By Seymour Goldberg and Sidney Kess

Many small employers have prototype profit-sharing or other prototype qualified plans that are sponsored by financial institutions. For most of these types of qualified plans, the clock is ticking for updating them with respect to a number of tax laws that have been enacted from 1995 through 2001.

In order to maintain the tax-qualified status of these plans, they must be updated by Dec. 31, 2002, if they are calendar year plans.

If the plans are not amended for “GUST amendments” (reflecting the law changes made from 1995 through 2000), then these plans lose their tax-qualified status and tax deductions for open years, and participants may be taxed on their account balances. Additionally, if plans are not further amended for changes made by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001, that are effective in 2002, then the higher deduction limitations under EGTRRA are not available in 2002. The Internal Revenue Service has indicated that certain good faith amendments for EGTRRA must be made by the end of the calendar year 2002 for calendar year plans.

Most financial institutions are attempting to abide by these timetables. However, many employers may not meet the Dec. 31, 2002, deadline at the rate that prototype plans are being updated.

As of August 2002, one major institution had a 13 percent compliance rate with respect to the plans that were sent out for completion. Of these, approximately 50 percent of the plan amendments sent out were not filled out properly.

If a client has not received its paperwork from the sponsor of its prototype plan, then the client should contact the plan sponsor as soon as possible and find out when it will be sent out.

IRS correction programs are available to employers who miss the deadline. However, these programs generally are time-consuming and costly.

In the absence of an extension of the deadline by the IRS, the client should do the paperwork by the Dec. 31, 2002, deadline.