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FAR REACHING PENSION LAW CHANGES PASSED
The massive tax legislation signed by President Bush on June 7, 2001 (entitled the Economic Growth and Tax Relief Reconciliation
Act of 2001-EGTRRA) contains the most far reaching pension law changes in 20 years. Most of the changes take effect in 2002.
The cumulative effect of the changes is to make qualified retirement plans much more attractive to small businesses. We are
highlighting some of the more significant changes below.
SAFE HARBOR 401(k) PLANS
It is not too late to establish a "safe harbor" 401(k) plan for 2000, either by adopting a new plan or by restating an existing
profit sharing or money purchase pension plan into a 401(k) plan with "safe harbor" provisions. (It is too late for an existing
401(k) plan to add safe harbor provisions, unless the delayed decision notice was given by May 1, 2000.) The safe harbor
provisions can allow owners to defer up to $10,500, often at little additional plan funding cost. A more detailed description
of "safe harbor" plans appears on the next page.
RESTATEMENT OF ALL PLANS
As we mentioned last year, the IRS has finally opened the process to review plan documents drafted to comply with the GUST law
changes. The deadline for restating and submitting retirement plans to the IRS for GUST is the last day of the plan year
beginning in 2001, or December 31, 2001 for calendar year plans. A later date applies if the employer signs a certification of
its intention to adopt a prototype or volume submitter plan. We are in the process of sending certifications for our clients to
sign.
SAFE HARBOR 401(k) PLANS
Safe harbor 401(k) plans are still very popular. It is not too late to adopt a new plan or to restate an existing profit
sharing or money purchase pension plan into a 401(k) plan with "safe harbor" provisions. However, it is too late for an
existing 401(k) plan to add safe harbor provisions for 2001 unless the delayed decision notice was given last fall. The safe
harbor provisions can allow owners to defer up to $10,500, often at little additional plan funding cost. Contact your advisor,
plan consultant or us if you are interested.
PLAN LIMIT INCREASES FOR 2001
Two of the dollar limitations have increased for years ending in 2001. The maximum amount that may be allocated to a
participant's account in defined contribution plans has increased to $35,000 from $30,000. Also, the maximum annual benefit a
defined benefit pension plan may provide has increased to $140,000 for 2001 from $135,000, payable at the Social Security
Retirement Age. See below for law changes for 2002 and later.
DEPOSITING 401(k) DEFERRALS INTO PLAN ACCOUNT
The assets of your 401(k) plan include the amounts that participants have had your business withhold from their wages to defer
into the plan. Labor Department regulations state that participant 401(k) salary deferrals must be transmitted (i.e.,
deposited into or a check mailed) to the plan trust account as of the earliest date on which it is reasonably possible to do so.
The regulation states that in no event shall the "earliest date" be later than the 15th business day of the month following the
month in which the amounts would have been paid to the employee. The "15th business day of the following month" rule is an
absolute deadline; it does not mean that you can automatically wait until that date.
We continue to recommend that you transmit participant 401(k) deferrals as soon as practical, but no later than 7-10 days
after they are withheld from the participants' paychecks. Please give your financial advisor, plan consultant or us a call
if you have any questions.
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IRS SIMPLIFIES RULES FOR DISTRIBUTIONS AT 70 ½
IRS proposed regulations have simplified the rules (effective for 2001) on the minimum amount participants must begin receiving
at 70½ from a qualified plan or IRA. Now a single table can be consulted to determine what percent of plan assets must be
distributed for each year. Previously, the distribution amount depended on several factors and could change dramatically in a
single year. Now, in almost all cases, the minimum distribution amount is less, often significantly less, than under the old
rules.
EGTRRA PENSION TAX LAW CHANGES AND THEIR SIGNIFICANCE
~~In depth~~
The changes noted below are effective for 2002, except as otherwise noted. (Current law is described at the end of each
number.)
1) The maximum benefit payable from a defined benefit plan will be 100% of average pay up to $160,000, beginning at age 62.
(The current limit is $140,000 payable at 65 or the participant's Social Security Retirement Age (SSRA), if later. For example,
a participant with a SSRA of 66 may receive an annual benefit of $160,000 at 62 compared to the old law maximum of approximately
$110,000.) This change can increase the funding very significantly on plan benefits for owners. Effective for limitation years
ending after 12/31/01.
2) The maximum amount that may be allocated to a participant's account in defined contribution plans, will be the lesser of
$40,000 or 100% of compensation. (The current maximum is the lesser of $35,000 or 25% of compensation.) See comments after 4)
below.
3) Compensation that may be considered for retirement plan purposes will be $200,000. (The current limit is $170,000.) This
means additional allocations can be obtained at little or no additional cost for wage earners at $200,000 compensation.
4) The maximum amount that may be contributed to a profit sharing (or 401(k)) plan and deducted per year will be 25% of the
compensation of participants benefiting under the plan. Salary (or cafeteria plan) reductions made by participants will be
deductible in addition to the employer contribution 25% limit.
Also, salary deferral amounts will not reduce a participant's compensation for calculating the deduction limit. (The current
deduction limit is 15% of the compensation of participants benefiting under the plan; salary reductions reduce a participant's
compensation and must be counted as part of the deduction amount.) These changes increase the attractiveness of 401(k) and
profit sharing plans. Because the deduction limit will be the same for money purchase pension plans, yet with flexibility as to
funding, these rule changes will virtually do away with the need for money purchase pension plans.
401(k) plans may wish to increase the maximum permitted salary deferral percentages since those deferral amounts will no longer
reduce the deduction limit. For example, if deferral percentages are increased, lower earning employees may be able to actually
defer 80% or more of their wages into the plan.
5) The maximum salary reduction amount will be $11,000 in 2002, increasing by another $1,000 in each of the next 4 years. (The
2001 limit is $10,500.)
6) The deduction limit for an IRA will be $3,000 per year for 2002-2004, $4,000 for 2005-2007 and $5,000 per year thereafter.
(The 2001 limit is $2,000.)
7) Individuals 50 or older can make "catch up" contributions to a 401(k) plan or an IRA. The 401(k) catch up amount is $1,000
for 2002, and increases by $1,000 for each of the next 4 years. The IRA catch up amount is $500 per year until 2006. (There is
no special rule now.)
8) For employers with under 100 employees who establish a qualified plan, SIMPLE plan or SEP after 2001, a tax credit of 50%
(in lieu of deduction) is given on administrative costs of up to $1,000 for the first 3 years of the plan.
9) Plan loans to S Corporation shareholders, partners and sole proprietors no longer will be considered prohibited
transactions. (Current law is the opposite.)
This newsletter is for general information and should not be used to resolve legal questions regarding specific fact situations.
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