YOU HAVE FOUND OUR OLD WEB SITE. BE SURE TO CHECK OUT OUR NEW AND IMPROVED SITE!     ERSA FAQs On January 31, 2003 the Bush administration proposed replacing 401(k)-style retirement accounts including small-business SIMPLE and SARSEP plans, 403(b) plans for nonprofit workers, and 457(b) programs for government employees, as well as corporate 401(k) plans with a new Employer Retirement Savings Plan (ERSA). Proposal also includes replacing IRA with a Retirement Savings Account (RSA), and the creation of new savings plan to be known as the Lifetime Savings Account (LSA). Below are some ERSA FAQs released by the Treasury Department.     Which types of employer-sponsored plans would be replaced by the new ERSA? The ERSA would replace all types of funded plans with employee contributions. ERSAs would replace 401(k) plans, SIMPLE 401(k) plans, 403(b) plans, governmental 457 plans, salary reductions simplified employee pensions (SARSEPs), and SIMPLE IRAs. The ERSA would not replace nongovernmental 457 plans   Are there any types of employers who would not be able to sponsor an ERSA? No. Any employer would be able to sponsor an ERSA.   Will the ERSA proposal have any effect on the amount that an employee will be able to defer under existing law? The amount that an employee will be able to defer under an ERSA will be $12,000 (increasing to $15,000 in 2006) plus, once the employee reaches age 50, a catch-up contribution of $2,000 (increasing to $5,000 in 2006). This is the same that an employee may defer under a regular 401(k) plan, a 403(b) plan, a SARSEP or a 457 plan, but it is greater than the amount permitted under a SIMPLE 401(k) or SIMPLE IRA.   Will after-tax contributions be permitted under an ERSA? Yes. After tax contributions will be permitted to an ERSA, and accounts attributable to such contributions made after 2003 will be treated much like the new RSAs. Distributions from such accounts will generally be exempt from taxation and the accounts will not be subject to the required minimum distribution rules until after the death of the participant.   Will governments with grandfathered 401(k) plans and public schools with 403(b) plans still be able to allow deferrals up to the maximum under a 403(b) or 401(k) plan as well as the maximum under a 457 plan? No. Once ERSAs are in place, all covered employees will be able to defer only the maximum applicable to ERSAs.   Will employers have to terminate their existing plans and transfer the assets to an ERSA? No. Beginning in 2004, all 401(k) plans will become ERSAs. SIMPLEs, SARSEPs, 403(b) plans, and governmental 457 plans may continue in existence indefinitely, but may not accept any future contributions after 2004.   What nondiscrimination tests will apply to ERSAs? The same simplified nondiscriminatory coverage requirement will apply to ERSAs (other than those covering only state and local government employees) that will apply to all other defined contribution plans (See Q&A below). An ERSA will satisfy the nondiscriminatory benefit requirements if the average contribution percentage for nonhighly compensated employees is no greater than 6% and the average contribution percentage for highly compensated employees does not exceed 200% of the average contribution percentage for nonhighly compensated employees. If the average contribution percentage for nonhighly compensated employees is greater than 6%, then the average contribution percentage for highly compensated employees may be any amount.   Will state and local governments and charitable organizations be subject to the nondiscriminatory benefit requirement? ERSAs covering only employees of state and local governments will be exempt from the nondiscriminatory benefit requirement. An ERSA covering only employees of a charitable organization will be subject to the nondiscriminatory benefit requirement only if it allows after tax contributions. In any event, an ERSA covering employees of a charitable organization will be subject to a universal availability requirement regarding the ability of employees to make deferrals under the plan. That is, all employees of the organization must be permitted to elect to make deferrals of more than $200.   Is there a safe-harbor design under which an employer will not be required to apply the general nondiscriminatory benefit rule described above? Yes. A plan can satisfy the nondiscriminatory benefit rule through any one of the following safe harbor employer contribution designs: 1. The employer makes a nonelective contribution on behalf of each participant in the plan equal to 3% of the employee's compensation, 2. The employer makes a matching contribution equal to 50% of each employee's deferrals (up to 6% of compensation), or 3. The employer makes a matching contribution that does not increase based on the level of an employee's deferrals and the match is equal to the amount that would be made under a 50% match (up to 6% of compensation), such as a match of 100% of each employee's deferrals (up to 3% of compensation).   Does the budget proposal related to ERSAs affect any other defined contribution plans? Yes. The proposal includes the following provisions that would greatly simplify the administration of all defined contribution plans: 1. There would be a single test to show that the plan meets the nondiscrimination rules with respect to coverage—ratio-percentage coverage. Under this test, the percentage of an employer's nonhighly compensated employees covered under a plan would have to be at least 70% of the percentage of the employer's highly compensated employees covered under the plan. The other coverage testing alternatives would be repealed. 2. Permitted disparity and cross-testing would be prohibited for defined contribution plans. 3. The top heavy rules would be repealed for defined contribution plans. 4. There would be a uniform definition of compensation for all purposes for defined contribution plans—the amount reported on form W-2 for wage withholding, plus the amount of ERSA deferrals. 5. A simplified definition of highly compensated employee would be adopted under which all individuals with compensation for the prior year above the Social Security wage base for that year would be considered to be highly compensated employees.   Does the ERSA proposal have any effect on defined contribution plans that do not involve employee deferrals or employee after-tax contributions? In other words, does the proposal affect pure profit sharing plans, stock bonus plans, and money purchase pension plans? Other than the simplifications discussed in the preceding question, the ERSA proposal would not affect the rules applicable to employer contributions to defined contribution plans, other than safe harbor nonelective contributions or matching contributions.   Will the ERSA proposal have any effect on defined benefit plans? No, the proposal would not affect the rules applicable to defined benefit plans.   Source: United States Department of the Treasury   Home | Disclaimer | © 2003 bWise Guys, LLC. All rights reserved.				More Information RSA/LSA FAQs Treasury Department Press Release Got an ERSA question? Got an ERSA answer? Join Discussion