MANDATORY
QUALIFIED RETIREMENT PLAN AND
NONQUALIFIED DEFERRED COMPENSATION PLAN
AMENDMENTS
By Marc S. Schechter
Economic Growth
and Tax Relief Reconciliation Act of
2001
Congress enacted the
Economic Growth and Tax Relief
Reconciliation Act of 2001 (“EGTRRA”),
on June 7, 2001, which included numerous
mandatory and optional modifications to
tax-qualified retirement plan rules.
The Internal Revenue Service issued
notices regarding necessary language to
be added to pension plans in compliance
with EGTRRA. Revenue Procedure 2005-66
finalized the EGTRRA remedial amendment
and restatement period for individually
designed plans. The deadline to bring
qualified plans into compliance is based
upon the last digit of the plan
sponsor’s federal employer
identification number (EIN). All
qualified retirement plans must be
amended to comply with the new
regulations to maintain the plans’
tax-qualified status. The
compliance periods are as follows:
|
Last Digit of Plan Sponsor’s
EIN |
Cycle |
EGTRRA Remedial Amendment
Period Ends |
|
1 or
6 |
A |
January 31, 2007 |
|
2 or
7 |
B |
January 31, 2008 |
|
3 or
8 |
C |
January 31, 2009 |
|
4 or
9 |
D |
January 31, 2010 |
|
5 or
0 |
E |
January 31, 2011 |
You may also like
other changes relating to Plan
eligibility, desired levels of
contribution, or other aspects of the
Plan. This would be a good time for us
to discuss those changes and incorporate
any changes into the restated Plan.
It is very important
that the amendment and restatement to
your Plan be adopted. Contributions to
the Plan will not be income tax
deductible and the Plan will be
disqualified if the amendment and
restatement is not timely adopted.
Disqualification has a host of adverse
results including the loss of the Plan's
tax-exempt status and potential
immediate taxation of the accumulated
benefits. A rollover to an IRA also is
invalid if the Plan loses its
tax-qualified status.
American Jobs
Creation Act
On October 22, 2004,
the American Jobs Creation Act (the
“Act”) was enacted. The Act put into
place new Internal Revenue Code Section
409A. This section changes the tax
rules applicable to unfunded,
nonqualified deferred compensation
plans. On September 29, 2005, the IRS
released proposed regulations which
taxpayers must, in good faith, comply
with by amending any non-qualified
deferred compensation plan, stock option
plan, stock appreciation rights plan, or
phantom stock plan before
January 1, 2009.
Under the new Code
Section 409A, any amounts deferred by an
employee under a nonqualified deferred
compensation plan are included in income
when deferred, or, if later, when they
are no longer subject to a substantial
risk of forfeiture (i.e., at the time it
vests), unless the plan complies with
the requirements of timing of elections,
distributions, and funding provided by
such Code section. Tax treatment under
Section 409A is the same as under prior
law; however, if the plan fails to
comply with the requirements of 409A,
deferrals are includible in income at
vesting and subject to an additional
20 percent tax.
Section 409A is
effective for compensation deferrals
after December 31, 2004. Deferrals
earned and vested before 2005 remain
subject only to prior law unless the
plan under which they are deferred is
materially modified after October 3,
2004. In that case, they are treated as
post-effective date deferrals and are
subject to Section 409A.
Any plan adopted
prior to October 4, 2005, should not be
materially modified (the regs provide
guidance) unless you want to comply with
the new rules. Plans adopted on or after
October 4, 2005, have, under
transitional relief in the regs, until
December 31, 2007, to amend to conform
to Section 409A. The time period to
change or modify certain payment
elections also was extended to
December 31, 2007 (but no payment due in
2007 can be postponed to later).
Meanwhile, the plan has to be operated
through December 31, 2007, in good faith
reliance on the provisions of Section
409A and Notice 2005-1. Thus, provisions
in the plan document that violate
Section 409A must be ignored and
operated in compliance with the new
requirements. Any plan provision
allowing "exercise of discretion" must
not be exercised in contravention of
Section 409A.
Please do not
hesitate to call our office if you have
any questions concerning these plan
amendments, possibilities for improved
plan design, or if we could be of
assistance in this regard.
