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ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT of 2001 (EGTRRA)

ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT of 2001 (EGTRRA). Plan Sponsor Web Conference Call Tuesday, October 9, 2001. For Plan Sponsor Use Only. Not for Distribution. A Connection that Makes the Most of. T R A N S A M E R I C A,. T H E I R S, & Y O U :. Adam Bonsky

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ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT of 2001 (EGTRRA)

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  1. ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT of 2001 (EGTRRA) Plan Sponsor Web Conference Call Tuesday, October 9, 2001 For Plan Sponsor Use Only. Not for Distribution.

  2. A Connection that Makes the Most of T R A N S A M E R I C A, T H E I R S, & Y O U : Adam Bonsky Vice President, Client Services Emily Urbano Vice President, Plan Compliance Y O U R P L A N For Plan Sponsor Use Only. Not for Distribution.

  3. Why The Connection Is Important To You • Opportunity to Enhance Your Plan • Higher Contribution Limits • Increased Profit Sharing Deduction Limit • Simplified Rules for New Plans • More Benefits with 401(k) Profit Sharing Plans • Enjoy Your Plan for Less • Reduce Taxes as a Corporation • Lower IRS Fees • Lower Administrative Fees

  4. Our Discussion Agenda • The Advantages of New Contribution Limits • Case Studies • Benefit from Increased Profit Sharing Deduction Limit • Pay Less Taxes and Save Money • Put EGTRRA into ACTION • How Transamerica is Helping You

  5. New Contribution Limits Everyone Can Save More ii iii iv iv v vi Current Effective Effective Maximum Limits for Defined Contribution Plans: Law20022003 Maximum Combined Employer/ Employee Contributions $35,000 $40,000 Maximum Compensation $170,000 $200,000 Employee Contribution Limits: 401(k) Plans $10,500 $11,000 $12,000 Catch-Up Limits for 401(k) Plans [Age 50+] N/A $1,000 $2,000 SIMPLE 401(k) Plans $6,500 $7,000 $8,000 Catch-Up Limits for SIMPLE 401(k) Plans [Age 50+] N/A $500 $1,000 (i) Lesser of $35,000 or 25% of employee compensation. (ii) Lesser of $40,000 or 100% of employee compensation; with Cost of Living Adjustment (COLA) increase in $1,000 increments after 2002. (iii) COLA increase in $5,000 increments after 2002. (iv) Increasing by $1,000 each year in 2004-6; thereafter, COLA increase in $500 increments. (v) Increasing by $1,000 each year in 2004-5; thereafter, COLA increase in $500 increments. (vi) Increasing by $500 each year in 2004-6; thereafter, COLA increases in $500 increments. i

  6. Understanding The Limits Helps Everyone Save More • 415 limits are based on the limitation year, typically the same as the plan year • The compensation limit is based on the plan year • The employee deferral limit is based on the calendar year • The catch-up contribution is based on the calendar year • SIMPLE limits are based on the calendar year • The 25% deduction limit is based on the employer’s taxable year that ends with or within the last day of the plan year

  7. Understanding The Catch-Up ProvisionOlder Workers Can Save More • Who Can Benefit • Events Triggering Catch-up • Employee has reached maximum deferral limit ($11,000) • Employee has reached maximum contribution limit (lesser of 100% of pay or $40,000) • Employee has contributed maximum deferral limit under the plan (example: 15% of pay) • Employee deferrals limited by ADP Test and for certain employees age 50+…MORE savings

  8. New Limits Build Better RetirementsHCEs Can Save More • Founder and CEO of X-Croft, a 6-person Web-based services firm • $250,000 Annual Gross Income • Age 55 • Plan limits deferrals to 5% for HCEs • Objective: Maximize her retirement contribution

  9. New Limits Build A Better RetirementHCEs Can Save More Geena Monroe, CEO Post-EGTRRA 2001 2002 Maximum Compensation $170,000 $200,000 401(k) Contribution 5% $8,500 5% $10,000 NCP Contribution $26,500 $30,000 Catch-Up Contribution $0 $1,000 Total Retirement Savings $35,000 $41,000 and for your select employees…MORE savings

  10. New Limits & Tax Credit Benefit Low To Middle Income Employees • Employee, Burger World • Age 21 • Filing head of household • 15% tax bracket • 50% tax credit rate • Employer Match: 50% of first 6%

  11. New Limits & Tax Credit Benefit EmployeesNHCEs Can Save More Post-EGTRRA 2001 2002 Gross Income $18,000 $18,000 401(k) Contribution 2% ($360) 6% ($1,080) Employer Match $180 $540 Gross Income on W-2 $17,640 $16,920 Federal Income Tax ($2,646) ($2,538) Bottom Line Tax Credit* $0** $540 Impact on Federal Income Tax After Tax Credit$2,646 $1,998 401(k) Savings $540 $1,620 * Deduction is applied after FICA and all other applicable taxes are taken from gross income. ** Does not reflect amount of 2001 tax rebate check. and for your employees…MORE savings Rick Howell

  12. Income Tax CreditLow To Middle Income Employees • Available to individuals with joint/head of household/single AGIs of $30,000/$22,500/$15,000 • Phases out for joint/head of household/single AGIs over $50,000/$37,500/$25,000 • Must be 18 or older (not a dependent or full-time student) • Maximum contribution eligible is $2,000 • Tax Credit up to 50% of employee contribution, maximum of $1,000

  13. Income Tax CreditLow To Middle Income Employees • The contribution amount eligible for the tax credit is reduced by distributions during the testing period which are includible in gross income Example:Tax Year 2002 Rick’s Deferrals in 2002 $1,080 2000 Hardship Withdrawal $1,000 Tax Credit Rate for 2002 50% Maximum Tax Credit $40 ($1,080 – $1,000 x 50%) • Expires 1/1/2007

  14. Improved Income Tax CreditHelps Employees Save More Planning Tips: • The Testing Period with respect to a tax year is: (1) the current tax year; (2) the 2 preceding tax years; and (3) the period after the end of the current tax year and before the due date (plus extensions) for filing the return for the year. • The tax credit will be applied after the child and dependent care and the child tax credit have been accounted for. • Employees should take advantage of their employer's tax-preferred family savings accounts to defray child and dependent care expenses. • Allows employees to maximize usage of the tax credit • If a joint return is filed by a participant and his/her spouse and the spouse receives a distribution during the testing period, the distribution is considered received by the participant.

  15. Income Tax CreditHelps Employees Save More Married Joint FilerHead of HouseholdAll Other FilerCredit Rate $0 - $30,000 $0 - $22,500 $0 - $15,000 50 percent $30,001 - $32,500 $22,501 - $24,375 $15,001-$16,250 20 percent $32,501 - $50,000 $24,376 - $37,500 $16,251-$25,000 10 percent Over $50,000 Over $37,500 Over $25,000 0 percent

  16. Increased Profit Sharing Deduction Limit Reduces Your Company’s Taxes • New profit-sharing deduction limit is 25%, up from 15% last year • Permits total payroll, including 401(k) deferrals • 401(k) deferrals are not subject to the employer deduction limit Post EGTRRA 2001 2002 Company Eligible Payroll $1,000,000 $1,000,000 (401(k) Employee Deferrals) ($100,000) $100,000 Adjusted Eligible Payroll $900,000 $1,000,000 Deduction Limit x 15% x 25% Employer Deductible Amount$135,000 $250,000 401(k) Employee Deferral $100,000 N/A Employer Contributions $35,000 $250,000 Total Deductible Amount $135,000 $350,000

  17. Build More With Profit Sharing Plans Using Increased Employer Deduction Limit • Profit Sharing Plans Offer the Flexibility Your Business Needs • Discretionary Contributions • No Minimum Funding Required • Flexible Plan Designs • Which Sponsors Benefit the Most? • Sponsors with Money Purchase Pension Plans • Sponsors with Two Plans (Money Purchase and Profit Sharing) • Sponsors already contributing full 15% • and for your company…a plan that SAVES MONEY

  18. Build More With Profit Sharing Plans Using Increased Employer Deduction Limit • Planning Tip: With EGTRRA, no advantage to Money Purchase Plans. Convert to a Profit Sharing Plan. • Lower Costs, Less Reporting, Flexible Plan Designs and More Benefits Call Your Transamerica Service Consultant for details. • and for your company…a plan that SAVES MONEY

  19. EGTRRA Solves Correction FailuresFor 401(k) Plan Sponsors • 401(k) plans are subject to unique discrimination tests • HCEs have often been limited in what they can defer • Many Plan Sponsors correct test failures by refunding contributions to HCEs • EGTRRA provides a better solution

  20. Make Testing Corrections for Less Using Bottom-Up QNECs AVG Traditional Bottom Up – QNEC Name Income Deferral ADP% ADP QNEC 2001 2002 HCE 1 $150,000 $10,500 7% HCE 2 $150,000 $10,500 7% HCE 3 $150,000 $10,500 7% HCE 4 $150,000 $10,500 7% 7% NHCE 1 $60,000 $1,600 2% 4% NHCE 2 $55,000 $1,100 2% 4% NHCE 3 $50,000 $1,000 2% 4% NHCE 4 $45,000 $900 2% 4% NHCE 5 $40,000 $800 2% 4% NHCE 6 $35,000 $0 0% 4% NHCE 7 $30,000 $0 0% 4% NHCE 8 $25,000 $0 0% 4% NHCE 9 $20,000 $0 0% 4% 15% NHCE 10 $5,000* $0 0% 1% 4% 25% 40% *Terminated 5/10/01$14,600 $4,250 $2,000 (lesser of lesser of $35,000 or $40,000 or 25% of pay) 100% of pay)

  21. Make Testing Corrections for Less Using Bottom-Up QNECs Which plans would benefit the most from a QNEC? • Plans that routinely fail non-discrimination tests • Plans that do not cover HCEs because they fear testing failure • Plans that are resistant to Safe Harbor for cost considerations • Companies that want to use contributions strategically • and for your company…CORRECTIONS for LESS

  22. Employees Enjoy Plan Benefits SoonerFaster Vesting Schedules • EGTRRA accelerated the vesting schedule for matching contributions: • Cliff – 3 years from 5 • Graded – 6 years from 7 • Planning Tip: Although the new schedule is only required for post-2002 match, consider using one schedule to simplify administration.

  23. Employees Enjoy Plan Benefits SoonerFaster Vesting Schedules 7-Year Graded Vesting 6-Year Graded Vesting Years of Vested Vested Credited ServicePercentagePercentage Less Than 1 0% 0% 1 0% 0% 2 0% 20% 3 20% 40% 4 40% 60% 5 60% 80% 6 80% 100% 7 100%

  24. EGTRRA Makes Your Job EasierTop Heavy Rules Simplified • New Key Employee Definition—“Any employee who in the prior year was: • an officer earning in excess of $130,000 annually (subject to increases in $5,000 increments) • a 5% owner • a 1% owner earning in excess of $150,000 annually.”

  25. EGTRRA Makes Your Job EasierTop Heavy Rules Simplified • Simplifications: • Repeal of look-back year for key employee definition • Repeal of 4-year look-back rule for distributions, except in-service distributions • Repeal of 4-year look-back rule for taking into account balances of terminated employees • Repeal of top-10 owner category • Exemption of Safe Harbor 401(k) plans from top-heavy testing • Satisfy top-heavy minimum with matching contributions • Simplifies data gathering process for Plan Sponsors • Less officers who will be HCEs and for your company…SAVE MORE MONEY

  26. EGTRRA And IRS Less Costs For Small Businesses IRS User Fee Waived • Plans established by sponsors with 100 or less employees • At least one NHCE must be covered under the plan • IRS filing submitted after 12/31/2001 and before the last day of the 5th plan year (or the end of the plan’s remedial amendment period that occurs within the 5 years, if later). Plan TypeIRS User Fee Prototype $125 Volume Submitter $125 / $1000 (limited / full scope) Individually Designed $700 / $1250 (limited / full scope) and for your company…LESS COSTS

  27. Shorter Hardship Suspension Period Employees Can Contribute Faster • Reduced suspension period to 6 months from 12 • Allows employees to resume deferrals sooner • Helps plan pass the required ADP test • You must amend Safe Harbor plans to add the reduced suspension period • Effective June 7, 2001 • Planning Tip: For employees who took hardship distributions in 2001, consider reducing the suspension period to 6 months.

  28. New Portability Is A Big WinFor You And Your Employees • Individual rollovers permitted between employer 401(a), 403(b), governmental 457 plans, and IRAs • Allows participants to consolidate their retirement savings accounts • Tax-exempt employer 457 plans are excluded • Applies to distributions after 12/31/2001 and for your company…the chance to INCREASE Plan Participation and Assets

  29. How Transamerica Is Helping YouGood Faith Amendments • All qualified plans must be amended • Good Faith amendments need to be in place to avoid cut back • In some cases, additional EGTRRA amendments will be required • Remedial Amendment Period for EGTRRA will extend until at least 2005, if Good Faith Amendments are adopted on time • IRS has provided sample language on some provisions • Many EGTRRA provisions still require IRS guidance • Not all EGTRRA provisions are required, e.g., Portability and Catch-Up Contributions are optional • EGTRRA Good Faith Amendments to be mailed in October

  30. How Transamerica Is Helping YouPlan Amendments • EGTRRA Good Faith amendments are separate from GUST* • Currently, GUST Amendments are being prepared • Our GUST restatement will include determination for Cross Tested New Comparability Plan Final Regulations for the Volume Submitter Document • Consulting with clients on desired EGTRRA changes *The GUST amendments are a compilation of amendments required to be made to qualified plans to conform with tax law changes covering the years 1994 to 2000. Most plans have 12 months after IRS approval of Transamerica's Prototypes and Volume Submitter plans in order to adopt the amendments. Transamerica will be processing and mailing these amendments to plan sponsors in the next several months.

  31. Communicating EGTRRA Advantages Worth a Look InformedSponsor Web site, Direct Mail Telephone, Client Visits Building Awareness for Your Employees Worth a Look InformedParticipant Web site Posters Statement Messages Enrollment Meetings and Materials Voice Response Unit (VRU) How Transamerica Is Helping YouOngoing Communication

  32. Make The Most Of The ConnectionOngoing Communication • Planning Tip: Make the most of EGTRRA. Congress can decide to either sunset the provisions or continue them after 2010. Why take a chance. Start NOW! • Your Action Steps • Contact Your Transamerica Service Consultant • Convert your Money Purchase Plan to a 401(k) Profit Sharing Plan • Maximize contributions and encourage employees to increase theirs • Take advantage of increased profit sharing deduction limit • Increase participation…the more participants save, the more you do • Look for your EGTRRA Plan Amendment Mailing • Choose the options you like • Sign the EGTRRA Amendments • Return to Transamerica ASAP And for you...Begin enjoying a Plan with MORE

  33. Any Questions?Let Us Help • Transamerica Retirement Services is your expert resource for: • Plan design consulting • EGTRRA guidance • Customized retirement solutions • ERISA expertise • New Comparability plans • Your Transamerica Service Consultant is here to help.

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