ECONOMIC GROWTH AND TAX RELIEFRECONCILIATION ACT of 2001 (EGTRRA)

1
ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT
of 2001 (EGTRRA)

• Plan Sponsor Web Conference Call
• Tuesday, October 9, 2001

For Plan Sponsor Use Only. Not for Distribution.
2
T R A N S A M E R I C A,
T H E I R S, Y O U
Adam Bonsky Vice President, Client Services
Emily Urbano Vice President, Plan Compliance

• A Connection that Makes the Most of

Y O U R P L A N
For Plan Sponsor Use Only. Not for Distribution.
3
Why The Connection Is Important To You

• Opportunity to Enhance Your Plan
• Higher Contribution Limits
• Increased Profit Sharing Deduction Limit
• Simplified Rules for New Plans
• More Benefits with 401(k) Profit Sharing Plans
• Enjoy Your Plan for Less
• Reduce Taxes as a Corporation
• Lower IRS Fees
• Lower Administrative Fees

4
Our Discussion Agenda

• The Advantages of New Contribution Limits
• Case Studies
• Benefit from Increased Profit Sharing Deduction
  Limit
• Pay Less Taxes and Save Money
• Put EGTRRA into ACTION
• How Transamerica is Helping You

5
New Contribution Limits Everyone Can Save More
ii iii iv iv v vi

• 
  
  Current Effective
  Effective
• Maximum Limits for Defined Contribution Plans
  Law 2002
  2003
• Maximum Combined Employer/ Employee
  Contributions
  35,000 40,000
• Maximum Compensation 170,000 200,000
• Employee Contribution Limits
• 401(k) Plans 10,500 11,000 12,000
• Catch-Up Limits for 401(k) Plans Age
  50 N/A 1,000 2,000
• SIMPLE 401(k) Plans 6,500 7,000
  8,000
• Catch-Up Limits for SIMPLE 401(k) Plans Age
  50 N/A 500 1,000
• (i) Lesser of 35,000 or 25 of employee
  compensation. (ii) Lesser of 40,000 or 100 of
  employee compensation with Cost of Living
  Adjustment (COLA) increase in 1,000 increments
  after 2002. (iii) COLA increase in 5,000
  increments after 2002. (iv) Increasing by 1,000
  each year in 2004-6 thereafter, COLA increase in
  500 increments. (v) Increasing by 1,000 each
  year in 2004-5 thereafter, COLA increase in 500
  increments. (vi) Increasing by 500 each year in
  2004-6 thereafter, COLA increases in 500
  increments.

i
6
Understanding The Limits Helps Everyone Save More

• 415 limits are based on the limitation year,
  typically the same as the plan year
• The compensation limit is based on the plan year
• The employee deferral limit is based on the
  calendar year
• The catch-up contribution is based on the
  calendar year
• SIMPLE limits are based on the calendar year
• The 25 deduction limit is based on the
  employers taxable year that ends with or within
  the last day of the plan year

7
Understanding The Catch-Up ProvisionOlder
Workers Can Save More

• Who Can Benefit
• Events Triggering Catch-up
• Employee has reached maximum deferral limit
  (11,000)
• Employee has reached maximum contribution limit
  (lesser of 100 of pay or 40,000)
• Employee has contributed maximum deferral limit
  under the plan (example 15 of pay)
• Employee deferrals limited by ADP Test

and for certain employees age 50MORE savings
8
New Limits Build Better RetirementsHCEs Can Save
More

• Founder and CEO of X-Croft, a 6-person Web-based
  services firm
• 250,000 Annual Gross Income
• Age 55
• Plan limits deferrals to 5 for HCEs
• Objective Maximize her retirement contribution

9
New Limits Build A Better RetirementHCEs Can
Save More

• Geena Monroe, CEO

Post-EGTRRA
2001
2002 Maximum
Compensation 170,000 200,000 401(k)
Contribution 5 8,500 5 10,000 NCP
Contribution 26,500 30,000 Catch-Up
Contribution 0 1,000 Total Retirement
Savings 35,000 41,000
and for your select employeesMORE savings
10
New Limits Tax Credit Benefit Low To Middle
Income Employees

• Employee, Burger World
• Age 21
• Filing head of household
• 15 tax bracket
• 50 tax credit rate
• Employer Match 50 of first 6

11
New Limits Tax Credit Benefit EmployeesNHCEs
Can Save More

Post-EGTRRA
2001
2002 Gross
Income 18,000 18,000 401(k) Contribution
2 (360) 6
(1,080) Employer Match 180 540 Gross Income on
W-2 17,640 16,920 Federal Income Tax
(2,646)
(2,538) Bottom Line Tax Credit
0
540 Impact on Federal Income Tax After Tax
Credit 2,646 1,998 401(k) Savings 540 1,620
Deduction is applied after FICA and all other
applicable taxes are taken from gross income.
Does not reflect amount of 2001 tax rebate
check.
and for your employeesMORE
savings

• Rick Howell

12
Income Tax CreditLow To Middle Income Employees

• Available to individuals with joint/head of
  household/single AGIs of 30,000/22,500/15,000
• Phases out for joint/head of household/single
  AGIs over 50,000/37,500/25,000
• Must be 18 or older (not a dependent or full-time
  student)
• Maximum contribution eligible is 2,000
• Tax Credit up to 50 of employee contribution,
  maximum of 1,000

13
Income Tax CreditLow To Middle Income Employees

• The contribution amount eligible for the tax
  credit is reduced by distributions during the
  testing period which are includible in gross
  income
• Example Tax Year 2002
• Ricks Deferrals in 2002 1,080
• 2000 Hardship Withdrawal 1,000
• Tax Credit Rate for 2002 50
• Maximum Tax Credit 40
• (1,080 1,000 x 50)
• Expires 1/1/2007

14
Improved Income Tax CreditHelps Employees Save
More

• Planning Tips
• The Testing Period with respect to a tax year is
  (1) the current tax year (2) the 2 preceding tax
  years and (3) the period after the end of the
  current tax year and before the due date (plus
  extensions) for filing the return for the year.
• The tax credit will be applied after the child
  and dependent care and the child tax credit have
  been accounted for.
• Employees should take advantage of their
  employer's tax-preferred family savings accounts
  to defray child and dependent care expenses.
• Allows employees to maximize usage of the tax
  credit
• If a joint return is filed by a participant and
  his/her spouse and the spouse receives a
  distribution during the testing period, the
  distribution is considered received by the
  participant.

15
Income Tax CreditHelps Employees Save More

• Married Joint Filer Head of Household All Other
  Filer Credit Rate
• 0 - 30,000 0 - 22,500 0 - 15,000 50
  percent
• 30,001 - 32,500 22,501 - 24,375 15,001-16,
  250 20 percent
• 32,501 - 50,000 24,376 - 37,500 16,251-25,
  000 10 percent
• Over 50,000 Over 37,500 Over 25,000 0
  percent

16
Increased Profit Sharing Deduction Limit Reduces
Your Companys Taxes

• New profit-sharing deduction limit is 25, up
  from 15 last year
• Permits total payroll, including 401(k) deferrals
• 401(k) deferrals are not subject to the employer
  deduction limit

Post
EGTRRA
2001
2002 Company
Eligible Payroll 1,000,000 1,000,000 (401(k)
Employee Deferrals)
(100,000) 100,000 Adjusted Eligible
Payroll 900,000 1,000,000 Deduction Limit x
15 x 25 Employer Deductible Amount 135,000 25
0,000 401(k) Employee Deferral 100,000 N/A Employ
er Contributions 35,000 250,000 Total
Deductible Amount 135,000 350,000
17
Build More With Profit Sharing Plans Using
Increased Employer Deduction Limit

• Profit Sharing Plans Offer the Flexibility Your
  Business Needs
• Discretionary Contributions
• No Minimum Funding Required
• Flexible Plan Designs
• Which Sponsors Benefit the Most?
• Sponsors with Money Purchase Pension Plans
• Sponsors with Two Plans (Money Purchase and
  Profit Sharing)
• Sponsors already contributing full 15

and for your companya plan that SAVES MONEY
18
Build More With Profit Sharing Plans Using
Increased Employer Deduction Limit

• Planning Tip With EGTRRA, no advantage to Money
  Purchase Plans. Convert to a Profit Sharing Plan.
• Lower Costs, Less Reporting, Flexible Plan
  Designs and More Benefits
• Call Your Transamerica Service Consultant for
  details.

and for your companya plan that SAVES MONEY
19
EGTRRA Solves Correction FailuresFor 401(k) Plan
Sponsors

• 401(k) plans are subject to unique discrimination
  tests
• HCEs have often been limited in what they can
  defer
• Many Plan Sponsors correct test failures by
  refunding contributions to HCEs
• EGTRRA provides a better solution

20
Make Testing Corrections for Less Using
Bottom-Up QNECs

• AVG Traditional
  Bottom Up QNEC
• Name Income Deferral ADP
  ADP QNEC 2001
  2002
• HCE 1 150,000 10,500 7
• HCE 2 150,000 10,500 7
• HCE 3 150,000 10,500 7
• HCE 4 150,000 10,500 7 7
• NHCE 1 60,000 1,600 2 4
• NHCE 2 55,000 1,100 2 4
• NHCE 3 50,000 1,000 2 4
• NHCE 4 45,000 900 2 4
• NHCE 5 40,000 800 2 4
• NHCE 6 35,000 0 0 4
• NHCE 7 30,000 0 0 4
• NHCE 8 25,000 0 0 4
• NHCE 9 20,000 0 0 4 15
• NHCE 10 5,000 0 0 1 4 25 40
• Terminated 5/10/01
  14,600
  4,250 2,000
• (lesser of lesser
  of
• 35,000
  or 40,000 or

21
Make Testing Corrections for Less Using
Bottom-Up QNECs

• Which plans would benefit the most from a QNEC?
• Plans that routinely fail non-discrimination
  tests
• Plans that do not cover HCEs because they fear
  testing failure
• Plans that are resistant to Safe Harbor for cost
  considerations
• Companies that want to use contributions
  strategically

and for your companyCORRECTIONS for LESS
22
Employees Enjoy Plan Benefits SoonerFaster
Vesting Schedules

• EGTRRA accelerated the vesting schedule for
  matching contributions
• Cliff 3 years from 5
• Graded 6 years from 7
• Planning Tip Although the new schedule is only
  required for post-2002 match, consider using one
  schedule to simplify administration.

23
Employees Enjoy Plan Benefits SoonerFaster
Vesting Schedules
7-Year Graded Vesting 6-Year Graded
Vesting Years of Vested Vested Credited
Service Percentage Percentage Less Than
1 0 0 1 0 0 2 0 20 3 20 40 4 40 60
5 60 80 6 80 100 7 100
24
EGTRRA Makes Your Job EasierTop Heavy Rules
Simplified

• New Key Employee DefinitionAny employee who in
  the prior year was
• an officer earning in excess of 130,000 annually
  (subject to increases in 5,000 increments)
• a 5 owner
• a 1 owner earning in excess of 150,000
  annually.

25
EGTRRA Makes Your Job EasierTop Heavy Rules
Simplified

• Simplifications
• Repeal of look-back year for key employee
  definition
• Repeal of 4-year look-back rule for
  distributions, except in-service distributions
• Repeal of 4-year look-back rule for taking into
  account balances of terminated employees
• Repeal of top-10 owner category
• Exemption of Safe Harbor 401(k) plans from
  top-heavy testing
• Satisfy top-heavy minimum with matching
  contributions
• Simplifies data gathering process for Plan
  Sponsors
• Less officers who will be HCEs

and for your companySAVE MORE MONEY
26
EGTRRA And IRS Less Costs For Small Businesses

• IRS User Fee Waived
• Plans established by sponsors with 100 or less
  employees
• At least one NHCE must be covered under the plan
• IRS filing submitted after 12/31/2001 and before
  the last day of the 5th plan year (or the end of
  the plans remedial amendment period that occurs
  within the 5 years, if later).
• Plan Type IRS User Fee
• Prototype 125
• Volume Submitter 125 / 1000 (limited / full
  scope)
• Individually Designed 700 / 1250 (limited /
  full scope)

and for your companyLESS COSTS
27
Shorter Hardship Suspension Period Employees Can
Contribute Faster

• Reduced suspension period to 6 months from 12
• Allows employees to resume deferrals sooner
• Helps plan pass the required ADP test
• You must amend Safe Harbor plans to add the
  reduced suspension period
• Effective June 7, 2001
• Planning Tip For employees who took hardship
  distributions in 2001, consider reducing the
  suspension period to 6 months.

28
New Portability Is A Big WinFor You And Your
Employees

• Individual rollovers permitted between employer
  401(a), 403(b), governmental 457 plans, and IRAs
• Allows participants to consolidate their
  retirement savings accounts
• Tax-exempt employer 457 plans are excluded
• Applies to distributions after 12/31/2001

and for your companythe chance to INCREASE
Plan Participation and Assets
29
How Transamerica Is Helping YouGood Faith
Amendments

• All qualified plans must be amended
• Good Faith amendments need to be in place to
  avoid cut back
• In some cases, additional EGTRRA amendments will
  be required
• Remedial Amendment Period for EGTRRA will extend
  until at least 2005, if Good Faith Amendments are
  adopted on time
• IRS has provided sample language on some
  provisions
• Many EGTRRA provisions still require IRS guidance
  
• Not all EGTRRA provisions are required, e.g.,
  Portability and Catch-Up Contributions are
  optional
• EGTRRA Good Faith Amendments to be mailed in
  October

30
How Transamerica Is Helping YouPlan Amendments

• EGTRRA Good Faith amendments are separate from
  GUST
• Currently, GUST Amendments are being prepared
• Our GUST restatement will include determination
  for Cross Tested New Comparability Plan Final
  Regulations for the Volume Submitter Document
• Consulting with clients on desired EGTRRA changes

The GUST amendments are a compilation of
amendments required to be made to qualified plans
to conform with tax law changes covering the
years 1994 to 2000. Most plans have 12 months
after IRS approval of Transamerica's Prototypes
and Volume Submitter plans in order to adopt the
amendments. Transamerica will be processing and
mailing these amendments to plan sponsors in the
next several months.
31
How Transamerica Is Helping YouOngoing
Communication

• Communicating EGTRRA Advantages
• Worth a Look
• InformedSponsor
• Web site, Direct Mail
• Telephone, Client Visits

• Building Awareness for Your Employees
• Worth a Look
• InformedParticipant
• Web site
• Posters
• Statement Messages
• Enrollment Meetings and Materials
• Voice Response Unit (VRU)

32
Make The Most Of The ConnectionOngoing
Communication

• Planning Tip Make the most of EGTRRA.
• Congress can decide to either sunset the
  provisions or continue them after 2010. Why take
  a chance. Start NOW!
• Your Action Steps
• Contact Your Transamerica Service Consultant
• Convert your Money Purchase Plan to a 401(k)
  Profit Sharing Plan
• Maximize contributions and encourage employees to
  increase theirs
• Take advantage of increased profit sharing
  deduction limit
• Increase participationthe more participants
  save, the more you do
• Look for your EGTRRA Plan Amendment Mailing
• Choose the options you like
• Sign the EGTRRA Amendments
• Return to Transamerica ASAP

And for you...Begin enjoying a Plan with MORE
33
Any Questions? Let Us Help

• Transamerica Retirement Services is your expert
  resource for
• Plan design consulting
• EGTRRA guidance
• Customized retirement solutions
• ERISA expertise
• New Comparability plans
• Your Transamerica Service Consultant is here to
  help.