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Determinations - Summary of EGTRRA Changes for Retirement Plans

Below is a brief summary of selected provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that affect retirement plans. Unless otherwise indicated, these provisions were effective for years beginning after December 31, 2001.



EGTRRA rules

Individual Retirement Accounts (IRAs)  
Increase Limit in
IRA Contributions.

The IRA contribution is increased as follows:

Year                        Dollar Limit
2002-2004                   $3,000
2005-2007                   $4,000
2008                           $5,000

The dollar limits after 2008 are indexed for inflation and subject to change in later years.


IRA Catch-up

Individuals who are age 50 or older will be allowed to make catch-up contributions to IRAs as follows:

Year                        Dollar Limit
2002-2005                    $500
2006-and thereafter    $1,000

Deemed IRAs Under
Employer Plans.

A plan can allow a participant to make voluntary after-tax contributions to a separate account that will be treated n the same manner as a traditional or Roth IRA. Such account must meet the requirements for IRAs under Code §408. Effective for years beginning after December 31, 2002.


Income Tax Credit for
Low and Middle Class
Income Savers.

A non-refundable tax credit is available to individuals who make pre-tax contributions to 401(k), 403(b) or 457 plans, or to IRAs. The credit applies to the first $2,000 contributed and is based upon the individual’s adjusted gross income as follows:

Credit   Individual              Joint
50%      $0-15,000              $0-30,000
20%      $15,001-16,250    $30,001-32,500
10%      $16,251-25,000    $32,501-50,000

Note: The adjusted gross income limits are subject to change in later years.




EGTRRA rules

Contributions/Benefit Limits  
Increased Limits on 401(k) and 403(b) Elective Deferrals.

The maximum elective deferral will eventually be increased to $15,000 as follows:

Year                     Limit
2002                    $11,000
2003                    $12,000
2004                    $13,000
2005                    $14,000
2006                    $15,000

After 2006, the maximum deferral amount is indexed in $500 increments and subject to change in later years.


Catch-up 401(k) and 403(b) Elective Deferrals.

Participants who are age 50 or older will be allowed to make pre-tax catch-up contributions each year in $1,000 increments until the $5,000 maximum is reached in 2006. Thereafter, the maximum amount will be indexed in $500 increments and subject to change in later years. Catch-up contributions are not subject either to nondiscrimination testing or the Code §415 individual limits. These amounts are also not applied against the employer’s maximum deduction limit under Code §404.


Defined Contribution Plan Code §415 Limits.

The annual limit on amounts allocated to a participant’s account is increased to the lesser of 100% of compensation or $40,000. The $40,000 limit is indexed in $1,000 increments and subject to change in later years. The MEA for 403(b) plans is repealed.


Defined Benefit Plan Code §415 Limits.

The annual benefit limit is increased to $160,000, indexed in $5,000 increments and subject to change in later years. The 100% of average compensation is repealed. There is an actuarial reduction for benefits commencing prior to age 62.


Limit on Plan Compensation.

The annual limit on compensation in determining contributions or benefits is increased to $200,000 and will be indexed in $5,000 increments and subject to change in later years.


Creation of “Roth” accounts in 401(k) and 403(b) plans.

Commencing in 2006, 401(k) and 403(b) plans may allow participants to elect to treat elective deferrals in a similar manner as “Roth” contributions to an IRA. These will be after-tax contributions but must be tested under the 401(k) ADP test along with elective deferrals and are aggregated with an employee’s deferrals in computing the individual’s Code §402(g) limit. The earnings on these amounts will not be subject to taxation provided that the contributions have been in the plan for at least 5 years. These contributions along with earnings may be rolled into a Roth IRA. Separate accounting will be necessary to track “Roth” contributions.


457(b) Contribution Limits.

The limit on an employee’s pre-tax contributions are increased to be the same as the limits for 401(k) and 403(b) plans ($11,000 in 2002, increasing in $1,000 increments up to $15,000 in 2006 and subject to change in later years). The requirement that pre-tax contributions to a 457 plan be aggregated with elective deferrals to a 401(k) and/or a 403(b) plan in determining an individual’s maximum pre-tax contribution for a calendar year is repealed as is the 33 1/3% of includible compensation limitation.


Increase in Deduction Limit for Profit-Sharing and Stock Bonus Plans.

The maximum deductible amount is increased to 25% of the total compensation paid to eligible employees. Employee elective deferrals are not included in determining this limit.


Definition of Compensation for Purposes of Deduction Limits.

For purpose of determining the maximum deductible amount, elective deferrals are included in the definition of compensation.


Repeal of 150% of Current Liability Funding Limit.

The limitation on current liabilities is increased to 165% in 2002, 170% in 2003 and is repealed for plan years beginning after December 31, 2003.


ESOP Dividends May Be Reinvested Without Loss of Dividend Deduction.

The employer will be allowed a deduction on dividends paid on employer stock if employees are given an election to either receive the dividend in cash or to reinvest the dividend in employer securities in the plan.


Faster Vesting of Employer Matching Contributions.

Vesting in employer matching contributions must be calculated in accordance with a vesting schedule that provides vesting at least as rapidly as either a 3 year “cliff" vesting schedule or a 6-year “graded” schedule.




EGTRRA rules

Changes to Nondiscrimination
Testing Rules
Employees of Tax-Exempt
Entities Disregarded for 401(k) Plan Testing.

Employees who are eligible to make elective deferrals under a 403(b) arrangement do not have to be aggregated with the employees of a related entity which sponsors a 401(k) plan provided no employee of a 403(b) sponsor participates in the 401(k) plan and 95% of the non-excludable employees participate in the 401(k) plan.


Repeal of “Multiple Use” Test.

The multiple use test is repealed.


Modifications of Top-Heavy Rules.

Changes to the top-heavy rules include:

  • Revising the definition of “key employee;”
  • Reducing the 5 year look back rule for distributions to 1 year; and 
  • Allowing employer matching contributions to now be used to satisfy the top-heavy minimum contribution requirement.



EGTRRA rules

Rollovers Between Various Types of Plans.

Distributions from any defined contribution arrangement, 401(k), 403(b), 457, etc., will be eligible to be rolled over to any other defined contribution arrangement. Taxable amounts can be rolled over to a defined contribution from an IRA arrangement. In addition, the IRS is given the authority to extend the 60-day rollover deadline in those circumstances where failure to comply with the 60-day period was beyond the control of the recipient (see FAQs: Waivers of the 60-Day Rollover Requirement).


Rollovers of After-Tax Contributions.

After-tax contributions may be rolled over to an IRA or to another qualified plan provided the plan maintains separate accounting of these amounts, including earnings.


Rollovers of Involuntary Distributions of less than $5,000.

Any distribution greater than $1,000 but less than $5,000 will have to be rolled over to an IRA unless the participant elects a cash distribution or elects to roll it over to another qualified plan. The Department of Labor is directed to issue regulations, which will provide a safe-harbor under which the employer may designate the IRA and selection of investments that will satisfy ERISA's fiduciary standards. This provision does not become effective until the Department of Labor issues such final regulations.


Rollovers of Certain Hardship Distributions

Any amounts, including employer contributions, distributed as the result of a financial hardship will not be eligible to be rolled over.


Safe-Harbor for Hardship Distributions.

The IRS is directed to revise its regulations to provide that a 6-month suspension from making elective contributions will constitute a safe-harbor in determining a financial hardship.


Relaxation of “Same Desk” Rule.

The “same desk rule” is eliminated by changing the distributable event from “separation from service” to “severance from employment.” Comparable changes have been made for 403(b) and 457(b) plans.




EGTRRA rules

Miscellaneous Changes  
Employer Provided Retirement Education.

Employer provided retirement advice provided on an individual basis will not be a taxable fringe benefit if it is available on a nondiscriminatory basis.


Elimination of Forms of Distribution.

An employee may elect to transfer his benefit from one qualified plan to another qualified plan without the transferee plan maintaining the optional forms of benefit if:

  • The transfer was a direct transfer and it was permissible under both plans;
  • The transfer resulted from a voluntary election by the employee after receiving proper notice; and
  • The employee could have elected a lump sum distribution in lieu of the transfer.

A defined contribution plan may also eliminate optional forms of distribution if the employee is eligible to receive a lump sum distribution at the time the optional form is being eliminated and the lump sum distribution is equal to or greater than the benefit that would be paid under the optional form benefit.


Expanded Notice of a Reduction in Benefits

Expands the type of information to be provided in a notice to participants of a reduction in benefits (including the conversion to a cash balance plan) and the time period that the notice must be given. The IRS is directed to provide guidance relating to the content and timing of the notice. This notice requirement is effective as of June 7, 2001. Good faith reliance will apply until regulatory guidance is issued.


Page Last Reviewed or Updated: 25-Aug-2016