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This article discusses planning considerations for 401(k) plan sponsors and participants in light of the changes made by the 2001 tax law. Because many of the provisions of the new law take effect January 1, 2002, these issues should be taken into account sooner rather than later
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA or the Act),2 which was signed into law by President Bush on June 7, 2001, made over 80 changes to the laws governing virtually all types of retirement plans and arrangements. The changes are designed to encourage savings for retirement through: (1) increased plan contribution limits; (2) increased employer deduction limits; (3) additional incentives for workers (in particular, older workers and low- to moderate-income workers); (4) enhanced plan portability; and (5) reduced administrative burdens associated with plans. These changes provide a number of opportunities for employers who sponsor plans and employees who participate in employer-sponsored plans and individual retirement arrangements. Given the limited space available to describe all of the changes in this law, this article will focus on how the Act provides new opportunities for 401(k) plan sponsors and participants.
EFFECTIVE DATES
Most of the changes enacted by the Act are effective beginning in 2002. However, unless Congress acts to extend the effective dates, each of the changes enacted by the Act will expire or "sunset" after December 31, 2010.3 Although plans will not need to be amended to comply with the Act until the applicable remedial amendment deadline, plans must operate in compliance with the Act in accordance with the applicable effective dates.
INCREASED PLAN CONTRIBUTION LIMITS
The Internal Revenue Code of 1986, as amended (the Code), imposes a number of limits on amounts that may be contributed to 401(k) plans. These limits have hampered the efforts of more than 76 million "baby boomers" who are expected to retire in the next 15 years to save enough money for such retirement.5 It is estimated that many of these baby boomers have saved only 40% of the amount needed to retain their present standard of living upon retirement. The Act encourages employers and employees to contribute more to plans by substantially increasing limits on contributions to 401(k) plans.
Increased Compensation Limit. Code...