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Taxpayer Relief Act of 1997: Highlights

  • Reporting Requirements Eased

Effective August 5, 1997, TRA '97 eliminates the requirement that qualified pension and welfare plans file summary plan descriptions ("SPDs") and summary of material modifications ("SMMs") with the DOL. SPDs and SMMs, however, must continue to be distributed to plan participants and, if requested, sent to the DOL.

  • Excess Distribution/Excess Accumulation Tax

TRA '97 repeals the 15% excise tax on both excess distributions from, and excess accumulations in, qualified retirement plans, tax-sheltered annuities, and individual retirement accounts ("IRAs") effective for distributions received after December 31, 1996 and for decedents dying after December 31, 1996. The excess distribution tax previously had been suspended through 1999. Excess distributions are distributions from such plans in a calendar year in excess of $160,000 (for 1997) or five times that amount for lump sum distributions.

  • Penalty Free IRA Withdrawal for Higher Education Expenses and First Time Homebuyers

Effective December 31, 1997, TRA '97 expands the circumstances under which the ten percent penalty tax on distributions from any type of IRA prior to the IRA owner having attained age 59½ is not applicable. No penalty tax will be incurred for (a) distributions for qualified higher education expenses of the taxpayer and (b) distributions for qualified first time homebuyers. Qualified higher education expenses include tuition, fees, books, supplies and equipment as well as reasonable room and board that are required for the enrollment or attendance of the taxpayer, his or her spouse or any child or grandchild in graduate or undergraduate courses. The IRS clarified that this provision will be effective for IRA distributions made after December 31, 1997, with respect to expenses paid after that date for an academic period beginning on or after January 1, 1998. An academic period includes a semester, trimester, quarter, or other academic term designated by an educational institution. For example, expenses incurred in October, 1997, but paid after December 31, 1997, if paid with IRA distributions will be subject to the 10% penalty tax.

A "qualified first time homebuyer distribution" is a distribution which is used within 120 days after it is received to pay "qualified acquisition costs" of a "first time homebuyer." A first time homebuyer is any individual who had no present interest in a principal residence during the two year period ending on the date of acquisition of the principal residence. The first time homebuyer exception is limited to distributions of $10,000 or less. Qualified acquisition costs include the costs of acquiring, constructing, or reconstructing a residence and related reasonable settlement, financing or other closing costs.

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