EGTRRA To Foster Retirement Plan Reevaluation By Employers

January 21, 2002 ( - The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) offers participants both new and expanded opportunities to save for retirement, and employers appear to be gearing up to help, according to a new survey.

Nearly half (42%) of employers responding to Hewitt’s 2001 Employer Reaction to EGTRRA Legislation survey say that EGTRRA will precipitate a broader reevaluation of their organization’s retirement plans within the next 18-36 months.

The survey, conducted last November and December, paints a picture of noticeable change in plan administration practices of the 160 employers who participated in the email survey.

Catch Match
The survey found that 80% of employers say they will allow employees age 50 and older to make “catch-up contributions” to retirement plans, with 16% still considering adding the feature. Plans will have to be amended to permit the new contribution, which allow workers age 50 and older to set aside funds for retirement above and beyond other plan and regulatory limits – if the plan has been amended to provide for the contributions, and if the participant is otherwise eligible to make contributions under the plan (see IRS Helps Sponsors “Catch Up”). 

Nearly two-thirds (63%) of those who will allow the contributions will do so in the first half of this year, according to the survey, while another 31% plan to do so before the end of 2002.  Another 6% will allow the contributions in 2003.

Most of those who plan to allow catch-ups (76%) will not match that contribution, while 10% plan to do so, and 14% are still considering the option.  Unlike the catch-up contribution itself, matching contributions are subject to standard nondiscrimination tests.

Contribution Changes

Two-thirds (67%) of survey respondents plan to increase contribution limits due to the increase in the defined contribution annual limit to the lesser of $40,000 or 100% of pay, with another 16% currently considering the increase. 

Perhaps tired of the expense and aggravation of testing, 36% of employers said they are considering the adoption of an ADP “safe harbor” design in order to eliminate future 401(k) nondiscrimination testing.

A small minority (8%) plan to create additional nonqualified deferral opportunities for employees who wish to take advantage of declining federal tax rates in the coming years, but another 26% are currently considering creating such opportunities.

Hewitt notes that 28% of employers are considering adding an automatic enrollment feature to their savings plan in an attempt to increase participation rates.  Meanwhile, nearly half (42%) are contemplating other design changes, including modifications to vesting requirements, matching formulas, and profit sharing formulas.

Nearly half (46%) say they will revise rollover procedures to accommodate employees who want to transfer IRA and after-tax contributions into their defined contribution plan, with another 17% considering revising their rollover procedures.

ESOP Story

Roughly a quarter of responding employers are revising, or are considering revising, their 401(k) plan to take advantage of the new ESOP dividend deductibility provisions.  Employers may now take advantage of an expanded dividend whether the employee has the dividend reinvested or paid out as a cash distribution – if the participant is given the choice to have the dividend paid to them in cash, even if they decide to leave the funds invested in the ESOP (see IRS Passes Along ESOP Dividend Pass-Through Insights) .

The vast majority (88%) will set the default election for dividend distributions to reinvestment in the plan, with the remainder opting for a cash payment default. 

Among those considering revising all or part of their 401(k), more than half (60%) will convert all assets in the company stock fund to an ESOP, while 23% of employers will convert employer matching contributions to an ESOP.  While not addressed by the survey, those plans could come under greater scrutiny in the wake of the Enron debacle.
Over half (53%) of employers will pay out dividends on a quarterly basis, while nearly one-quarter (24%) of employers will accumulate the dividends and pay them out annually, according to Hewitt.

Nearly a third (29%) of employers say that ESOP dividend payments will be effective for dividends paid in 2001, while 21% indicated payments will be effective beginning in 2002, and another 18% indicated payments will be effective some time after the first quarter of this year.

Tell All?

Most (86%) of employers will specifically communicate EGTRRA provisions to employees as part of their efforts to encourage retirement savings, with another 10% currently considering their approach.  Almost half (49%) of employers plan to communicate the “saver’s tax credit” (for lower-income workers) on savings plan contributions to increase participation, with another 25% considering such a move.

Over half of employers (52%) are not increasing their financial education or advice efforts, but a third are considering increasing those efforts, and 15% say they are increasing efforts to provide more financial education or advice.

Roughly one in five (19%) employers plan to help employees save for college expenses through payroll deduction or direct deposit into the newly expanded Section 529 tuition savings plans. Nearly half (46%) are considering such a move, according to the survey.