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GUST Restatement Definition
GUST Restatement was a requirement mandated by the Internal Revenue Service (IRS) for companies offering annuities and retirement savings plans such as 401(k)s to make certain adjustments in the manner of administering such accounts. Certain changes in American legislation pertaining to taxation brought about a new requirement for employers and retirement plan sponsors to sign new adoption agreements as well as restate their prototype qualified plans. Failure to comply with the various newly-formulated statutory regulations would invariably lead to disqualification of the employer or retirement plan sponsor.
A Little More on GUST Restatement
The term “GUST” in GUST Restatement is an acronym that was in turn, derived from a combination of four different acronyms that represented four specific tax regulations pertaining to changes in the administration of retirement plans. These are —
- The General Agreements on Tariffs and Trade, or GATT,
- The Uniformed Services Employment Rights Act of 1994, also known as USERRA,
- The Small Business Job Protection Act of 1996, or SBJPA, and
- The Taxpayer Relief Act of 1997, or TRA ’97.
Most businesses that offered some form of retirement savings plan, especially 401(k)s were required by the IRS to revise the explanatory documents associated with the savings plans, restate their policies pertaining to plan administration and re-submit them with the IRS no later than January 31, 2004. The IRS hoped that such measures would ensure that all retirement savings plans offered by employers were in compliance with its rules. In addition to the four specific tax regulations that contributed to the “GUST” acronym, employers were also required to update their retirement saving plans in order to comply with two ther tax regulations —
- The IRS Restructuring and Reform Act of 1998, or RRA ’98, and
- The Community Renewal Tax Relief Act of 2000, or CRA.
Of these, the Community Renewal Act made alterations to the basic definition of compensation to include some benefits pertaining to transportation. Such alterations usually affected the maximum allowable contribution of retirement plans.
Moreover, apart from the GUST restatement compliance requirement, qualified retirement savings plans were also required to comply with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
The Importance of GUST Restatement and EGTRRA
The changes effected by GUST and EGTRRA had major implications for both employers as well as employees — these new regulations offered tax credits to employers for introducing retirement savings plans to their employees and educating them about the particulars of such plans. Similarly, higher deductible amounts were on offer for contributions to retirement savings plans. Moreover, the new regulations also offered higher benefits at retirement.
The Individual Retirement Account (IRA) contributions were increased as follows:
- A dollar limit of $3,000 was set for contributions made between 2002 and 2004.
- For the years 2005 to 2007, the dollar limit for contributions was increased to $4,000.
- The dollar limit was further increased to $5,000 for the year 2008.
GUST restatement laws also offered tax credits to employees for their individual contributions towards retirement savings plans — employees over the age of 50 could now make catch-up contributions to their plans as follows:
- A maximum contribution of $500 between the years 2002-2005, and
- A maximum contribution of $1,000 starting from the year 2006 and thereafter.
Besides, employees were also allowed to take smaller required distributions from their Individual Retirement Accounts (IRAs) and make larger contributions to their 401(k) retirement savings plans.
Moreover, individuals who made pre-tax contributions to 401(k), 403(b) or 457 plans, or IRAs were offered non-refundable tax credits, applicable to the first $2,000 contributed. These tax credits were based on the adjusted gross incomes of the individual employees and were calculated as follows:
- A credit of 50% was available for individual contributions between $0 and $15,000, as well as joint contributions between $0 and $30,000.
- A credit of 20% was available for individual contributions between $15,001 and $16,250, as well as joint contributions between $30,001 and $32,500.
- A credit of 10% was available for individual contributions between $16,251 and $25,000, as well as joint contributions between $32,501 and $50,000.
However, the adjusted gross income limits were subject to change in later years.
The EGTRRA, in particular, allowed participants of retirement savings plans to make voluntary after-tax contributions to separate accounts that were deemed equal to traditional or Roth IRAs. However, it was mandatory for such accounts to meet the requirements for IRAs under Code §408. This EGTRRA provision was effective for years beginning after December 31, 2002.
Failure of employers to submit GUST restatement caused retirement savings plans to lose their tax-favored status. This potentially resulted in a loss of deductibility for the employers’ contributions to their retirement plans.
By convention, the GUST restatement supplanted all prior versions of the plan, including all amendments made, as of the effective date of the restatement. However, in the event that a GUST restatement superseded previously adopted EGTRRA amendments as a result of the restatement not incorporating or reflecting the amendments, the restatement could result in one of the following situations —
- The plan not being operated in conformity with its terms,
- A decrease or total elimination of accrued benefits in violation of the anti-cutback rules,
- Failure of a qualification requirement.