Before the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") was enacted, tax-qualified retirement plans were allowed to comply with new law in operation until the date (usually years later) by which plan amendments were required. The Internal Revenue Service, perhaps recognizing that operational compliance can be difficult in the absence of written plan documents, has announced that "good faith" EGTRRA amendments must be adopted in the first year that a plan operates in compliance with the new law.
IRS Notice 2001-57 states that "good faith" EGTRRA amendments are required in two situations:
- The tax-qualified retirement plan is required to implement an EGTRRA provision for a given plan year, and existing plan language is not consistent with the EGTRRA provision.
Example: The plan’s vesting provisions must be changed to provide for faster vesting of employer matching contributions, as required by EGTRRA. - The tax-qualified retirement plan elects to implement an EGTRRA provision for a given plan year, and existing plan language is not consistent with operating the plan in accordance with the EGTRRA provision.
Example: The sponsor of a 401(k) plan decides to allow "catch-up" contributions, as permitted by EGTRRA.
Generally, a "good faith" EGTRRA amendment must be adopted by the end of the plan year in which the EGTRRA change will take effect. In many cases, this deadline will be the last day of the 2002 plan year — December 31, 2002 for calendar-year plans.
IRS Notice 2001-57 contains sample plan amendments that cover most situations in which a tax-qualified retirement plan will need to be amended for EGTRRA. These sample amendments need not be adopted word for word — they may be tailored for use in a particular plan.
What if the IRS issues regulations or other guidance after a good faith EGTRRA amendment has been adopted? Will another good faith amendment be required? No. The plan will have to be operated in accordance with the IRS guidance from the effective date of the guidance, but amendments to comply with the guidance will not have to be adopted until the final EGTRRA amendment deadline — which will be no earlier than the last day of the 2005 plan year.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
