| The Economic Growth and
Tax Relief Reconciliation Act of 2001 (EGTRRA) and its Effects on
401k Plan Contributions
(December 20th, 2009)
 The Economic
Growth and Tax Relief Reconciliation Act (EGTRRA) is a legislation
introduced in 2001 that allows American workers to have more opportunities
and ways of saving for their retirement through contributions made
to a 401k plan. The biggest changes brought about by the EGTRRA
include lowered tax rates and simplified retirement rules for 401k
plans, Individual Retirement Account (IRAs) and other defined benefit
pension plans. The modifications were so large that many books were
written on the Act and its effects on qualified retirement plans.
In this article, we summarize some of the significant changes to
401k plans.
i) Increased 401k Contribution Limits
The 401k contribution limit was raised substantially
from 2004 from $13,000 to $15,000 in 2006 as a result of rising
popularity of 401k plans. As of beginning of 2004, the total estimated
number of 401k plans in America was 438,000 with assets totalling
$1.9 trillion & 42.4 million active participants. Also, a rule
of “15% of compensation” which before 2002, required
total company wide contributions to not exceed 15% of the company’s
total payroll was eliminated. As a result, instead of limiting employee
contributions to any percentage of total pay, the 401k contributions
are now based on an annual maximum set by the IRS, with it being
$16,500 for 2009. For employees 50 years or over, an additional
$5,500 is permitted in 401k catch up contributions thus totalling
$22,000 for the year 2009.
401k Contribution Limits
|
Annual
Limit |
| 2002 |
$11,000 |
| 2003 |
$12,000 |
| 2004 |
$13,000 |
| 2005 |
$14,000 |
| 2006 |
$15,000 |
| 2007 |
$15,500 |
| 2008 |
$16,000 |
| 2009 |
$16,500 |
IRA Contribution Limits Table
|
Annual
Limit |
| 2002 |
$3,000 |
| 2003 |
$3,000 |
| 2004 |
$3,000 |
| 2005 |
$4,000 |
| 2006 |
$4,000 |
| 2007 |
$4,000 |
| 2008 |
$5,000 |
| 2009 |
$5,500 |
ii) Invention of 401k
Catch up Contributions for People 50 years or over
Employees who turn 50
years or older within the current contribution year can contribute
an additional $5,500 for 2009 and this clause is known as 401k ‘catch
up’ contributions with the term ‘catch up’ referring
to these older baby boomers being able to catch up with their retirement
savings by contributing more than the rest of the younger class
of retirement savers (people less than 50 years).
iii) Temporary Tax Credit
for Low & Middle Income Savers
Single tax payers with
adjusted gross income (AGI) of $25,000 or less are eligible for
a tax credit of $1,000 on their 401k contributions. This also applies
to taxpayers filing as head of household with incomes of $37,500
or less or married filing joint taxpayers with AGI of $50,000 or
less. This credit starts in 2002 and will last only up to 2006 and
applies only to people aged 18 or over who are not claimed by another
taxpayer as a dependent.
iv) Increased Rollover
Rights
The EGTRRA permits increased
opportunity to rollover funds from one qualified retirement plan
to another. Rollovers are now permitted between 401k plans, 403b
plans, 457 plans, traditional & Roth IRAs as well as Roth 401ks.
It is up to the discretion of each employer to see which type of
rollover they permit, so be sure to check with your human resources
department for information pertaining to your rollover.
v) Quicker Vesting
Employer matched contributions
to your 401k are required to vest as quickly as:
i) 100% vested after three
years
ii) 20% vested after two
years
iii) Additional 20% vested
for each year after the 2nd year for up to 100% vesting.
vi) Easier Rules on 401k
Hardship Withdrawals
Investors who took withdrawals
from their 401k plans were at first prohibited from making additional
contributions for 12 months; this has now been reduced to only 6
months thanks to the EGTRRA.
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