected taxpayer and who has extended his or her 2000 federal income tax return to a date beyond September 10, 2001, has until February 12, 2002, to file the return. The extension does not cover the time to pay the tax (the extension request, which was due before September 11, 2001, should have included payment of the estimated tax liability). However, if payment is late, the period from September 11, 2001, through January 9, 2002, will be disregarded in calculating any failure to pay penalty.
• Non-individual returns. If an affected taxpayer other than an individual has a return originally due on or after September 11, 2001, and on or before November 30, 2001, the return is automatically granted a six month extension and a 120-day postponement to file such return and to pay the tax. If a return was not originally due within this time frame, but the affected taxpayer is on a six-month extension that expires between these dates, an additional 120 days to file is granted under IRC §7508 (e.g., a corporate return for calendar year 2000 which was on a 6-month extension to September 17, 2001, is extended to January 15,2002). Where the return was already on extension, the 120-day postponement does not extend the time to pay the tax, since the estimated tax liability should have been paid when the extension was granted, but failure-to-pay penalties would not accrue from September 11, 2001, to January 9, 2002. Returns covered by this paragraph include a partnership return, corporate income tax return, estate or trust income tax return, estate tax return, an annual return filed by a tax-exempt organization, an excise tax return and an employment tax return. In the retirement plan context, this would include the Form 5330 excise tax return (pertaining to, among other things, prohibited transaciton excise taxes, excise taxes for minimum funding deficiencies, and excise taxes for corrective distributions from 401(k) plans that are made more than 2-1/2 months after the close of the plan year).
• Estimated tax payments. Estimated tax payments for tax year 2001 that were originally due on or after September 11, 2001, and before January 15, 2002, are extended to January 15, 2002. This applies to all affected taxpayers.
• Postponement to perform certain acts. Pursuant to its authority under IRC §7508A, the IRS has postponed for 120 days the performance of other acts described in Treas. Reg. §301.7508A-1(c)(1), if the act had to be performed within the period beginning September 11, 2001, and ending November 30, 2001. In the retirement plan context, these acts include: 1) the deadline for making contributions under IRC §219(f)(3) (IRA contribution deadline), IRC §404(a)(6) (qualified plan contribution deadline for employer deduction purposes), IRC §404(h)(1)(B) (SEP contribution deadline for employer deduction purposes), and IRC 404(m)(2) (SIMPLE contribution deadline for employer contribution purposes, 2) making distributions under IRC §408(d)(4) (to correct an excess IRA contribution or to reverse a decision to contribute to an IRA), 3) recharacterizing contributions under IRC §408A(d)(6) (recharacterizing a traditional IRA contribution as a Roth IRA contribution or vice versa), and 4) making a rollover contribution under IRC §402(c) (distribution from a qualified plan), IRC §403(b)(8) (distribution from a 403(b) plan), or IRC §408(d)(3) (distribution from an IRA).
• Limited extension for other taxpayers. A taxpayer, other than an affected taxpayer (as described above), who has difficulty in meeting a federal tax obligation because of disruption in the transportation and delivery of documents by mail or private delivery services resulting from the terrorist attack, has until November 15, 2001, to file returns and make payments required to be made from September 11, 2001, through October 31, 2001.
• Federal tax deposits not extended but penalty relief provided. The time for making tax deposits under IRC §6302 (e.g., income tax withholding) cannot be extended under IRC §6081 nor postponed under IRC §7508A. However, the IRA will waive the addition to tax under IRC §6656 for failure to timely make any deposit of tax if the deposit is made on or before November 15, 2001, and the deposit was required to be made from September 11, 2001, through October 31, 2001. To qualify for this relief, the taxpayer must be unable to meet their deposit obligations because their (or their service provider's) records, computers, or other essential supporting services were damaged, or essential personnel were injured, by the attack.

General short-term relief on due dates. In Notice 2001-63, the IRS grants all taxpayers (regardless of whether the taxpayer is an "affected taxpayer" described above) a postponement to September 24, 2001, for due dates for all federal tax obligations falling between September 10, 2001, and September 24, 2001. This postponement covers the filing of returns and claims for refund, the payment of tax (including estimated tax payments), making elections, and filing any other federal tax documents. It does not,however, apply to the deposit of federal taxes (e.g., withholding deposits). This relief is in addition to the relief granted in Notice 2001-61, as described above.

Form 5500 extension. In PWBA News Release 01-36, the DOL's Pension and Welfare Benefit Administration (PWBA), together with the IRS and the PBGC, extend the deadline for filing certain Form 5500s and Form 5500-EZs. The extension applies to plan administrators, employers, and other entities located in the covered disaster area (as described above), or to filers located outside the disaster area but who are unable to obtain the information necessary for filing from service providers, banks or insurance companies whose operations are directly affected by the disasters. For such filers, if the Form 5500 or Form 5500-EZ is originally due (i.e., without regard to extensions) between September 11, 2001, and November 30, 2001, the due date is automatically extended by six months plus 120 days. If instead the return is currently on extension, and the extension expires between September 11, 2001, and November 30, 2001, an additional 120 days to file is provided. If a filer has difficulty meeting a filing deadline because of a disruption of transportation and delivery of documents by mail or private delivery service resulting from the disasters, but the filer does not otherwise qualify for the extensions described in this paragraph, the filing will be deemed timely if made by November 15, 2001. The extensions granted by this news release cannot be extended further by filing Form 5558. If a filer is entitled to any extension described in this paragraph, the filer should check Part 1, Box D, on the Form 5500, or Part 1, Box B, on the Form 5500-EZ, indicating an extension is applicable, and attach a statement labeled "SEPTEMBER 11, 2001 TERRORIST ATTACK" that explains the basis for the extension being claimed.

Reminder of fiduciary obligations. The PWBA, in its new release described in the prior paragraph, also recognizes that fiduciaries may encounter an array of problems with respect to the investment of employee benefit plan assets upon the reopening of the securities markets. Such fiduciaries may in good faith find it necessary and prudent to take "extraordinary steps" in order to safeguard plan assets and to facilitate the return to orderly markets. The PWBA notes that the fiduciary should be sensitive to ensuring that temporary procedures so adopted, and the decisions so made, are documented and adequately protect the interests of the plan participants and beneficiaries.

Guidance on certain items still needed. There are a number of actions not specifically dealt with in the guidance described above, but which affect plan administrators and plan sponsors. First, there are the minimum funding deadlines under IRC §412, which are applicable to defined benefit plans and money purchase plans. The minimum funding deadline is separate from the tax filing and tax payment deadlines addressed in IRS Notices 2001-61 and 2001-63. For example, a sponsor of a plan that has a calendar plan year has until September 15 to make minimum funding deposits in order to avoid a funding deficiency, which is subject to an excise tax under IRC §4971. It is expected that Congress will authorize IRS to grant relief for minimum funding that was due on September 15, 2001, and possibly as of later dates. Plan sponsors should make all reasonable efforts to make the minimum funding deposits in a timely fashion, or as soon as they are able, pending issuance of guidance. Current rumors, as of September 20, 2001, was that any extension would be extremely limited (probably not longer than September 24, 2001) except for those directly affected by the terrorist attacks (i.e., those within the covered disaster area). Second, there is the issue of timely deposit of participant contributions (including 401(k) deposits), pursuant to DOL Reg. §2510.3-102. There has been no specific relief granted here. Given PWBA's comments about fiduciary obligations, it is advisable for employers to make all reasonable efforts to deposit participant contributions as soon as they are able. It is expected, however, that PWBA will recognize reasonable delays. Third, corrective distributions made under the ADP test or ACP test, pursuant to IRC §§401(k)(8) and 401(m)(6), have to be made within 2-1/2 months of the plan year in order for the employer not to be subject to an excise tax under IRC §4979. A 401(k) plan with a June 30 plan year, for example, had a 2-1/2 month period that ended September 15, 2001, with respect to the plan year ending June 30, 2001. The acts listed in §301,7508A-1(c)(1), as described above, do not include these refunds. It is not clear at this time whether there will be any relief from the IRC §4979 excise tax for employers who failed to make the corrective distributions by the statutory 2-1/2 month period. Congress is expected to grant IRS the authority to issue extensions but, like the minimum funding extension, will likely be very limited.

Employer contributions to restore surrender charges on annuity contracts are treated as contributions under IRC §§401(a)(4), 404 and 415 (added September 17, 2001). The IRS has issued a number of private rulings regarding the proper treatment of amounts contributed by an employer to restore losses to the plan. In most of those prior rulings, the employer has demonstrated a risk of fiduciary liability with respect to the loss and, on that basis, the IRS has granted relief under various tax code sections regarding the treatment of such contributions. Specifically, where fiduciary liability is a bona fide risk, the IRS has allowed the employer to restore the losses without having to treat those amounts as contributions to the affected participants for purposes of the deduction limits under IRC §404 or the annual additions limit under IRC §415(c). In addition, the employer is not required to test whether the allocation of the restoration amounts to the affected participants satisfies the nondiscrimination testing requirements of IRC §401(a)(4). The employer then takes its deduction for the restoration amount as a business deduction, under IRC §162. Many plan sponsors have raised these contribution issues when the plan is invested in group annuity contracts and those contracts are surrendered in favor of other investments that the sponsor and/or plan trustees believe will provide better rates of return for participants. Unfortunately, in many of these situations, the surrender of the contracts results in withdrawal fees assessed against the participants' accounts. In PLR 200137064 that was precisely the situation. The employer wanted to make good on the surrender charges and proposed to contribute an amount sufficient to restore each affected participant's account to the value it would have if there were no surrender charges. However, the IRS did not rule favorably for the employer under these circumstances. The IRS noted the following: 1) over the course of the plan's holding of the contracts, the investment return exceeded the guaranteed rate under the contracts, 2) each participant's account under the group annuity contracts was invested according to the direction of the participant, 3) the contractual withdrawal charges ranged from no more than 10% for the first four years, to 0% after ten years, 4) the actual surrender charges were approximately 5%, 5) there was no evidence presented that the proposed payments to the plan would be made pursuant to an order or judgment of the Department of Labor, an arbitration proceeding, or a court of competent jurisdiction, and 6) the documentation presented in support of the ruling request shows that some plan participants are dissatisfied that the contracts were surrendered and the surrender charges incurred, solely because other investments, not provided for under the contracts, became more attractive over time. On the basis of these facts, the IRS did not feel a sufficient showing had been made to demonstrate a reasonable risk of liability to the employer for breach of fiduciary duty. Thus, the restorative payments would be treated as contributions for purposes of IRC §§401(a)(4), 404 and 415. Does this mean an employer cannot make such a restorative payment? Not necessarily, but the employer must take into account the tax code sections which come into play. Depending on the amount of the restorative payment needed for a participant's account and that participant's compensation under IRC §415(c)(3), it is very possible, particularly for a large account balance that might incur a significant surrender charge, that a restorative payment could cause a violation under IRC §415. (The increase of the §415 limit by EGTRRA, effective in 2002, might help here but, for example, if the participant has terminated employment and does not earn compensation for the year of the restoractive payment, there would definitely be a §415 violation.) Also, if the total restorative payments are substantial, it could cause the employer to exceed its deduction limit under IRC §404, particularly the deduction limit under §404(a)(3), if applicable, which is based on a percentage of aggregate participant compensation. (Again, EGTRRA will provide more deduction limit room, by raising the §404(a)(3) limit from 15% to 25%, and carving 401(k) deferrals out of that deduction limit, but a substantial restorative payment could still result in an excess under §404(a)(3), with resulting excise taxes under IRC §4972 for nondeductible contributions, or at least a reduction of the amounts the employer might otherwise contribute to the plan as current employer contributions.) Finally, participants with the largest balances and, thus, the largest restorative payments needed, are more likely to be highly compensated employees, which can create nondiscrimination testing problems under IRC §401(a)(4). This private letter ruling underscores the importance of proceeding carefully under these circumstances, obtaining advice of legal counsel, and, if a restorative payment is desired, to seek a private letter ruling, setting out circumstances that will demonstrate a fiduciary liabilty risk.

IRS clarifies effective dates under EGTRRA for compensation dollar limit increase, top heavy changes, and suspension periods following hardship withdrawals (added September 2, 2001). Notice 2001-56 clarifies the effective dates of three EGTRRA provisions: the increase in the compensation limit under IRC §401(a)(17), the amendments to the top heavy rules under IRC §416, and the reduction of the mandatory suspension period for hardship withdrawals from 401(k) plans. The complete text of Notice 2001-56 is available at the IRS website. Coincident with the release of this notice, IRS is releasing Notice 2001-57 (see separate summary), which provides sample plan amendments to incorporate various EGTRRA provisions. Those sample amendments take into consideration the effective dates rules described in Notice 2001-56.

• Compensation dollar limit. EGTRRA increases the compensation limit under IRC §401(a)(17) to $200,000, effective for plan years beginning on or after January 1, 2002. Notice 2001-56 clarifies that, when determining benefit accruals for a post-2001 plan year, if any compensation period taken into account started before January 1, 2002, the plan may (but is not required to) apply the new $200,000 limit. This primarily affects defined benefit plans and target benefit plans, which might use an averaging period to determine compensation that, for post-2001 plan years might include one or more compensation periods during which the participant earned $200,000 or more. Consider the following example.

  Example. A defined benefit plan provides for a benefit formula equal to the product of: years of service x 1% x high 3-year average compensation. The plan year is the calendar year. As of December 31, 2001, a participant's highest consecutive three years of compensation are 1999, 2000, and 2001, when she earned $220,000, $240,000 and $260,000, respectively, and the participant's years of service total 10 years. The IRC §401(a)(17) limitations in effect for those years were $160,000 for 1999 and $170,000 for 2000 and 2001. Thus, the participant's high 3-year average compensation for benefit accrual purposes in the plan year ending December 31, 2001, is ($160,000 + $170,000 + $170,000)/3, or $166,667. The participant's accrued benefit as of December 31, 2001, is determined as follows: 10 years x 1% x $166,667, or $16,667. For 2002, this participant's compensation is $270,000, and she earns her 11th year of service. To determine this participant's accrued benefit for the next year (i.e., the 2002 plan year), the plan has the following two choices with respect to the effective date of the increased compensation dollar limit. Option #1 is to apply the new $200,000 compensation limit not only to 2002, but also to prior plan years. Option #2 is to apply the new $200,000 compensation limit only to compensation periods beginning in 2002 and later, and continue to apply the compensation limits that were in effect in prior years, as determined under pre-EGTRRA law. Compare the difference in the two options for this participant, when the accrued benefit is determined as of December 31, 2002.

  Option #1. Under this approach, the participant's compensation for 2000 and 2001, which are the two years included with 2002 to determine her high 3-year average, is also limited to $200,000 per year. This results in an average compensation of $200,000 for the 2002 plan year. The accrued benefit determined as of December 31, 2002, is: 11 years x 1% x $200,000, or $22,000.

  Option #2. Under this approach, the participant's compensation for 2000 and 2001, which are the two years included with 2002 to determine her high 3-year average, remain limited to $170,000 per year (which reflects the IRC §401(a)(17) limit in effect in each of those years). This results in an average compensation of $180,000 for the 2002 plan year. The accrued benefit determined as of December 31, 2002, is: 11 years x 1% x $180,000, or $19,800.

• Top heavy determinations. EGTRRA §613 makes significant changes to the top heavy rules, including modifications to the key employee definition, a change in the way distributions are taken into account for top heavy determinations, and new rules regarding the use of matching contributions to satisfy the top heavy minimum benefit and the determination of the minimum benefit under a defined benefit plan when no key employees or former key employees benefit under the plan for the plan year. EGTRRA §613 provides that its amendments are effective for plan years beginning on or after January 1, 2002. As expected, Notice 2001-56 clarifies that these new rules are effective for the plan year beginning in 2002, even if the applicable determination date for top heavy purposes falls in plan year that starts in calendar year 2001. For example, one of the changes made by EGTRRA is that the compensation requirement for the key employee officer test is $130,000. Thus, when making a top heavy determination the 2002 plan year, the $130,000 compensation test will be applied to officers, even if the plan year that includes the determination date starts in 2001. Also, key employee determinations under EGTRRA are based only on data for the plan year that includes the determination date, and not the 4-year period preceding that plan year. Again, for purposes of making top heavy determinations for the 2002 plan year, the 4-year lookback period is not taken into account to identify key employees, even if the determination date falls in a plan year that begins in 2001.

  Example. A calendar-year profit sharing plan is making its top heavy determination for the plan year beginning January 1, 2002. Since that plan year begins in 2002, the new rules apply. The determination date for that plan year is December 31, 2001. (Note that if this were the first plan year of the plan, the determination date for the 2002 plan year would be December 31, 2002, but we are assuming that this is not the first plan year of the plan.) To determine whether the plan is top heavy for 2002, account balances are determined as of December 31, 2001, in accordance with the regulations under IRC §416 (but as modified by EGTRRA). To identify when the December 31, 2001, account balances belong to key employees or non-key employees, the EGTRRA definition of a key employee is applied, even though the determination is being made on the basis of 2001 data. Thus, a key employee for purposes of the 2002 top heavy determination is any employee who, for the 2001 plan year, satisfies at least one of the following definitions: 1) the employee owns more than 5% of the employer (or of a related employer under IRC §414(b), (c), (m) or (o)) as of any day during the 2001 plan year, 2) the employee owns more than 1% of the employer (or of a related employer under IRC §414(b), (c), (m) or (o)) as of any day during the 2001 plan year and has compensation (as defined in IRC §415(c)(3)) for the 2001 plan year that exceeds $150,000, or 3) the employee is an officer of the employer at any time during the 2001 plan year and has compensation (as defined in IRC §415(c)(3)) for the 2001 plan year that exceeds $130,000. Data for the 1997 through 2000 plan years, which would have been taken into account under the 4-year lookback rule under pre-EGTRRA law, are not taken into account to identify the key employees. Note that the 5% and 1% ownership levels are determined by taking into account ownership that is attributed to the individual, under the attribution rules in IRC §318. Also, if there are more than 3 officers that satisfy the test described in 3), the number of officers might be limited under IRC §416(i)(1). For more information about the key employee definition, subscribers to the 2001 Edition of The ERISA Outline should consult the definition in Chapter 1 (but taking into account the EGTRRA changes, which are not reflected in the 2001 Edition).

• Hardship withdrawal suspension period. EGTRRA §636 requires the Treasury to modify its regulations under IRC §401(k) so that, under the "safe harbor" provisions for determining whether hardship withdrawals are available to a participant, a participant who takes a hardship withdrawal is suspended from contributing to the employer's plans for a period not exceeding 6 months, rather than for 12 months, which is the period currently reflected in Treas. Reg. §1.401(k)-1(d)(2)(iv)(B)(4). Notice 2001-56 clarifies that the reduction to a 6-month suspension period will be effective for calendar years beginning on or after January 1, 2002, rather than to hardship withdrawals that occur on or after January 1, 2002. The effect of this clarification is that, for a hardship withdrawal made during 2001, the plan may (but is not required to) end the suspension as of the later of 6 months after the withdrawal occurred or January 1, 2002. If a hardship withdrawal was made in the first six months of 2001 (i.e., January 1 through June 30, 2001), the suspension may be lifted as of January 1, 2002, because at least six months has elapsed since the hardship withdrawal as of that date. If a hardship withdrawal was made in the second six months of 2001 (i.e., July 1 through December 31, 2001), the suspension may be lifted as early as six months after the hardship distribution was made. Alternatively, the plan may continue to apply a full 12-month suspension period to the 2001 hardship distributions, and start using the 6-month suspension period for hardship withdrawals made on or after January 1, 2002. The good faith amendment adopted to incorporate the reduced suspension period must also reflect which approach applies to 2001 hardship withdrawals. Also note that (except for safe harbor 401(k) plans that provide a matching contribution, as discussed in the next paragraph), a plan may continue to use a suspension period longer than 6 months (including the pre-EGTRRA 12-month suspension period) for hardship distributions made after December 31, 2001.

  Special issue for certain safe harbor 401(k) plans. If a safe harbor 401(k) plan provides a matching contribution that satisfies the ADP safe harbor test under IRC §401(k)(12)(B) or the ACP safe harbor test under IRC §401(m)(11), the plan must reduce the suspension period to 6 months, at least for hardship distributions paid on or after January 1, 2002. For 2001 hardship withdrawals, the safe harbor plan is allowed to adopt any of the options discussed in the prior paragraph. The reason for this more restrictive effective date rule is that Notice 98-52 specifically refers to the mandatory suspension period under Treas. Reg. §1.401(k)-1(d)(2)(iv)(B)(4). Thus, when the suspension period is reduced to 6 months as of January 1, 2002, the safe harbor matching provisions are not satisfied if the suspension period is longer than 6 months, at least with respect to hardship distributions made on or after January 1, 2002.

IRS issues sample amendments to comply with EGTRRA good faith amendment requirement (added September 2, 2001. Notice 2001-57 prescribes sample amendments that plan sponsors may use to fulfill their requirements to adopt good faith amendments under EGTRRA. The complete text of Notice 2001-57, which includes the sample amendments, is available at the IRS website. Notice 2001-42 requires that, in order to be entitled to the EGTRRA remedial amendment period (which will end no earlier than the last day of the 2005 plan year), a plan must adopt good faith amendments that adopt the EGTRRA provisions. A good faith amendment is required only for EGTRRA provisions that are mandatory (e.g., the new key employee definition of top heavy purposes) and those optional EGTRRA provisions (e.g., catch-up contributions under IRC §414(v)) that the plan sponsor wishes to adopt. The effective date of each EGTRRA provision adopted must be the date as of which the provision must apply to the plan or, in the case of an optional provision, as of the date the plan began operating in accordance with that provision.

• Structure of sample amendments. The sample amendments are designed in a format that is used by pre-approved plans (i.e., master/prototype plans and volume submitter plans) that use a basic plan document, which contains the default provisions of the plan, and an adoption agreement, which contains the adopting employer's elective provisions. If a plan is not structured in this manner, the sponsor will need to modify the amendment to incorporate the sample adoption agreement elections into the terms of the amendment. If the plan is a pre-approved plan, the good faith amendment must be a clearly identified addendum to the plan (or basic plan document) and/or adoption agreement. If the amendment is instead incorporated into the other provisions of the plan, the IRS will treat the plan as an individually-designed plan.
• Provisions addressed by the sample amendments. The sample amendments are divided into three categories: amendments for defined contribution plans, additional amendments for 401(k) plans, and amendments for defined benefit plans. The amendments for defined contribution plans include: 1) plan loans for owner-employees and shareholder-employees, 2) increased annual additions limit under IRC §415(c), 3) increased compensation dollar limit under IRC §401(a)(17), 4) modified top heavy rules, 5) accelerated vesting requirements for matching contributions under non-top-heavy plans, 6) expanded rollover rules, 7) disregarding rollovers to determine whether the value of a vested interest exceeds $5,000 (for plans that are not subject to the QJSA requirements under IRC §§401(a)(11) and 417), and 8) repeal of the multiple use test. The additional amendments for 401(k) plans include: 1) increased contribution limits under IRC §402(g) and, in the case of a SIMPLE-401(k) plan, under IRC §408(p)(2), 2) exemption from the top heavy rules for certain safe harbor 401(k) plans, 3) catch-up contributions, 4) reduced contribution suspension period following a hardship withdrawal, and 5) replacement of "separation from service" with "severance from employment" to determine permissible distribution events for 401(k) contributions. The amendments for defined benefit plans include: 1) increased annual benefit limit under IRC §415(b) for non-multiemployer plans, 2) increased annual benefit limit under IRC §415(b) for multiemployer plans, 3) increased compensation dollar limit under IRC §401(a)(17), 4) modified top heavy rules, and 5) expanded rollover rules. Although the amendment for plan loans to owner-employees and shareholder-employees is not included in the sample amendments for defined benefit plans, presumably that amendment may be adopted by a defined benefit plan. Subscribers to ERISA Views should refer to the focus topic in the Summer 2001 Issue (Issue #22) for more details on these various EGTRRA provisions.

Alternative model amendment to adopt 2001 Regulations on minimum distributions allows effective date in 2001 other than January 1; model amendment may be adopted by end of GUST remedial amendment period (added July 17, 2001). On January 17, 2001, the Treasury released new proposed regulations under IRC §401(a)(9) (pertaining to minimum distributions after age 70-1/2). These new regulations (referred to as the 2001 Regulations) may be followed instead of the original proposed regulations published in 1987 (referred to as the 1987 Regulations). In the preamble to the 2001 Regulations was a model amendment for adopting the 2001 Regulations for a qualified plan. That model amendment was republished in Announcement 2001-18. One problem with that original model amendment is that it had to make the 2001 Regulations effective as of January 1 of a calendar year, so that all minimum distributions made for that year had to be calculated in accordance with those regulations. Some plans, by the time they start complying with the 2001 Regulations in 2001, have already made distributions for 2001 that were calculated in accordance with the 1987 Regulations. Announcement 2001-82 provides relief in the form of an alternative model amendment (text provided below). The model amendment in Announcement 2001-82 should be used for a plan that starts using the 2001 Regulations during 2001, but on a date other than January 1. If the alternative amendment is used, the plan starts calculating minimum distributions under the 2001 Regulations only as of the date specified in that amendment. If, prior to that date, an amount has already been distributed under 1987 Regulations that would equal the amount required to be distributed for 2001 under the 2001 Regulations, then no further distributions are required for the rest of the year. If, on the other hand, the amount already distributed for 2001 under the 1987 Regulations is less than the amount required under the 2001 Regulations, the difference must be distributed by the end of the year. If an employer adopted the original model amendment for 2001, showing a January 1 effective date, but the plan did not actually start operating under the 2001 regulations until a later date in 2001, the employer must adopt this alternative model amendment.

• Alternative amendment may not be used after 2001. The alternative amendment is only available for 2001. If a plan is not going to start using the 2001 Regulations until a later calendar year (e.g., 2002), the original model amendment must be used, with an effective date of January 1 of that calendar year.
• GUST amendment period applies to adoption of model amendment. It was not clear in the preamble to the 2001 Regulations whether a plan could start operating under the 2001 Regulations and then adopt a conforming model amendment later. Announcement 2001-82 clarifies that a plan is permitted to do this, so long as the conforming model amendment is adopted by the end of the GUST remedial amendment period.
• Text of alternative model amendment. Here is the text of the alternative model amendment in Announcement 2001-82:

  With respect to distributions under the Plan made on or after [SPECIFY DATE ON WHICH THE PLAN BEGAN OPERATING IN ACCORDANCE WITH THE 2001 PROPOSED REGULATIONS] for calendar years beginning on or after January 1, 2001, the Plan will apply the minimum distribution requirements of section 401(a)(9) of the Internal Revenue Code in accordance with the regulations under section 401(a)(9) that were proposed on January 17, 2001 (the 2001 Proposed Regulations), notwithstanding any provision of the Plan to the contrary. If the total amount of required minimum distributions made to a participant for 2001 prior to [SPECIFY DATE ON WHICH THE PLAN BEGAN OPERATING IN ACCORDANCE WITH THE 2001 PROPOSED REGULATIONS] are equal to or greater than the amount of required minimum distributions determined under the 2001 Proposed Regulations, then no additional distributions are required for such participant for 2001 on or after such date. If the total amount of required minimum distributions made to a participant for 2001 prior to [SPECIFY DATE ON WHICH THE PLAN BEGAN OPERATING IN ACCORDANCE WITH THE 2001 PROPOSED REGULATIONS] are less than the amount determined under the 2001 Proposed Regulations, then the amount of required minimum distributions for 2001 on or after such date will be determined so that the total amount of required minimum distributions for 2001 is the amount determined under the 2001 Proposed Regulations. This amendment shall continue in effect until the last calendar year beginning before the effective date of the final regulations under section 401(a)(9) or such other date as may be published by the Internal Revenue Service.

Implementing EGTRRA - remedial amendment period no earlier than the end of the 2005 plan year but "good faith" compliance amendments will need to be adopted sooner; 12-month GUST amendment period under Rev. Proc. 2000-20 will not end earlier than December 31, 2002 but general GUST amendment period is not extended (added July 3, 2001). The IRS has quickly issued initial guidance on how plan sponsors will implement EGTRRA (just a little more than a month after the enactment of the legislation!) The primary guidance is in Notice 2001-42, with some supplemental information in Announcement 2001-77 (see later items on this What's New page regarding other guidance in Announcement 2001-77 that changes the determination letter process). Notice 2001-42 provides a good balance between the need to finally end the amendment process for GUST and the need for prompt adoption of EGTRRA-related amendments to facilitate plan administration and design. For the complete text of Notice 2001-42, CLICK HERE. Here are the highlights regarding the implementation of EGTRRA.

• 1) The general remedial amendment period for EGTRRA will not end earlier than the last day of the 2005 plan year (i.e., the first plan year beginning in 2005).
• 2) To be entitled to the EGTRRA remedial amendment period described in 1), the plan must adopt a "good faith" EGTRRA amendment by the later of: a) the end of the plan year in which the EGTRRA change is required to be, or is optionally, put into effect, or b) the end of the GUST remedial amendment period. Note that a) refers both to amendments that would be mandatory and those that would be optional. For example, the changes to the top heavy rules made by EGTRRA are mandatory to the extent they change the definition of a key employee and modify the manner in which the top heavy rules are satisfied. On the other hand, the change in the top heavy rules that permit the use of matching contributions to satisfy the top heavy minimum contribution requirements would be optional, because the plan would not fail to be qualified if the employer decided to satisfy the top heavy minimum only with nonelective contributions. Since most of the EGTRRA amendments are effective in 2002, in most cases the related good faith amendment will need to be adopted on or before the end of the GUST remedial amendment period or the end of the 2002 plan year, whichever ends later. However, some of the EGTRRA amendments are effective after 2002 (e.g., deemed IRA accounts in the plan are not permitted until the 2003 plan year, so the good faith amendment to permit the establishment of deemed IRA accounts would not be required until then).
• 3) By the end of August 2001, the IRS expects to issue sample EGTRRA amendments. Plans may adopt these amendments verbatim, or in a modified form. Use of the sample amendments verbatim or in a materially similar form will be deemed to satisfy the good faith amendment requirements described in 2). However, the good faith amendment standard can still be satisfied by making material modifications to the sample amendments (or by individually-designing amendments), although the drafters of such amendments will have to determine for themselves whether the good faith compliance standard is satisfied. The IRS will not be issuing determination letters on EGTRRA amendments until further notice, so it will not be possible (at least for now) to obtain any reliance as to whether materially different or individually-designed EGTRRA amendments satisfy the good faith standard.
• 4)The GUST remedial amendment period for adopters of master/prototype plans (M&P) and volume submitter plans, or for those who timely certify with an M&P sponsor or volume submitter practitioner, as prescribed by Rev. Proc. 2000-20, will not end earlier than December 31, 2002. Under Rev. Proc. 2000-20, the GUST amendment period ends 12 months after the month in which the GUST opinion letter or advisory letter is issued (but not earlier than the last day of the 2001 plan year). Notice 2001-42 extends the 12-month period for certain M&P plans and volume submitter plans. If the 12-month period would end prior to December 31, 2002, it will be deemed to extend to that date. Thus, for any M&P plan or volume submitter plan that qualifies for the special amendment period under Rev. Proc. 2000-20 and receives its GUST opinion letters or advisory letters before January 2002, is deemed to have a 12-month period that ends December 31, 2002. If the GUST letters are issued January 2002 or later, the normal 12-month period rule will apply. This will simplify the calculation of the GUST amendment period for many adopters of these plans since IRS expects to have approved many of them before January 2002. It also eliminates the need to determine when the end of the 2001 plan year is to calculate the end of the GUST remedial amendment period for employers who qualify for the special amendment period prescribed by Rev. Proc. 2000-20. This extension also gives more time to adopt the good faith compliance amendment described in 2) above. This is the only extension of the GUST remedial amendment period. The general GUST remedial amendment period, which ends on the last day of the 2001 plan year, is NOT being extended. An individually-designed plan (unless the employer has timely certified with an M&P plan sponsor or volume submitter practitioner in order to obtain the special amendment period under Rev. Proc. 2000-20) is subject to the general GUST amendment period.
• 5) Because of anti-cutback issues under IRC §411(d)(6), it may be necessary to adopt certain good faith EGTRRA amendments before the deadline described in 2) above. Unfortunately, EGTRRA did not provide anti-cutback relief like the GUST laws did. Notice 2001-42 cites the top heavy rules as an example where anti-cutback issues may arise. For example, if an employee receives a lesser nonelective contribution under a plan because his matching contribution was used to satisfy the top heavy minimums, pursuant to the EGTRRA law change, an anti-cutback issue arises if, under the present terms of the plan, his matching contributions would not be used to satisfy the top heavy minimum. If a protected benefit would not be accrued until the end of the year (i.e., because of a last day employment requirement), then §411(d)(6) is not violated if the related good faith amendment is adopted before the end of the year. This helps defined contribution plans with respect to the EGTRRA changes to the top heavy rules because the top heavy minimum contribution in a defined contribution plan is usually limited to those non-key employees who are still employed at the end of the plan year, pursuant to §1.416-1, M-10, of the regulations. However, a defined benefit plan cannot use a last day employment rule, although most defined benefit plans require completion of at least 1,000 hours of service for the plan year before the top heavy minimum benefit is accrued. Thus, good faith compliance amendments relating to the EGTRRA changes to the top heavy rules are generally required under a defined benefit plan before any employee has at least 1,000 hours of service. However, in section III of Notice 2001-42, the IRS provides that, if good faith amendments are adopted by May 31, 2002 (March 31, 2002, if the plan uses elapsed time), a defined benefit plan will not be treated as impermissibly reducing accrued minimum benefits, even if an employee has actually accrued the benefit under the terms of the plan.

GUST determination letter submission not required to protect GUST remedial amendment period for adopters of M&P plans and volume submitter plans (added July 3, 2001). The GUST remedial amendment period normally ends on the last day of the 2001 plan year. However, for adopters of master/prototype plans (M&P) and volume submitter plans, or for those employers who timely certify with an M&P sponsor or volume submitter practitioner, as prescribed by Rev. Proc. 2000-20, the GUST remedial amendment period does not end until the later of: 1) December 31, 2002 (see the discussion above of Notice 2001-42) or 2) 12 months after the month in which the GUST opinion letter or advisory letter is issued. Under section 19 of Rev. Proc. 2000-20, if the GUST amendments are not adopted until after the close of the 2001 plan year, pursuant to the extended remedial amendment period described in this paragraph, a determination letter must be requested as a condition for having the adoption of the GUST amendment being treated as timely. Announcement 2001-77, section II.E., modifies Rev. Proc. 2000-20 to change this requirement if the employer is otherwise entitled to rely on the GUST opinion letter issued on the M&P plan or the GUST advisory letter issued on the volume submitter plan, pursuant to the reliance rules prescribed by Announcement 2001-77 (see next paragraph). The extended remedial amendment period described in this paragraph is available only if the M&P sponsor or volume submitter practitioner submitted a GUST-amended M&P plan or volume submitter plan by December 31, 2000. During the second half of 2001, IRS will be publishing a list on the Internet of the M&P plans and volume submitter plans that were submitted by December 31, 2000, so adopting employers (or those that have timely certified with the M&P sponsor or volume submitter practitioner) will know that they qualify for the extended GUST remedial amendment period.

New reliance rules for adopters of M&P plans and volume submitter plans (added July 3, 2001). Prior to the issuance of Announcement 2001-77, only adopters of standardized M&P plans and certain adopters of "safe harbor" nonstandardized M&P plans could rely on the opinion letter issued to such plans without having to obtain a determination letter. Announcement 2001-77 provides reliance on the opinion letter issued to any nonstandardized M&P plan (even if the plan is not a safe harbor plan) and on the advisory letter issued to any volume submitter specimen plan. However, the reliance is more limited than for a standardized M&P plan or safe harbor nonstandardized M&P plan. In order to have reliance on an opinion letter or advisory letter, the following conditions must be satisfied: 1) the employer must adopt an M&P plan or volume submitter plan that has obtained a GUST opinion letter or GUST advisory letter, and also has been amended to reflect the requirements of §314(e) of CRA 2000 relating to the definition of compensation under IRC §414(s) and IRC §415(c)(3) (see the news item on this What's New page that was added on June 4, 2001), 2) the employer adopts the M&P plan or volume submitter plan in identical form, and chooses only options permitted by the plan, 3) if the adoption of the M&P plan or volume submitter plan is the restatement of an existing plan, the plan being restated was in compliance with pre-GUST law, the plan complied with GUST in operation, and the amended plan provides the appropriate retroactive effective dates to comply with GUST, 4) the plan in operation did not continue to apply the family aggregation rules after the 1996 plan year (GUST repealed family aggregation effective for plan years beginnning after December 31, 1996), 5) the plan in operation did not continue to apply the IRC §415(e) limit in post-1999 limitation years (GUST repealed §415(e) effective for limitation years beginning after December 31, 1999), 6) if the plan being adopted is a volume submitter plan, the employer adopted the plan after the advisory letter was issued, and 7)the employer does not modify the trust agreement in a manner that would cause the plan to fail to be qualified. For the complete text of Announcement 2001-77, CLICK HERE.

• If the conditions of the prior paragraph are satisfied, the adopter of a nonstandardized M&P plan or volume submitter plan may rely on the opinion letter or advisory letter, without obtaining a determination letter. However, such reliance does not necessarily entitle the employer to have reliance on the coverage and nondiscrimination requirements of IRC §§401(a)(4), 401(a)(26), 401(l), 410(b), or 414(s). Generally, the employer will need to apply for a determination letter if it wants reliance on these coverave and nondiscrimination requirements. However, if certain conditions are satisfied, the employer will have reliance on one or more of these rules. (1) If the plan covers 100% of all nonexcludable employees (i.e., all employees other than excludable employees, as defined in §1.410(b)-6 of the coverage regulations - see Section III of Chapter 8 of The ERISA Outline Book for details), the reliance also extends to IRC §§401(a)(26) and 410(b). (2) If the employer has elected a safe harbor allocation formula or benefit formula, as prescribed by §1.401(a)(4)-2(b) (defined contribution plans) or §1.401(a)(4)-3(b) (defined benefit plans), and the definition of compensation elected by the employer is a safe harbor definition under IRC §414(s), as described in §1.414(s)-1(c) (see Part B. of the compensation definition in Chapter 1 of The ERISA Outline Book for details), the reliance also extends to IRC §401(a)(4) (including IRC §401(l)) if the allocation formula or benefit formula is a permitted disparity formula.
• If the employer maintains, or has ever maintained, another plan that covers some of the same participants, the reliance does not cover the plan for compliance with the IRC §415 limits nor the top heavy rules of IRC §416, except to the extent the plan is a standardized M&P plan and the other plan is a paired plan.

Revised determination letter procedures give employers more flexibility in fashioning scope of determination letter (added July 3, 2001). Announcement 2001-77 modifies Rev. Proc. 2001-6 and Rev. Proc. 2000-20 to modify some of the determination letter procedures. Now an employer, when filing Form 5300 or Form 5307, may decide whether it wants a letter as to form only, or as to form and one or more of the coverage and nondiscrimination requirements of §§401(a)(4), 401(a)(26) and 410(b). If a form-only letter is requested, Schedule Q is no longer required. The application forms are being revised and should be released by the end of August 2001. For determination letter applications filed between July 23, 2001, and December 31, 2001, Announcement 2001-77 prescribe several filing options under which employers will be able to use either the new or revised forms. Applications filed after December 31, 2001, will have to use the revised forms. There are no changes to the user fee schedules (except for certain multiple employer plan filings - see next paragraph). If the plan being submitted is an amended plan, IRS encourages applicants to highlight changes in order to expedite review.

• New procedures for multiple employer plans. A multiple employer plan may now request a determination letter for the plan as a whole, without having separate letters issued with respect to each adopting employer. The user fee for such a request is the same as for a single-employer plan. However, a letter on the plan generally does not cover any adopting employer for the coverage and nondiscrimination testing requirements of IRC of §§401(a)(4), 401(a)(26), 401(l), 410(b) and 414(s), and, if an adopting employer maintains or ever maintained another plan, the requirements of IRC of §§415 and 416. If separate letters are also desired for one or more adopting employers, each such employer must submit a separate Form 5300 as well (completed through question 8), and each employer can decide whether to include Schedule Q in order to obtain reliance on one or more of the coverage and nondiscrimination requirements. If separate letters are also required for one or more adopting employers, the normal user fees for multiple employer plans, as prescribed by Rev. Proc. 2001-8, are applicable.

Final regulations on "new comparability" or "cross-tested" defined contribution plans make only minor changes to proposed regulations; "floor" allocation level will be required in most new comparability plans; new rules take effect in the 2002 plan year (added July 2, 2001; modified July 3, 2001). The Treasury has finalized regulations regarding so-called "new comparability" or "cross-tested" defined contribution plans. The effective date is plan years beginning on or after January 1, 2002. This is a uniform effective date that applies to all new comparability defined contribution plans, regardless of whether the plan was in existence when IRS announced its review of new comparability plans (Notice 2000-14) or was adopted after that date. (Note that aggregated plans that consist of at least one defined contribution plan, and are tested on a "benefits" basis are subject to these rules, too, even if one of those plans is a defined benefit plan - see ¶5 of this summary.) The regulations amend Treas. Reg. §§1.401(a)(4)-8(b)(1), 1.401(a)(4)-9(b)(2) and 1.401(a)(4)-9(c)(3). A more complete summary of these regulations will be included in the Current Developments section of the Summer 2001 Issue of ERISA Views. We also plan to devote the focus topic in the Fall 2001 Issue of ERISA Views to an analysis of new comparability plans, demonstrating the use of these plans in post-2001 plan years, taking into account both the new contribution limits enacted by EGTRRA and the requirements established by these new regulations. For the complete text of the new regulations,CLICK HERE.

What do the regulations do? They establish a "gateway" rule for defined contribution (DC) plans to prove allocations are nondiscriminatory on the basis of benefits. ("New comparability" is simply a phrase often used to refer to DC plans that do this.) In other words, before a DC plan can be tested on the basis of benefits (i.e., converting allocations to equivalent benefit rates (EBRs) and applying the rate group test under Treas. Reg. §1.401(a)(4)-2(c) using those EBRs), the "gateway" test must be satisfied first. The gateway test establishes a minimum contribution rate that must be provided to the nonhighly compensated employees (NHCs) who benefit under the plan. However, certain DC plans are exempt from the gateway test by establishing that the allocation rates are "broadly available" (as defined in the regulations), as described in ¶2 below, or by providing certain allocation schedules based on age and/or service, as described in ¶3 below. A special gateway test also applies to certain "DB/DC plans" (see ¶5 below). So let's get to specifics.

¶1. The "gateway" test. Under the "gateway" test, the lowest permissible allocation rate for any NHC who benefits under the plan is one-third of the highest allocation rate for any highly compensated employee (HCE) who benefits under the plan. However, if each NHC receives an allocation that is no less than 5% of compensation (as defined under IRC §415(c)(3)), the gateway is deemed satisfied. Note that the compensation definition under the 5% test is different from the compensation definition for the one-third test. The one-third test is based on the allocation rate. An employee's allocation rate is the percentage obtained by dividing the employee's allocation for the plan year derived from employer contributions (other than matching contributions, if the plan also includes a 401(k) arrangement) and forfeitures, divided by his plan year compensation. See Treas. Reg. §1.401(a)(4)-2(c)(2). Plan year compensation, in turn, is defined in Treas. Reg. §1.401(a)(4)-12 as compensation determined under IRC §414(s) (generally measured for the plan year, or the portion of the plan year that the employee is eligible for the plan). The 5% test, which is a safe harbor for meeting the gateway, is based on §415(c)(3) compensation, which is the same definition used to determine top heavy minimum contributions. The final regulations make an important clarification, however, that for purposes of the 5% test, §415(c)(3) compensation may be measured over the same periods that may be used for determining allocation rates. Therefore, if an employee is eligible for only part of the year, §415(c)(3) compensation for only that portion of the plan year may be taken into account to determine if the 5% test has been satisfied with respect to that employee. Note that for a new comparability plan that generally provides at least a 5% allocation to NHCs, the gateway test will have little or no impact.

• Only employees who benefit must receive gateway. Note that only employees who benefit under the plan for coverage testing purposes must receive the gateway contribution. The final regulations clarify this. Thus, if the plan requires employment on the last day of the plan year to receive an allocation, employees who fail to benefit because of the last day rule would not have to receive the gateway contribution (assuming the plan otherwise passes coverage).
• Example. A new comparability plan provides for two allocation groups: Group A consists of owners of the company, who are all HCEs, and Group B consists of other eligible employees. The employer makes a discretionary contribution for each group. The amount contributed for the benefit of each group is allocated to the eligible employees included in that group, using a pro rata allocation formula based on §415(c)(3) compensation. For the last several years, the contribution rate for Group A has been in the range of 14% to 20%, and the contribution rate for Group B has been in the range of 6% to 8%. The plan passes the rate group test on the basis of equivalent benefit rates (EBRs). The regulations would not affect this plan, so long as the contribution rate for Group B does not drop below 5%. Of course the plan would still have to show that the rate group test can be passed on the basis of EBRs on a plan year by plan year basis.
• Example. Assume in the prior example that the plan has been passing the rate group test (using EBRs) by only contributing 3% for Group B. Under the regulations, if the employer did not want to increase the contribution rate for Group B above 3%, it would have to limit the contribution rate for Group A to 9% (so the one-third test can be satisfied under the gateway test), even if the plan's EBRs could pass the rate group test if the contribution rate were greater than 9%. If the plan does not meet the gateway test, then the plan could not use EBRs to pass the rate group test.

¶2. Broadly available allocation rates. The regulations do not require a plan to pass the gateway test described in ¶1. above, so long as each allocation rate can meet a "broadly available" test. The broadly available test essentially treats each allocation rate in a manner similar to the way "benefits, rights or features" (BRFs) are treated under Treas. Reg. §1.401(a)(4)-4. That regulation requires that each BRF under the plan is available to a group of employees who, if they were treated as participating in a separate plan, could satisfy the nondiscriminatory classification test under Treas. Reg. §1.410(b)-4. The nondiscriminatory classification test is the first part of the average benefits test under the minimum coverage requirements. The coverage ratio needed to pass the nondiscriminatory classification depends on the percentage of employees that are NHCs and is within a range of 20% to 50%. For more details on the nondiscriminatory classification test, see Chapter 8, Section V, Part B., of The ERISA Outline Book.

• Certain "transition allocations" disregarded. In determining whether the allocation rates are "broadly available" on a nondiscriminatory basis, certain "transition allocations" are disregarded. This rule was not in the proposed regulations, and must be in response to some plan designs used mostly by larger employers to replace an employee's prior participation in a defined benefit plan. It should have little or no utility for smaller employers, particularly in light of the fact that the broadly-available test is unlikely to be helpful to small companies that maintain new comparability DC plans (see analysis in the next paragraph of the impact of the broadly available test). There are three types of transition allocations covered by this exception: (1) a defined benefit replacement allocation, (2) a pre-existing replacement allocation, and (3) a pre-existing merger or acquisition allocation. In all three cases, the transition allocation must be established in the plan and, with limited exceptions, cannot be modified. A defined benefit replacement allocation (DBRA) must meet general conditions established in the final regulations, plus specific conditions established by the IRS. In conjunction with the release of these final regulations, the IRS has issued Rev. Rul. 2001-30 to prescribe these specific conditions. In general, a DBRA is replacing the equivalent age-based allocation rate that the covered employee was receiving under a prior DB plan. The exceptions for pre-existing allocations grandfathers certain formulas that are already in place or, due to a merger or acquisition are in place within a short period after the publication of the regulations. A pre-existing replacement allocation, like the DBRA, also replaces an employee's prior participation in a DB plan, but it doesn't have to satisfy the regulatory requirements of a DBRA. This relief is provided only to a replacement allocation formula that was in effect on or before June 29, 2001 (i.e., the date these regulations were published in the Federal Register). A pre-existing merger or acquisition allocation is one that is provided to an acquired group of employees to replace all or part of the retirement benefits that the affected employees would have received from their prior employer's plan. The exception for pre-existing merger or acquisition allocations applies only to merger or acquisition transactions that occur no later than August 28, 2001 (i.e., 60 days after the publication of these final regulations), and only for plan provisions adopted no later than January 1, 2002.
• What's the practical implication of the broadly available allocation rates option? If a plan's allocation rates are broadly available, the Treasury's concerns regarding the new comparability design are alleviated, because a meaningful percentage of the NHCs are also receiving the higher allocation rates. A typical new comparability plan design will not meet this test, however. Consider the examples under ¶1 above. In that plan, the higher allocation rates are provided only to owners, who are the eligible employees included in Group A. Group A does not consist of a group of employees that could pass the nondiscriminatory classification test because 0% of the NHCs have the Group A contribution rate available to them. Therefore, this plan cannot meet the broadly available standard and will have to satisfy the gateway test in order to continue using EBRs to test under §401(a)(4) in post-2001 plan years. (Note that the plan described in those examples also could not satisfy the age-based allocation exception described in ¶3 below, because the allocation groups are not established on the basis of age and/or service.) The primary benefactors of the broadly available exception will be certain larger plans that, although providing the higher allocation rates to a substantial number of NHCs, still need to be tested on a benefits basis, and the broadly available exception will relieve the employer from having to raise the allocation rates of certain NHCs to the gateway contribution level.
• What type of plan design might meet the broadly available test? Consider the following example. BMI Corporation has three allocation groups. Each group covers a different division. For each plan year, a different contribution rate is made for each division based on its profitability. For the 2002 plan year, Division A's group gets a 20% allocation rate, Division B's group gets a 7% allocation rate and Division C's group gets a 3% allocation rate. Assume there are HCEs and NHCs in each group. The gateway test is not satisfied because the NHCs in the Division C group have an allocation rate which is less than one-third of the allocation rate received by the HCEs in the Division A group, and they have not received an allocation equal to at least 5% of 415(c)(3) compensation. But suppose that each division passes the nondiscriminatory classification test. Thus, the 20%, 7% and 3% allocation rates are broadly available, and the plan would not have to pass the gateway test in order to be tested on the basis of EBRs.

¶3. Gateway relief for certain "age-based" allocation plans. In addition to relieving plans with broadly available allocation rates from the gateway test, certain plans that provide age-based allocations also are relieved from the gateway. The proposed regulations had referred to this exception as a subset of the broadly available test, but the final regulations set it out as a separate exception, providing more clarity to the rule. The plans covered by this exception include age-weighted profit sharing plans, which allocate the employer's contribution strictly on the basis of an age-weighted allocation factor, and target benefit plans. When plans are designed in accordance with this exception, all employees, including the NHCs, have the potential to "grow into" the higher allocation rates (i.e., as they get older or accumulated more service with the employer), so the Treasury is not concerned with the fact that certain NHCs receive allocation rates that are less than the gateway contribution. To fall under this exception, the plan must use an allocation formula that applies to all employees who benefit under the plan, and the allocation formula must be a "gradual age or service schedule." A gradual age or service schedule is one that defines specific bands that are based solely on age, solely on years of service, or solely on points that represent the sum of age and years of service. (The proposed regulations did not allow a formula based on the sum of age and service, but the final regulations modified the rule.) In addition, the allocation rates must "increase smoothly" at "regular intervals" under the allocation schedule. These terms are defined below.

• Regular intervals. To determine if the allocation rates are at regular intervals, there must be uniform bands (excluding the highest band), meaning that each band is the same length (e.g., 5-year age intervals, 3-year service intervals, or 10-point intervals based on age and service). If allocation bands are based on age or age-and-service points, the first bracket is deemed equivalent to the others if the maximum age or points in that bracket is 25 or less. If allocations bands are based on service, the first bracket is deemed equivalent to the others if the maximum service in that first band is one year or less. For example, if the plan provides separate allocation rates based on age, the first bracket being participants under age 25, with subsequent brackets in 5-year groups (e.g., ages 25-29, ages 30-34, ages 35-39, etc.), and the highest bracket age 65 and older, the allocation formula would satisfy the regular interval requirement.
• Smooth increases. The allocation method has smooth increases if two tests are satisfied: 1) the allocation rate for each allocation band is greater than the allocation rate for the prior band, but by no more than 5 percentage points, and 2) the ratio of the allocation rate for an allocation band to the allocation rate for the previous band is not more than 2.0 or, if less, the ratio of the allocation rates for the two preceding bands. To illustrate, suppose the allocation formula provides for age bands based on 5-year increments, as described in the prior paragraph. Suppose for the 2002 plan year that the allocation rate for the lowest age band is 2% and the allocation rate for the 25-29 age band is 3%. That means the ratio of the 25-29 age band's rate (3%) to the ratio of the under 25 age band's rate (2%) is 1.5. Since that ratio is no more than 2.0 ratio, the smooth increase test is passed so far. To pass the smooth increase test with respect to the next age based (30-34), the allocation rate could not exceed 4.5%, because that produces a 1.5 ratio when compared to the allocation rate for the 25-29 age band (4.5%/3%), and the ratio cannot exceed the ratio for the prior two age bands (which was 1.5). All of the age bands would have to meet this test in order for the plan to be excused from the gateway test under this age-based allocation formula exception.
• Minimum allocation rates allowed without voiding age-based allocation exception. If a plan with age or service based allocations also provides a minimum allocation rate (e.g., no less than 3% of compensation) which causes the resulting allocation rates to fail the regular interval or smooth increase test, there are two exceptions in the regulations that may enable the plan to still satisfy this exception. Under one exception, if it can be shown that under a hypothetical schedule the regular interval and smooth increase tests could be met, and the lowest band in the hypothetical schedule would receive an allocation no less than 1% of compensation, the plan is deemed to meet the exception. This might help a plan that provides a minimum allocation (e.g., 4% of compensation) to employees with 10 or fewer years of service, even though higher bands include fewer than 10-year intervals. An example of this is provided in the regulations. The other exception applies only to plans that base the allocation bands solely on age and can satisfy a special test which analyzes the equivalent accrual rate for employees who are in bands that receive allocations higher than the minimum allocation rate. An example of this is also provided in the regulations.
• What if the "regular intervals" and "smooth increases" tests are not satisfied? All that means is that, unless the plan can meet the broadly available exception described in ¶2 above, the gateway contribution test, as described in ¶1 above, will have to be satisfied in order to use EBRs to show that the rate group test is satisfied in post-2001 plan years.
• Age-weighted profit sharing plans will almost always satisfy the age-based allocation exception. These plans are designed to make allocations strictly based on age, providing a higher allocation rate as the participant gets older to take into account that each year's contribution will be accumulated over a shorter period of time to normal retirement age because of the participant's advancing age. Generally, unless the 415 limits result in a lower allocation, or the top heavy minimum contribution rules result in a greater allocation, the age-based allocation method will produce identical EBRs for each eligible participant. Age-weighted plans should almost always satisfy the age-based allocation exception described above. Thus, these plans will be able to ignore the gateway test under the regulations and still use EBRs to pass §401(a)(4), even if some of the NHCs receive a lower contribution rate than would be required under the gateway test. Note that many of these plans are top heavy, so the contribution rate for NHCs will generally be no lower than 3% of compensation because of the top heavy minimum contribution requirements.
• Target benefit plans deemed to meet exception. A target benefit plan is deemed to meet the age-based allocation exception if the plan is a safe harbor target benefit plan under §1.401(a)(4)-8(b)(3) of the regulations, OR if the plan fails to meet that safe harbor solely because of one or more of the following reasons: (1) the interest rate used is not a standard interest rate as defined in §1.401(a)(4)-12, (2) the target benefit is calculated assuming future compensation increases at a specified rate, or (3) the plan computes the current year contribution using the actual account balance rather than the theoretical reserve.

¶4. Safe harbor 401(k) plans. Sometimes the employer maintains a safe harbor 401(k) plan in addition to (or as part of) a new comparability profit sharing plan. If the profit sharing contributions are tested on the basis of EBRs, and the gateway test has to be satisfied, the safe harbor nonelective contribution under the safe harbor 401(k) rules, as described in IRC §401(k)(12)(C), is permitted to be included in the determination of whether the gateway test is satisfied. For example, suppose an employer maintains a new comparability plan with a safe harbor 401(k) arrangement. To satisfy the 401(k) safe harbor, the employer provides the 3% safe harbor nonelective contribution. In addition, a discretionary profit sharing plan is provided using the plan design described in the examples in ¶1 (Group A consists of owners, Group B consists of all other eligible employees). The 3% safe harbor nonelective contribution may be counted in determining whether the Group B employees satisfy the gateway test. Thus, if the gateway test requires NHCs to have at least a 5% allocation, and all the Group B employees are eligible for the 3% safe harbor nonelective contribution, then their allocation from the discretionary contribution would only have to equal at least 2% of compensation.

¶5 DB/DC combinations. In some cases an employer maintains both a defined benefit plan and a defined contribution plan. Under these regulations, if those plans are permissively aggregated in order to pass coverage and nondiscrimination testing (known as a DB/DC plan), and the nondiscrimination test is run on the basis of benefits (i.e., normal accrual rates under the DB plan plus EBRs under the DC plan), additional conditions are imposed starting in the 2002 plan year. (Note that a DB/DC plan does not exist if the plans are being aggregated solely to apply the average benefit ratio test under §1.410(b)-5 of the Treasury regulations.)

What are the additional conditions for a DB/DC plan? The DB/DC plan must meet a special gateway test, on an allocations basis, unless: 1) the DB/DC plan is "primarily defined benefit", OR 2) the DC component and DB component of the aggregated DB/DC plan are broadly available if tested separately. A DB/DC plan is treated as primarily defined benefit if 50% or more of the NHCs benefiting under the plan have a normal accrual rate under the DB plan that exceeds their EBRs under the DC plan. (This is the same as under the proposed regulations.) The special gateway test that must be satisfied if the DB/DC plan cannot satisfy one of the exceptions requires that each NHC's combined allocation rate (i.e., the sum of the NHC's allocation rate under the DC plan and the NHC's equivalent allocation rate under the DB plan) is not be less than 5%, if the highest combined allocation rate for any HCE is 25% or less. If the highest HCE combined allocation rate is more than 25%, the minimum combined allocation rate for the NHCs would be 5% plus 1% point for each 5% points (or portion thereof) that the highest HCE rate exceeds 25% (e.g., 6% if the highest HCE rate is more than 25% but not more 30%). In an important change in the final regulations, a safe harbor alternative deems the special gateway as satisfied if the combined allocation rate for all NHCs is no less than 7-1/2% of §415(c)(3) compensation, even if the special gateway would otherwise require a higher allocation rate. (In other words, the 5% gateway test that would apply in a stand-alone DC plan is increased to 7-1/2%.) When determining whether the special gateway is satisfied, the NHCs who benefit under the DB plan may be treated as having an equivalent normal allocation rate that equals the average of the equivalent normal allocation rate of all of the NHCs who benefit under the DB plan.

If one of these tests is not satisfied, the DB/DC plan is not permitted to test on the basis of benefits. In other words, it must test on the basis of contributions. If the DB plan is tested separately from the DC plan (i.e., there is no DB/DC plan for testing purposes), the requirements in this ¶5 are not applicable.

¶6 Determination letters addressing final regulations. Announcement 2001-77 addresses procedures for obtaining determination letters on the new regulations. For determination letter applications filed on or after August 22, 2001, an employer may request review under these final regulations. If a determination letter is requested on the nondiscrimination test, and the test is performed on the basis of benefits, the new regulations must be satisfied if the request relates to a plan year beginning after December 31, 2001.

• Volume submitter plans. Volume submitter plans may include formulas that rely on cross-testing. To facilitate compliance with these new regulations, the IRS will permit volume submitter specimen plans to be amended, as part of the GUST approval submission, to reflect the requirements of these regulations (e.g., to provide a mechanism by which the plan will be able to satisfy the gateway test requirement). For GUST applications still pending, the amendments needed to address these regulations must be submitted by October 22, 2001, in order to be considered as part of the GUST advisory letter. If the GUST letter was already issued, the speciment plan may be resubmitted to incorporate provisions to address the regulations. If the resubmission is made by October 22, 2001, the new advisory letter will be treated as the initial GUST advisory letter for purposes of determining the 12-month GUST remedial amendment period under Rev. Proc. 2000-20. These rules for volume submitter plans are also provided in Announcement 2001-77.

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