These FAQs provide information on GUST and EGTRRA plan qualification requirements. For current determination letter procedures and plan language resources, see: Determination, opinion and advisory letters Amend or update a plan (cumulative lists, LRMs, QABs, alert guidelines, etc.) These FAQs provide general information and should not be cited as legal authority. What guidance is used to determine whether a plan document is "qualified"? GUST What does the acronym "GUST" mean? What were the major pre-99 changes made by GUST? What were the major post-98 changes made by GUST? EGTRRA What does the acronym "EGTRRA" mean? What were the major changes made by EGTRRA? What guidance is used to determine whether a plan document is "qualified"? A qualified retirement plan must meet the applicable requirements of Internal Revenue Code section 401(a). This section changes from time-to-time as Congress enacts new laws that change existing qualification requirements. For example, in 2001, Congress enacted EGTRRA, which significantly changed these requirements. Guidance explaining these requirements may be found in the income tax regulations, revenue procedures, revenue rulings, and other pronouncements issued by the Internal Revenue Service. The IRS uses checksheets that contain many questions concerning qualification that must be addressed by Employee Plans (EP) specialists before a plan may receive a determination letter if Form 5300 is filed. Specialists who are reviewing Form 5310 are additionally required to focus on pertinent information disclosed on the application. A similar approach is used to evaluate Form 5307, as the volume submitter or master or prototype (M&P) plan document submitted for a determination letter was previously subject to a comprehensive and detailed review of the qualification of its provisions under IRC 401(a) before the IRS issued the advisory or opinion letter to the practitioner or prototype plan sponsor. Accordingly, any review of the application is generally limited to elective provisions (eligibility, vesting allocation or benefit formula, etc.) selected by the adopting employer and any modifications from the approved document. The checksheets used by IRS specialists to evaluate plan qualification are available at IRS checklists for retirement plan documents. Back to top GUST 1. What does the acronym "GUST" mean? The term "GUST" refers to: the Uruguay Round Agreements Act. Pub. L. 103-465 which implemented the Uruguay Round of General Agreement on Tariffs and Trade ("GATT"); the Uniformed Services Employment and Reemployment Rights Act of 1994, Pub. L. 103-353 ("USERRA"); the Small Business Job Protection Act of 1996, Pub. L. 104-188 ("SBJPA"); the Taxpayer Relief Act of 1997, Pub. L. 105-34 ("TRA '97"); the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206 ("RRA '98"); and the Community Renewal Tax Relief Act of 2000, Pub. L. 106-554 ("CRA"). Back to top 2. What were the major pre-99 changes made by GUST? Listed below is a summary of major changes to qualification requirements made by GATT, TRA'97, SBJPA and USERRA that were effective before plan years beginning on or after January 1, 1999. IRC Section Change General effective date 401(a)(5) Social Security Retirement Age treated as a uniform retirement age for 401(a)(4). PYBA 12/31/1996 401(a)(9) New definition of Required Beginning Date. Required actuarial adjustments. PYBA 12/31/1996 414(q) New definition of Highly Compensated Employee; Top Paid Group Election; Calendar Year Data Election. PYBA 12/31/1996 401(a)(17) & 414(q)(6) Repeal of family aggregation rules. PYBA 12/31/1996 401(a)(26) Limited 401(a)(26) to defined benefit plans. Added 2 employee rule. Removed 50 employee requirement for Qualified Separate Lines of Business. PYBA 12/31/1996 401(k) Tax-exempt organizations & Indian tribal governments may sponsor 401(k) plans. PYBA 12/31/1996 401(k)/401(m) SIMPLE 401(k) plans. Prior year/current year testing options. Change in distribution methodology for excess contributions. First Plan Year Rule. PYBA 12/31/1996 411 Repeal of 10-year vesting schedule for multi-employer plans. PYB on or after the earlier of (1) the later of (a) 1/1/1997 or (b) the date on which the last collective bargaining agreement terminates or (2) 1/1/1999. 401(a)(11) & 417(e) Involuntary cashout limit increased to $5,000. PYBA 08/05/1997 414(n) Leased employee - primary direction and control test replaces historically performed test. PYBA 12/31/1996 414(u) Allows plans to comply with the requirements of USERRA without creating qualification problems that might otherwise arise. Effective with respect to reemployments initiated on or after 12/31/1994. 415(b)(2)(E) Amends 415 requirements regarding the assumptions used in the actuarial adjustments of IRC 415(b)(2)(B), (C) and (D). LYBA 12/31/1994 415(c)(1)(A) Change in defined contribution dollar limit. LYBA 12/31/1994 415(c)(3) Elective deferrals included in 415 compensation. LYBA 12/31/1997 415(c)(3) Allows contributions for disabled employees (including HCEs) without first making an election. LYBA 12/31/1996 417(a)(7) Allows waiver of 30-day minimum waiting period between explanation & annuity starting date. Explanation may be provided after annuity starting date. PYBA 12/31/1996 417(e) Changes the prescribed actuarial assumptions used in computing the minimum value placed on certain distributions from DB plans. For distributions with an annuity starting date in PYBA 12/31/1994. PYBA=Plan years beginning after LYBA=Limitation years beginning after Note: See Rev. Proc. 97-41, Rev. Proc. 98-1, Rev. Proc. 98-14, Rev. Proc. 99-23 and Rev. Proc. 2000-27 for more detailed discussions of the effective dates for the changes in qualification requirements made by GUST. Back to top 3. What were the major post-98 changes made by GUST? Listed below is a summary of major changes to qualification requirements made by GATT, TRA'97, SBJPA and USERRA that were effective for plan years beginning after December 31, 1998. IRC Section Change General effective date 401(k)(12) & 401(m)(11) Safe harbor requirements (alternative methods of meeting the nondiscrimination requirements). PYBA 12/31/1998 401(k)(3)(F) & 401(m)(5)(C) Alternative nondiscrimination rules for 401(k) plans providing for early participation. PYBA 12/31/1998 415(e) Repeal of combined plan 415 limit. LYBA 12/31/1999 402(c)(4)(C)/ 401(a)(31) Change in definition of eligible rollover distribution. For distributions after 12/31/1998 415(c)(3) Qualified transportation fringes per IRC 132(f)(4) included in 415 compensation. LYBA/PYBA 12/31/2000; retroactive to LYBA/PYBA 12/31/1997, if taken into account in operation PYBA=Plan years beginning after LYBA=Limitation years beginning after Back to top EGTRRA 1. What does the acronym "EGTRRA" mean? The term "EGTRRA" refers to the Economic Growth Tax Relief Reconciliation Act of 2001, Pub. L.107-16. Back to top 2. What were the major changes made by EGTRRA? 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. Provisions - Individual Retirement Accounts (IRAs) Provision EGTRRA rules 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 Contributions. 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 in 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. Provisions - Contributions/benefit limits Provision EGTRRA rules 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. Provisions - Changes to nondiscrimination testing rules Provision EGTRRA 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. Provisions - Distribution/portability Provision 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. Provisions - Miscellaneous changes Provision EGTRRA rules 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. Back to top
