Plan amendments to conform to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Generally, master and prototype plans are amended by sponsoring organizations. However, you may need to request a determination letter regarding a master or prototype plan you maintain that is a nonstandardized plan if you make changes to adopt some provisions of EGTRRA. Your request should be made on the appropriate form (generally Form 5300 or Form 5307). The request should be filed with Form 8717, User Fee for Employee Plan Determination Letter Request, and the applicable user fee. See User fee, later.

Earned income of members of recognized religious sects. For years beginning after December 31, 2001, earned income for retirement plans includes amounts received for services by self-employed members of recognized religious sects opposed to social security benefits who are exempt from self-employment tax.

Credit for startup costs. For costs paid or incurred in tax years beginning after December 31, 2001, for retirement plans established after that date, you may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or qualified plan. The credit equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. You can choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.

You must have had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year. At least one participant must be a non-highly compensated employee. The employees generally cannot be substantially the same employees for whom contributions were made or benefits accrued under a plan of any of the following employers in the 3-tax-year period immediately before the first year to which the credit applies.

1. You.
2. A member of a controlled group that includes you.
3. A predecessor of (1) or (2).

The credit is part of the general business credit, which can be carried back or forward to other tax years if it cannot be used in the current year. However, the part of the general business credit attributable to the small employer pension plan startup cost credit cannot be carried back to a tax year beginning before January 1, 2002. You cannot deduct the part of the startup costs equal to the credit claimed for a tax year, but you can choose not to claim the allowable credit for a tax year.

Compensation limit. For years beginning after December 31, 2001, the maximum compensation used for figuring contributions and benefits increases to $200,000. This amount is subject to cost-of-living increases after 2002.

Deduction limits. After 2001, certain deduction limits change as explained next.

Elective deferrals. For years beginning after December 31, 2001, elective deferrals are not subject to the deduction limit that applies to profit-sharing plans (discussed next). Also, elective deferrals are not taken into account when figuring the amount you can deduct for employer contributions that are not elective deferrals.

SEP and profit-sharing plans. For years beginning after December 31, 2001, your maximum deduction for contributions to a SEP or a profit-sharing plan increases to 25% of the compensation paid or accrued during the year to your eligible employees participating in the plan. Compensation for figuring the deduction for contributions includes elective deferrals.

Defined benefit plans. For plan years beginning after December 31, 2001, your deduction for contributions to a defined benefit plan can be as much as the plan's unfunded current liability.

Elective deferrals. The limit on elective deferrals increases to $11,000 for tax years beginning in 2002 and then increases $1,000 each tax year thereafter until it reaches $15,000 in 2006. These new limits will apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), and deferred compensation plans of state or local governments and tax-exempt organizations. The $15,000 figure is subject to cost-of-living increases after 2006.

Catch-up contributions. For tax years beginning after 2001, a plan can permit participants who are age 50 or over at the end of the plan year to also make catch-up contributions. The catch-up contribution limit for 2002 is $1,000. This limit increases by $1,000 each year thereafter until it reaches $5,000 in 2006. The limit is subject to cost-of-living increases after 2006. The catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts.

• The catch-up contribution limit.
• The excess of the participant's compensation over the elective deferrals that are not catch-up contributions.

SIMPLE plan salary reduction contributions. The limit on salary reduction contributions to a SIMPLE plan increases to $7,000 beginning in 2002 and then increases $1,000 each tax year thereafter until it reaches $10,000 in 2005. The $10,000 figure is subject to adjustment after 2005 for cost-of-living increases.

Catch-up contributions. For years beginning after 2001, a SIMPLE plan can permit participants who are age 50 or over at the end of the year to make catch-up contributions. The catch-up contribution limit for 2002 is $500. This limit increases by $500 each year thereafter until it reaches $2,500 in 2006. The limit is subject to cost-of-living increases after 2006. The catch-up contributions a participant can make for a year cannot exceed the lesser of the following amounts.

• The catch-up contribution limit.
• The excess of the participant's compensation over the elective deferrals that are not catch-up contributions.

User fee. The user fee for requesting a determination letter does not apply to certain requests made after December 31, 2001, by employers who have 100 or fewer employees, at least one of whom is a non-highly compensated employee participating in the plan. See User fee under Setting Up a Qualified Plan in chapter 4.

Limits on contributions and benefits. For years beginning after December 31, 2001, the maximum annual benefit for a participant under a defined benefit plan increases to the lesser of the following amounts.

• 100% of the participant's average compensation for his or her highest 3 consecutive calendar years.
• $160,000 (subject to cost-of-living increases after 2002).

For years beginning after December 31, 2001, a defined contribution plan's maximum annual contributions and other additions (excluding earnings) to the account of a participant increases to the lesser of the following amounts.

• 100% of the compensation actually paid to the participant.
• $40,000 (subject to cost-of-living increases after 2002).

For years beginning after December 31, 2001, the maximum compensation that can be taken into account for this limit increases to $200,000. This amount is subject to cost-of-living increases after 2002.

Excise tax for nondeductible (excess) contributions. For years beginning after December 31, 2001, in figuring the 10% excise tax, you can choose not to take into account as nondeductible contributions for any year contributions to a defined benefit plan that are not more than the full funding limit figured without considering the current liability limit. Apply the overall limits on deductible contributions first to contributions to defined contribution plans and then to contributions to defined benefit plans. If you use this new exception, you cannot also use the existing exception discussed in chapter 4 under Excise Tax for Nondeductible (Excess) Contributions.

Rollover distributions. A hardship distribution made after December 31, 2001, will not qualify as an eligible rollover distribution.

Involuntary payment of benefits. If a participant's employment is terminated, a plan may provide for immediate distribution of the participant's benefit under the plan if the present value of the benefit is not greater than $5,000. For distributions after December 31, 2001, benefits attributable to rollover contributions and earnings on the contributions can be ignored in determining the value of these benefits.

Saver's tax credit. Beginning in 2002, retirement plan participants (including self-employed individuals) who make contributions to their plan may qualify for the saver's tax credit. The amount of the credit is based on the contributions participants make and their credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate can be as low as 10% or as high as 50%, depending on the participant's adjusted gross income. The credit also depends on the participant's filing status. For more information, see Publication 553, Highlights of 2001 Tax Changes.

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