Dale R. Vlasek
McDonald Hopkins LLC
P: 216.348.5452
E: dvlasek@mcdonaldhopkins

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In 2001, Congress passed the Economic Growth and Tax Relief and Reconciliation Act of 2001 (“EGTRRA”). EGTRRA made sweeping revisions to the Internal Revenue Code (“Code”) as it affected retirement plans.

EGTRRA Changes

Because EGTRRA has been in existence for nearly 8 years, many have forgotten its impact and the changes it made. Most notably EGTRRA made dramatic increases in the amount of contributions and benefits that could be provided by retirement plans.

For example, for Defined Contribution Plans, such as 401(k) Plans and Profit Sharing Plans, EGTRRA:

• Increased the Code Section 415 limits from the lesser of 25% of compensation or $35,000 to 100% of compensation or $49,000 (for 2009);
• Increased 401(k) salary deferral limits from $10,500 to $16,500 (for 2009);
• Added catch-up contributions, currently $5,500 (for 2009);
• Raised compensation limit from $170,000 to what is now $245,000 (for 2009);
• Increased the deduction limit from 15% of compensation (which included 401(k) deferrals) to 25% of compensation and excluded 401(k) deferrals from that 25% limit.

There were a number of other technical changes which are mostly positive as they dealt with
Plans.

The EGTRRA changes generally became effective for plans starting with the first Plan Year beginning after December 31, 2001. Because many, if not most, of the changes increased limits and added options that did not exist before (like catch-up contributions), employers who wished to take advantage of these new limits and new options needed to amend their plans to include them. It was and is legally permissible to operate a plan under the lower limits or without permitting catch-up contributions. So if an employer wanted to use the higher limit or new options its plan document needed to be changed. The Internal Revenue Service (“IRS”), however, had not finished determining how these new limits and new provisions were to operate and how the language describing their new features was to be drafted for the plans. Consequently, the IRS permitted employers to adopt what are called “Good Faith EGTRRA Amendments.”

 “Official” EGTRRA Amendment

These Good Faith EGTRRA Amendments were intended to be used as a temporary measure permitting employers to use the new limits and new options. The Good Faith EGTRRA Amendments were to be ultimately replaced after the IRS finalized how it wanted the new provisions drafted and how the new limits and provisions were to work.

The IRS finished that process and began requiring plans to be amended for the “real” EGTRRA amendments. Even though an employer adopted Good Faith EGTRRA Amendments it will still need to adopt a plan which incorporates the “real” EGTRRA amendments.

As part of opening up that process, the IRS dramatically revised the practice and timing of when a plan needed to be amended. Historically since ERISA was enacted, whenever there had been major ERISA and/or Tax Code revisions to plans, the IRS has put a date as of which plan needed to be amended and/or filed with the IRS for the issuance of a new determination letter.

Internal Revenue Service – New Procedures

Under the new IRS procedures, an employer will have a different date by which to amend its Plan depending on what type of plan document it is using and the last digit of its Employer Identification Number (EIN).

Qualified Retirement Plan documents can be categorized into three plan document types; Prototype Plans, Volume Submitter Plans and Individually Designed Plans. Prototype Plans and Volume Submitter Plans are frequently described as “pre-approved” plans because the sponsor of these plan documents have submitted the draft language to the IRS and the IRS has reviewed and approved the language. An Individually Designed Plan does not have pre-approved language.

Prototype Plans and Volume Submitter Plans have until January 31, 2011 to adopt the EGTRRA restated documents if the plans are defined contribution plans and until January 31, 2013 if they are defined benefit plans.

Individually Designed Plans, which include the customized documents for larger employers, Employee Stock Ownership Plans (“ESOPs”) or Prototype Plans which have made amendments or choices not specifically permitted on the Prototype Adoption Agreement so that they are “out of prototype status”, must restate for EGTRRA on a rolling 5-year cycle. What date is used depends on the last digit of the Employer’s EIN. The dates are as follows:

Then Cycle A starts all over in 2012.

Interim Amendments – The so-called Cumulative List Amendments

Notwithstanding these time periods, employers may still need to adopt various interim amendments to stay in compliance with the Code. Each year the IRS publishes what is called the Cumulative List of required changes which need to be incorporated into an employer’s plan document. Any new cumulative list amendments and requirements added since the prior year need to be added by amendment. Accordingly, employees will see their plan document provider or law firm sending them amendments from time to time.

Conclusion

The tax-favored status of a retirement plan is dependent on the plan document’s compliance with the required language of the Code. Although, the constant amendment of plans may appear meaningless, costly and never-ending, it is a critical requirement to maintain the qualified status of a plan. Failure to keep a plan updated for the Code Changes like the official EGTRRA changes eight years after its enactment or the repetitive Cumulative List changes jeopardizes the qualified status of the plan.

©McDonald Hopkins LLC (2009) Dale Vlasek