Pension Law Changes

The recently enacted Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) offers many positive changes to retirement plans including increased portability of benefits, make up contributions for older individuals and increased deductible limits to employers. Of course before applying the new laws to your specific situation, you should obtain professional advice.

Retirement Plan Contribution Limits

The overall individual limit of additions to participating employee’s account for a defined contribution plan (profit sharing, money purchase, 401(k)) is $40,000 or 100% of compensation for 2002. The compensation taken into account is up to $200,000.

For many years, the tax-deductible limit for a profit sharing/401(k) plan was 15% of eligible wages. The overall employer deductibility limit is now 25% of eligible payroll for all defined contribution plans. This amount does not include employee contributions under a 401(k) plan, which are deductible over and above any employer contributions.

The new law increases the amount that an employee can contribute to a 401(k) through payroll deduction to $11,000 for 2002. The limit goes up by $1,000 a year until it reaches $15,000 in 2006.

Special catch up contributions for older individuals who need an opportunity to save more for retirement are available. Any participant who has reached the age of 50 by the end of the plan year and has maximized their allowable elective deferral contribution may make an additional pre-tax contribution. The catch-up contributions are not restrictive based on pay. The contribution may only be made after a participant is at the statutory elective deferral limit, the plan's dollar or percentage limit, or the ADP limit (this is the one that catches your highly compensated employees). For 2002 that amount is $1,000. The amount increases in $1,000 increment until 2006 when it reaches $5,000.

Pension Portability

The new law provides that eligible rollovers distributions from tax-qualified plans, 403(b) annuities, and government 457 plans may be rolled over to any of the other types including IRA accounts. Distributions of pre-tax and after-tax contributions can now be rolled into other qualified plans or IRA accounts. Taxable IRA amounts may be rolled into qualified plans now as well.

Tax Credits for Individual Plan Participants

To encourage individuals to save for retirement the new tax law introduced a new tax credit for individuals who contribute to 401(k) plans. The maximum annual contribution eligible for credit is $2,000. The credit percentage rate ranges from 0% to 50% depending on the participants Adjusted Gross Income. The amount is reduced by any distributions from an IRA or qualified plan for the participant or spouse from the past two years, the current year and the window of time between the end of the current year and the due date of the tax return.

The credit is phased out as follows:  

Miscellaneous Provisions

The maximum number of years of vested service that can apply to employer matching contributions in a 401(k) account has changed from 7 to 6. Plan participants must be at least 20% vested in the in the second year of service and increase by additional 20% increments up to 100% in the 6^th year of service.

One final change we wanted to bring to your attention concerns the suspension of employee contributions when an employee takes a hardship withdrawal from a 401(k) plan. The new law shortens the period that employee contributions must stop from 12 months to six months.

Of course these are just some of the highlights of EGTRRA. As you read this and have questions, we do encourage you to seek professional advice. If we can be of assistance in helping you interpret the above information or learn of the many other provisions contained in the laws concerning retirement plans please do not hesitate to call us.