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
December 31, 2006.
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, 2006, to amend to conform
to Section 409A. The time period to
change or modify certain payment
elections also was extended to
December 31, 2006 (but no payment due in
2006 can be postponed to later).
Meanwhile, the plan has to be operated
through December 31, 2006, 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.
