October 2001

Wickens, Herzer, Panza, Cook & Batista Main Page

The Briefs Newsletter

          TOPICS AT A GLANCE

Firm News  by David L. Herzer

Obtaining College Financial Aid    by Mark P. Altieri

A Partnership, LLC or S Corporation: Which Entity To Choose For A Business?   by Mark P. Altieri

Retirement Plan GUST Update Requirements and EGTRRA (2001 Tax Act) Pension Provisions  by Richard A. Naegele

Our Authors

 Mark P. Altieri and Russell R. Aukerman, Editors

FIRM NEWS by David L. Herzer

Construction Update of Our New Office

We are receiving constant comments from our friends about the progress of our new office building at Route 83 and I-90 (Route 2) in Avon. You can see our site from I-90 (don't drive off the road looking-a recent photo appears below). As you know, Wickens, Herzer, Panza, Cook & Batista has outgrown its historic offices in downtown Lorain and began construction on the new building early this summer. Everything is going along better than expected. The City of Avon has been most gracious and our construction manager, Paul Pustay, has been superb. We hope to have the basic infrastructure in place by winter and are looking to a Spring, 2002 move.

Thanks for sharing with us in all the excitement of our Firm making this transition. As always, all of the attorneys and staff at the Firm thank you for your continued support and for providing us with the opportunity to serve you.

WHPC&B Adds Two New Law School Graduates

Grafton native Spencer Ryan has recently joined the Firm as an Associate Attorney (pending passage of the Ohio Bar Exam) in the Litigation Department. We are pleased that Spencer has become a part of the Firm, as we know him well – he has worked as a clerk for us in the Litigation Department for the past five years. Spencer graduated with honors from Bloomsburg University of Pennsylvania in 1998 with Bachelor Degrees in Spanish and Political Science. While attending Ohio Northern University's College of Law, he served as the Chief Justice of the College's Moot Court Program.

Rennie Rutman was also hired this summer as an Associate Attorney (pending passage of the Bar) in the Probate and Estate Planning Department. Rennie is also a Greater Cleveland native and received her bachelor's degree summa cum laude from John Carroll University before graduating from Case Western Reserve University School of Law with honors in May of this year.

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Guidelines for and Forms of Financial Aid. Let's say you are in the typical situation of not having adequately saved for your and your family's college educational expenses. Now what? At this point, you will need to review the rules on obtaining various forms of financial aid and scholarships that might be available to you and your family members. Every family, regardless of income levels, should thoroughly explore potential college financial aid sources.

The best form of financial aid is so-called "gift aid," which does not have to be repaid. The most common forms of gift aid are grants and scholarships. Grants are frequently determined on the basis of the student's financial need while scholarships are typically awarded on the basis of merit and academic performance.

So-called "self-help" aid is assistance that must be earned or repaid. There are a variety of loans available to assist in financing college expenses. Some are "subsidized" loans (like Stafford and Perkins loans) where the rate of interest is relatively low and that interest does not start to accrue or require repayment until graduation of the student. Unsubsidized loans might have a reasonable rate of interest but will start accruing interest immediately with repayment necessitated within a short time after taking out the loan. Government and college subsidized work-study programs are another source of self-help aid that is readily available the more financially needy the student is.

Lastly, if the child is open to a four year military career as an officer after graduating from college, ROTC scholarships and stipends are particularly generous. The ROTC benefit will cover at least two and up to four years of tuition, book and fee expense as well as providing a cash stipend of a few hundred dollars per month to the officer candidate. Another indirect benefit of the ROTC route is the fact that major corporations very heavily recruit management employees out of the armed services officer corps regardless of the individual's specific undergraduate degree.

Financial Aid Opportunities – Search by School. How is this entire process initiated? As you explore the process through my related Web links (given below), you will see it is slightly more elaborate than I am briefly describing to you here. But the following is a good road map.

First, you, your spouse and the college-bound child will sit down with a good hard-copy college guide that you have picked up at the library or purchased. Some of my favorites are located at my Web site
(http://www.personal.kent.edu/~maltieri/web/guide/home.htm). Click on Educational Savings then click College Guide Books (you may obtain the noted books at virtually any public library if you do not desire to purchase them). There are also superb ways to do your college searching on-line. You can link to my favorite sites by going to my Web site, clicking on Educational Savings and then College Guides On-line.

After conducting your college review, you and your family will have tentatively picked out a half dozen or so college prospects for the child. Some may be public colleges and universities and others may be private colleges. At this point, do not presume out of hand that you will be unable to afford the additional $10,000 or $15,000 of annual tuition expense at the private college. As we will see, typically the private colleges are well endowed and they have a lot of grant and scholarship money based on both financial need and merit.

So far you have tentatively picked out as many colleges and universities as you feel fit the needs and desires of your child. Now go to the Web site of each of these colleges to check up on available grants and scholarships that that specific college or university offers. After going to the appropriate college Web site, click on the Admissions tab. That category is where you generally will find information on grants and scholarships. The hard-copy college guide won't give you enough specific information although if you can get a paper catalog of the specific college or university (available at most libraries), you will be able to see details on grant and scholarship information.

Be prepared to be amazed at the number of opportunities available. The more that you are in financial need and/or your child is intellectually talented, the better off you are going to be to cash in on these opportunities.

NOTE: There are a number of financial aid services that are promoted to parents to provide the type of assistance that I am talking about. Most of these services charge a hefty fee to do what we have just learned you can readily do for yourself. Moreover, some times the service will do a less competent job of locating available money than you could do for yourself. Are all of these financial aid services scams? No. Indeed, the help of a professional in this all-important area can be very reassuring. But do tread cautiously here and by all means attempt to do the work yourself before your retain an outsider to help you. Also, you may want to look at a couple of superbly written books on financing college expenses written by clear experts in this field. If so, go to my Web site, click on Educational Savings then Information on Financial Aid and look at the books written by Kristen Davis and the Barron's Guide.

There are numerous free-access Web sites providing general information on financial aid and the availability of grant and scholarship money. Go to my Web site, click on Educational Savings and then Information on Financial Aid. The best of these sites is the Department of Education's Finding Out About Financial Aid and Funding Your Education and the Web links off of them. Via the site, you will be able to obtain much of the information that people from a financial aid services could sell you. The Department of Education's site is free, comprehensive, and an excellent Web starting point relative to what we have just talked about.

The FAFSA Application. As you will see on the U.S. Department of Education's Student Financial Assistance site that was just referenced, part and parcel of the entire process of obtaining financial aid in any form (loans, grants or scholarships) requires the filing of the Free Application for Federal Student Aid (FAFSA). As you study the financial aid information provided by the colleges that you have selected, you will see the FAFSA heavily emphasized. The college will provide you with a Web link to the FAFSA homepage (or you can access it via my Web site (click on Educational Savings and then FAFSA) that will allow you to file the FAFSA on-line. Alternatively, you can obtain a hard copy of the FAFSA from most public libraries or the financial aid office of the college that your child is interested in attending.

Any financial aid that is based on financial need – whether loans, grants or scholarships – will be predicated on your filing the FAFSA. Therefore, of all the various things we have talked about relative to financial aid, the timely filing of a complete FAFSA application is by far the most important single item.

It is wise to file the FAFSA as early in the applicable year as possible. If your child is entering college in the fall, you should have your FAFSA application filed by February or mid-March of that year. What information is included on the FAFSA? Your and your child's financial resources will all be detailed on the FAFSA. Wealth owned in your child's name counts much more heavily toward the family's ability to pay than wealth in your and your spouse's name (in this regard, be wary of the time you gift property to your child as noted on the next page).

NOTE: The FAFSA will request your and your child's tax information from last year. If you are doing what I (and most colleges) advise and are filing the FAFSA early in the year your child will attend college, you will be requested to provide information from last year's tax return-a return you probably have not yet completed since it is not due until April 15. What now?

The FAFSA allows you to estimate your tax information from last year if you haven't already filed your tax return. At this point, I would strongly recommend doing the following. By the end of January you will have received miscellaneous tax information from employers, contractors, banks, etc. Purchase one of the computerized tax preparation programs (Turbotax is my favorite) and use the tax information available to you to create a draft tax return for last year. This process will force you to become familiar with the tax preparation software and will generate for you a tax return with numbers that are fairly close to being accurate. Again, the FAFSA specifically allows you to use those approximate tax return numbers to complete your FAFSA. Later, you will finalize and file your tax return and provide updated tax information to FAFSA if there were material changes from what you had earlier given them.

Gifting Property to Children and Possible Effects on the FAFSA. In completing the FAFSA, wealth that is in the child's name will count about three times more toward the families ability to fund educational expenses than if such wealth was in the parents' name. Additionally, the parents' assets are buffered by an "asset protection allowance". The child does not get any asset protection allowance. Therefore, if you are gifting appreciated property to the child to fund college expenses, you will want to time the gift so that is doesn't impair the FAFSA reporting.

EXAMPLE: Mark and Debbie are in the 28% marginal tax bracket on their ordinary income and a 20% rate of taxation on their long-term capital gains. Son Bryan is 18 years old and is in the 15% bracket on ordinary income and is subject to a 10% rate of taxation on long-term capital gains. Mark and Debbie own stock that they bought for $1,000 that is now worth $11,000. In completing the FAFSA, the value of that stock will count in the family's computation of ability to pay Bryan's college expenses, but will be factored in at a significantly less rate if the stock is in Mark and Debbie's name rather than Bryan's name. When the family files Bryan's FAFSA report, the stock is in Mark and Debbie's name.

On the basis of the FAFSA, Bryan's financial aid office at his college grants $5,000 of financial aid against the total $15,000 cost for tuition, fees and room and board. At this point in time, it may be prudent for Mark and Debbie to transfer legal ownership of the stock to Bryan and have Bryan sell the stock in his name. This would affect tax savings of $1,000 (the $10,000 gain ($11,000 sales price minus $1,000 cost) taxed at Mark and Debbie's 20% long-term capital gain rate versus the $10,000 gain taxed at Bryan's 10% long-term capital gain rate). There should also be some state income tax savings here as well.

Bryan would then take his $10,000 of after-tax wealth (the $11,000 sales price minus his $1,000 tax cost) to help pay the remaining $10,000 of tuition, fee and room and board expense.

A Note on the SAT and ACT College Entrance Exams. As we have discussed, there is a large amount of scholarship and grant money available to meritorious students. How do the college financial aid and scholarship people determine which students better merit scholarship money when the criteria is academic performance?

One of the disturbing trends in American education is the phenomenon of "grade inflation". What has happened in recent years at all educational levels (grade school, high school and higher education) is a marked increase in the grade point averages of students. Despite that general GPA increase, scores on standardized exams have stagnated or gone down. Thus, the inherent academic knowledge of American students has apparently not increased while GPAs generally have.

Although widely acknowledged in academic circles, the general public is not as familiar with this problem. The people that run college financial aid and admission offices are, however, well aware of it. Therefore, the student applicant's scores on the college admissions exams – the SAT and ACT – are often given more weight by admissions and financial aid officers than the student's GPA in the determination of that student's academic achievement.

Where am I going with all of this? Most colleges accept either the SAT or ACT score in the admissions and scholarship-awarding process. Check the admissions criteria for the school that you and your child have selected in order to confirm this. As I have just explained, a high score on the SAT or ACT will carry great weight in both the admissions and scholarship awarding process. With preparation, most students can greatly improve their SAT and/or ACT scores.

NOTE: As a parent, you can drive yourself to utter frustration trying to motivate your child to prepare for the college entrance exams. It is probably a distinct minority of high school students that have sufficient discipline and motivation to really attack the SAT/ACT preparation process (in my own family, maybe half of my children have this ability). Remember the old adage, "You can bring a horse to water but you can't make him drink". This saying has particular meaning here.

However, if you think your child is the type that will put in sufficient time and effort to prepare for the SAT and/or ACT exams, there are superb resources to enable that child to dramatically improve his or her scores. Excellent hard copy and computer programs are available to assist the student's SAT or ACT preparation (go to my Web site, click on Educational Savings then SAT/ACT Preparation Programs – these SAT/ACT sites also are excellent for general college searching and information on college careers and financial aid). My personal favorites are the Princeton Review and Kaplan courses. These courses have an excellent historic prospective on both the SAT and ACT exams, complete specific outlines of subject matter that will be tested and (most importantly) copies of old exams and model answers. Although the old exams are not repeated word-for-word, there is a great continuity in the style and substance of the questions. If your child spends sufficient time studying these old exams and the other related material, the child most probably will significantly improve his or her SAT or ACT scores.

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Overview. One of the more common questions that clients pose to the business and tax attorneys at the firm is what form of business entity is best from a tax and non-tax standpoint. As a very general proposition, most small businesses desire a form of doing business that will avoid the double-tax possibility of a regular "C" corporation. That is, there is a desire to conduct business as a tax "flow-through" entity: an S corporation or an entity taxable as a partnership or a proprietorship. If personal liability for business debts is a heightened concern (for example, because certain business risks cannot be adequately insured against), a form of doing business that would provide personal liability protection, such as a corporation or a limited liability company (LLC), would be desirable.

I have written a couple of very detailed articles relative to the tax distinctions between S corporations and entities taxed as a partnership. Anyone who would like to review this more detailed research can go to my website at http:\\www.personal.kent.edu\~maltieri\web\guide\home.htm, scroll down to my publications and review the Ohio CPA Journal and The Tax Adviser articles specifically on this subject.

However, in this Briefs article I would like to focus our general readership on some major areas of concern that repeatedly come up with regard to the tax distinctions between S corporations and partnership entities. Furthermore, I am providing you with some coverage of the so-called "at-risk" rules that are frequently overlooked in this analysis.

All states permit the formation of limited liability companies ("LLCs") and/or limited liability partnerships ("LLPs"). LLCs and LLPs have, for the most part, replaced general partnerships. Many practitioners and business people assume that the taxation of these new entities is uniformly the same as for general partnerships, which is not always the case.

Most professionals and business people are well aware of the fact that LLCs cloak their owners in limited liability. Fewer people understand the liability protections afforded through the LLP entity. The limited liability partnership is a recently created variation of a state-law general partnership. In Ohio, a general partnership can be seamlessly converted without tax affect into a limited liability partnership. The primary difference between an LLP and a general partnership is that the LLP partner is not personally liable for any partnership liability due to the wrongful acts or omissions (e.g., negligence) of his or her partners or an employee of the LLP. This limitation on an LLP partner's personal liability does not extent to that partner's own negligence or misconduct.

As a general rule, the taxation of owners of an LLC (known as members), partners in a general partnership and partners in an LLP is similar. Unless I note otherwise, references to "partners" or "partnership" in this article collectively refers to an LLC and their members as well as partners in a general partnership and LLP. A major exception to this collective treatment of partners involves the "at-risk" and self-employment tax discussions below.

So what are the general parameters? Many small business clients desiring limited liability have the ability to form either an S corporation or as an LLC taxable as a partnership. In such situations should the tax adviser recommend the S corporation route or house the business in an LLC? Although the taxation of S corporation and partnership operations is generally similar, that is, both are "flow through" or "conduit" entities for federal income tax purposes, significant differences exist between the federal income taxation of S corporations and partnerships as will be discussed below.

How about the tax adviser's recommendation of the general partnership as the business entity of choice? With the advent of LLCs, the much-maligned general partnership might appear to be a relic. Still the use of a general partnership or an LLP might indeed be warranted instead of an S corporation or LLC if the at-risk issues discussed later in this article are a primary concern.

As discussed in my more detailed articles that I just referenced, there are many more income tax distinctions relevant to S corporations and partnerships than the items I am about to describe to you. However, it has been my experience that the following categories are the most misunderstood by both professionals and business people. Therefore, I have prepared a brief description of the tax differences with an illustrating example for each category.

Entity Debt and Outside Tax Basis. An owner's income tax basis in his or her partnership or stock interest in the business is referred to as the "outside basis". The effect of entity level debt in the computation of the owner's outside basis is a major difference between the taxation of S corporations and partnerships.

There is no effect on the owner's tax basis in S corporation stock when the entity initially incurs and pays off debt on which it is the primary obligor. This is the case even if the shareholder(s) guarantees the S corporation debt. This is important in that the outside tax basis of the owner's interest in the S corporation is a limitation on the ability to receive a tax-free distribution of cash from the entity as well as a general limitation on the current use of losses passing through from the entity level to the owners.

The effect of entity debt in an organization taxed as a partnership is significantly different. In essence, the incurrence and retirement of partnership debt is treated as if the partners individually and proportionately borrowed the funds and then contributed those funds to the partnership. On retirement of the debt by the partnership, there is a reciprocal deemed cash distribution to the partners. The deemed cash contribution increases the partner's outside basis in the entity, while the deemed cash distribution reduces the partner's outside basis (and triggers recognized gain to the extent the distribution exceeds outside basis). This last point on the possibility of "phantom income" does not occur in the S corporation context since, as discussed in the prior paragraph, the S corporation's incurrence and discharge of entity level debt has no effect on the shareholder's outside stock basis so no deemed cash contribution or distribution occurs.

CAUTION: There is a very technical and complex distinction between the way partners share recourse and nonrecourse debt. Very generally, partners share recourse debt in accordance with their loss sharing ratios while they share nonrecourse debt in accordance with their profit-sharing ratios. Recourse debt is partnership debt for which a partner bears the economic risk of loss. Conversely, nonrecourse debt is entity debt for which no partner bears an economic risk of loss for that liability. Generally, nonrecourse debt is secured by partnership property such that in the event of default the lender may look only to the collateral to satisfy the debt.

If the entity is a partnership, the partners would each get $25,000.00 of basis credit for the entity level debt so that both Mark and Dave could currently use their losses and receive the cash distributions tax-free.

The Basis Effect of the Owner Loaning Money to the Entity. When an S corporation shareholder directly loans money to his or her corporation, the principal amount of the loan will provide a buffer against which loss pass-throughs may be taken if the outside stock basis has been reduced to $0. However, the loan will not directly affect the owner's outside basis in his or her stock. It is only the outside basis in the stock interest that acts as a buffer for tax-free cash distributions.

As previously noted, in the case of an entity taxable as a partnership, the entity debt directly affects the partner's outside basis in his or her partnership interest. When a partner loans money on a nonrecourse basis to his or her partnership, only that partner bears the economic risk of loss associated with default on the loan. Therefore, in that situation, the lending partner will get 100% basis credit relative to the principal amount of the loan as it is treated as a recourse loan with respect to that lending partner.

If NEWCO is an S corporation, Mark's outside basis in his stock interest is $0. The $5,000.00 cash distribution in excess of basis is a recognized taxable gain to him. If NEWCO is a partnership, Mark receives the $5,000.00 distribution tax-free since his outside basis prior to the distribution is $50,000.00.

At-Risk Complications. I had earlier made the point that members of an LLC, partners in a general partnership and partners in a LLP are generally treated in the same manner for federal income tax purposes. However, under this subsection of our analysis it is critical to note that the rules differ from the Entity Debt and Outside Tax Basis analysis that was just addressed and that the choice of business entity could be a critical factor. We will now see a meaningful distinction between S corporations, general partnerships, LLCs and LLPs.

Three different limitations may apply to the current deductibility of losses in a pass-through entity. The first (the "overall limitation") limits the current deductibility of flowed-through losses to the partner or S corporation shareholder's outside tax basis in the entity. I noted the computation of outside basis earlier as well as the fact that S corporation shareholders additionally can utilize basis in their direct loans to the corporation as a loss pass-through buffer.

The second limitation that may apply to limit the current use of losses after the overall limitation has been hurdled are the "at-risk" rules of Section 465, the focus of the current discussion. Business entity selection has a direct bearing under Section 465 as will be detailed momentarily.

After running the gauntlet of the overall limitation and the at-risk rules, flowed-through losses are lastly limited by the passive loss rules of Section 469. A business is passive as to a given owner unless that owner is a material participant in it under Section 469 (generally requiring hands-on, regular and continuous services). If passive, any resulting losses are deductible by the owner only against passive income derived from other sources. Business entity selection is not generally relevant to a determination of material participation. For this reason (and the fact that I will otherwise presume the owner is a material participant), I will ignore this third limitation and concentrate on the effect of the at-risk limitation.

Section 465 (the second limitation) prohibits the current deductibility of flowed-through losses unless the partner or S corporation shareholder then has a sufficient amount "at-risk" in the business. An owner's at-risk amount is an ever-changing number. He or she is at-risk to the extent of: (1) cash or the tax basis of non-cash property contributed to the business, PLUS (2) most recourse borrowings by the business for which the owner has personal liability, PLUS (3) the owner's share of amounts borrowed for use in the business that are "qualified nonrecourse financing" (qualified recourse financing is present if the business has nonrecourse debt collateralized with real property it uses in its business), PLUS (4) the owner's share of flowed-through income items. The owner's at-risk amount is decreased by (A) cash withdrawn from the business, and (B) the owner's share of flowed-through (and deducted) loss items, and (C) a reduction in recourse debt that had earlier increased the owner's at-risk amount under (2) above.

Recall that under (2), the owner will be at-risk for his or her share of recourse liabilities. The widespread conclusion that entities taxed as partnerships (general partnerships, LLC's and LLP's) are taxed similarly now breaks down due to the way the owners share entity liabilities under Ohio law. A general partner will be at-risk for his or her share of all general partnership debt. An LLP partner will similarly be at risk for all normal debt of the LLP.

However, similar liabilities in an S corporation or LLC would not increase the amount at-risk for their owners. Even though the lender would have recourse against any of the assets of the business, the personal liability shell provided by the S corporation or LLC entity would prevent the lender from satisfying the debt out of the personal wealth of the owners.

What if the owners in the latter situation personally guaranteed the business' debt? Under the at-risk rules, neither a member of an LLC nor an S corporation shareholder would get to increase his or her at-risk amount from a guarantee of business debt until the owner is actually called upon to satisfy the loan. A guaranty of entity debt by a general partner or LLP partner would not disqualify that owner from an at-risk build-up since such a partner would have personal liability for repayment of the debt under state law immediately upon its creation irrespective of the guarantee.

If the entity was either a general partnership or an LLP, Mark and Dave would each have an at-risk amount at the end of the year of $20,000 and their share of NEWCO losses for the year would be fully deductible (presuming no passive loss issues) on their personal returns. Furthermore, this result would pertain even if they had not guaranteed the bank debt.

CAUTION: If in the following year no other activity occurred other than NEWCO's payment of the payables out of the prior year's cash reserves, the owners in the latter general partnership or LLP scenario would have a gross income inclusion as their at-risk amounts would go negative and be recaptured under Section 465(a).

Self-Employment Tax Issues. We will also see a meaningful distinction between S corporations, general partnerships, LLCs and LLPs under this category. The distinction between S corporations and general partnerships in regards to self-employment tax is relatively well known to practitioners and many business people. A general partner’s earnings from self-employment would include his/her distributive share of partnership operating income, assuming the partnership is actively engaged in a trade or business. In contrast, distributive S corporation income (presuming payments of reasonable wages to active owners) is not subject to self-employment tax.

Assuming that a reasonable salary for Mark and Dave is $100,000 each, and NEWCO is an S corporation, the company can deduct the $200,000 with Mark and Dave each receiving a $50,000 share of the net income on their respective K-1s. The overall effect is to save $2,900 of self-employment tax, the Medicare portion. If NEWCO’s income is more than $300,000, the savings will be even greater.

A limited partner’s distributive share of the income from a partnership is generally excluded from the definition of net income from self-employment. Proposed Regulations provide that a partner or LLC member is to be treated as a limited partner unless: the partner or member has personal liability for the debts of or claims against the partnership by reason of being a partner or member; the partner or member has authority to contract on behalf of the partnership; or the partner or member participates in the partnership trade or business for more than 500 hours during the taxable year. However, if the activities involve the provision of professional services, individual providing any such services will not be considered a limited partner.

An LLC member will generally not be personally liable for the debt of the corporation, whereas a partner in a LLP will bear such liability. Accordingly, under the Proposed Regulations there is an advantage to a LLC over a general partnership or LLP, assuming the activities are non-professional in nature and the member meets the other specified criteria.

As just illustrated, if NEWCO is an S corporation, Mark and Dave's distributive share of the operating income will not be self-employment income. However, if NEWCO is a general partnership (under the final regulations) or an LLP (under the Proposed Regulations) Mark and Dave's distributive share of operating income will be entirely self-employment income. This would be the case as to Mark (even though he renders no services to NEWCO) due to the fact that he would bear personal liability for the general or limited liability partnership debt. If NEWCO is an LLC, under the Proposed Regulations Dave's distributive share would be self-employment income but Mark's would not.

Conclusion. As is obvious from the above analysis, the proper choice of business entity is not a easy task. Many counter-balancing concerns are in play. Generally, if limiting the owner's personal liability is a primary concern, we will go the S corporation or LLC route. However, as noted under the "at-risk" analysis, an LLP or a general partnership might better fit the bill if the owner's at-risk amount is to be maximized. Lastly, the analysis of self-employment tax issues is often a critical concern. Proper consultation with your tax adviser and lawyer is critical.

I will briefly summarize the concepts in this article in the following matrix:

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RETIREMENT PLAN GUST UPDATE REQUIREMENTS AND EGTRRA (2001 TAX ACT) PENSION PROVISIONS  by Richard A. Naegele

As we previously informed you, all tax-qualified retirement plans are required to be amended and restated for compliance with the requirements of several recent tax acts (collectively called "GUST"). In June, 2000, the IRS stated that all retirement plans were required to be updated by the last day of the plan year commencing in 2001 (i.e., December 31, 2001 for a plan with a December 31 year end).

The IRS recently issued Notice 2001-42 providing additional guidance on the GUST update requirements. While not extending the regular GUST remedial amendment period beyond the last day of the 2001 plan year, the IRS extended the amendment period for prototype and

volume submitter plans until December 31, 2002. The vast majority of retirement plans prepared by Wickens, Herzer, Panza, Cook & Batista (and upwards of 80% of all retirement plans) fall into these categories.

Clients whose current plan documents are Wickens, Herzer, Panza, Cook & Batista volume submitter or prototype plans automatically have until December 31, 2002 to adopt new plans. Clients with individually designed plans or plans prepared by another provider may be required to sign a nonbinding statement of intent to adopt a prototype or volume submitter plan prior to December 31, 2001 in order to qualify for the extended 2002 GUST update period.

Please note: individually designed plans do not qualify for the extended 2002 update period. Generally, more complicated plan documents such as Employee Stock Ownership Plans (ESOPs), collectively bargained pension plans, cross-tested profit sharing plans and larger defined benefit plans will need to be updated for GUST by the last day of the 2001 plan year.

Additionally, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), enacted June 7, 2001, makes many changes to retirement plans. Attached is a chart listing some of the key EGTRRA retirement plan changes.

Please contact Richard Naegele or Thomas Huemmer of our office if you have further questions regarding the updating of retirement plan documents.

RETIREMENT PLAN DOLLAR AND PERCENTAGE LIMITS (EGTRRA 2001)

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This issue features contributions by:

Mark P. Altieri – Co-Editor of Briefs, Mr. Altieri is a member of the Business Organizations and Tax Department, with an emphasis in non-qualified deferred compensation, executive compensation, and tax law generally.

David L. Herzer – President of our Firm and a member of the Business Organization and Tax Department, Mr. Herzer is a regular contributor to the Firm News column.