On August 5, 1997, President Clinton signed the Taxpayer Relief Act of 1997 ("TRA97") into law. The new law implements a variety of minor, but helpful, changes for tax-qualified retirement and savings plans, as well as other employee benefits. The following is a summary of some of the more significant of those changes.

1. Elimination of "SPD" filing requirement – Under the new law, summary plan descriptions ("SPDs") (and any summaries of material modifications ("SMMs")) will no longer have to be filed with the Department of Labor ("DOL"). Instead, SPDs and SMMs will have to be furnished to DOL only if the agency so requests. This change, which is effective August 5, 1997, applies to welfare benefit plans (i.e., health, severance, disability and like plans), as well as retirement plans.
   
2. Use of electronic media for plan communications – In an apparent effort to facilitate the use of modern technology in plan administration, TRA97 requires both DOL and the Internal Revenue Service ("IRS") to issue guidance concerning the use of new technology (such as electronic mail or other paperless technology) to satisfy the various notice, consent, and disclosure requirements applicable to retirement and other employee benefit plans. This guidance must also clarify the extent to which plan transactions, such as participant loans, can be done on a "paperless" basis.

b) $3,500 Small Benefit Cash-Out Limit Increased to $5,000

Prior to the enactment of TRA97, tax-qualified plans could automatically cash out a terminating employee only if his or her plan benefit was $3,500 or less. To enable plans to reduce the costs associated with tracking (and otherwise maintaining records for) former employees, TRA97 increases the automatic cashout limit to $5,000. Unfortunately, Congress did not include an automatic upward adjustment of this limit for inflation.

In an apparent effort to facilitate benefit portability, the new law expands upon current IRS regulations by clarifying that a tax-qualified plan may accept rollover contributions even if the predecessor plan does not have a favorable IRS determination letter. Under proposed IRS regulations, a plan may accept such a rollover without jeopardizing its continued tax qualification so long as the plan administrator reasonably concludes that the distributing plan is tax-qualified. At the same time, however, the regulations also provide that an administrator’s decision to accept a rollover will automatically be deemed to be reasonable only if the distributing plan has a current determination letter. TRA97 directs the IRS to clarify that such a letter is not necessary for an administrator to reasonably conclude that the distributing plan is qualified.

1. Matching contributions for the self-employed will no longer be counted under $9,500 limit -- Effective for plan years beginning after December 31, 1997, matching contributions for self-employed individuals (such as partners and sole proprietors) will no longer be counted in applying the annual pre-tax elective contribution limit (currently $9,500) to these individuals. This will have the effect of increasing the amount that can be contributed on behalf of such persons and, therefore, may be an inducement for partnerships and sole proprietorships to establish (or increase an already existing) matching program.
   
2. Limits imposed on mandatory investment of 401(k) contributions in employer stock -- Effective for plan years beginning after December 31, 1998, if a plan requires employees’ elective 401(k) contributions to be invested in employer stock, no more than 10 percent of these contributions may be invested in such securities. This restriction is extremely limited as it does not apply to either (i) matching or other employer contributions or (ii) elective contributions made prior to the plan year in which the rule goes into effect; nor does it apply to plans that do not require (other than by direction of the participants) investment of employee contributions in employer stock. However, if it is applicable, the plan would be precluded from separately permitting participants to voluntarily invest more than 10% of their affected contributions in employer stock. This limitation will not apply to ESOPs; nor will it apply where the assets of all individual account plans (such as 401(k) or profit sharing plans) maintained by an employer constitute no more than 10% of the assets of all plans maintained by that employer (which will not often be the case).
   
3. New exception to the 10% excise tax for non-deductible contributions to 401(k) plans -- Effective for tax years beginning after December 31, 1997, TRA97 establishes an exception to the 10% excise tax on non-deductible contributions for those amounts representing elective contributions and/or matching contributions made to a 401(k) plan.
   
4. Repeal of excess distribution and retirement accumulation taxes -- Effective for distributions (or deaths) occurring after 1996, TRA97 repeals the 15% tax on excess distributions and excess accumulations. Under prior law, a 15% excise tax was imposed on "excess" plan distributions (generally, distributions in excess of $160,000) made in any year, and for deceased participants, a 15% estate tax was imposed on the participant’s estate for any "excess" retirement accumulations.
   
5. Moratorium on application of nondiscrimination rules to government plans -- TRA97 makes permanent the current IRS moratorium on the application of the nondiscrimination rules to tax-qualified plans sponsored by state and local governmental entities. This moratorium applies to all applicable nondiscrimination rules, including those applicable to 401(k) plans and section 403(b) tax sheltered annuity arrangements.
   
6. Simplification of section 403(b) "exclusion allowance" limit -- In keeping with earlier legislation, TRA97 simplifies application of the exclusion allowance limit for section 403(b) tax sheltered annuity arrangements by expanding the definition of "compensation" to include elective pre-tax contributions to any tax-qualified or section 125 "cafeteria" plan.

TRA97 establishes an extended deadline for adopting any needed qualified plan amendments for implementing the changes made by TRA97. For nongovernmental plans, the deadline is the first day of the first plan year beginning on or after January 1, 1999. For governmental plans, the deadline is extended two additional years to the first plan year beginning on or after January 1, 2001. In addition, TRA97 provides that an employer may implement the new changes without first amending the plan document so long as an appropriate amendment reflecting the change is ultimately adopted by the extended deadline.

TRA97 also extends or increases the favorable tax treatment of various other employee benefits. Among the more significant of these changes are the following:

TRA97 extends the income tax exclusion for employer-provided educational assistance to June 1, 2000 and will apply to any expenses for educational courses beginning before that date. The maximum amount that may be excluded from income continues to be $5,250 per year and graduate level courses remain ineligible for the exclusion.

Beginning in 1998, employees may be offered the choice between receiving cash or employer-provided parking. Under prior law, employees who were offered this choice would be taxed on the amount of the cash no matter which option was selected. Under TRA97, only those employees who choose cash will be taxed. Thus, employer-provided parking paid through an employee salary reduction arrangement should be excludable from income. However, such a choice still may not be made as part of an employer-sponsored section 125 "cafeteria" plan.

Under current law, self-employed individuals can deduct 40% of the cost of their health insurance premiums. Under TRA97, the deductible percentage will gradually increase over the next ten years (in 5 or 10% increments), so that, by 2007, the entire premiums will be deductible.