November 2002

Tax Alert for Retirement Plansn

By Sidney Kess and Seymour Goldberg

Many small employers have prototype profit-sharing or other forms of qualified plans that are sponsored by financial institutions. Most of these types of plans must be updated by the end of the year to comply with a number of changes in the tax law.

Generally, plans must be updated by December 31, 2002, in order to maintain their tax-qualified status. Plans not updated for certain tax law changes made from 1995 through 2000 [the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), the Uniformed Services Employment and Reemployment Rights Act of 1994, the Small Business Job Protection Act of 1996, and the Taxpayer Relief Act of 1997, collectively known as the GUST amendments] will lose their tax-qualified status. Tax deductions for open years may be lost, and plan participants may be taxed on their account balances. In addition, if plans are not further amended for changes made by the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) that are effective in 2002, then this act’s higher deduction limitations are not available. The IRS has indicated that certain good faith amendments for the 2001 Tax Act must be made by the end of 2002 for calendar-year plans.

Although most financial institutions are attempting to abide by these timetables, many employers may not meet the December 31, 2002, deadline. As of September 2002, one major institution reported a 50% compliance rate for plans that were sent out for completion. Of these, approximately 40% of the plan amendments sent out were not properly completed.

Employers that have not received the appropriate paperwork should contact their plan sponsor as soon as possible. Although IRS correction programs are available to employers that miss these deadlines, these programs are generally time-consuming and costly. Employers should presume that the IRS will not extend the deadline, and prepare to file the paperwork by December 31, 2002.