The Economic Growth and Tax Relief Reconciliation Act of 2001, contains many provisions affecting the administration and operation of employer-sponsored retirement plans. The changes in the law will enhance overall attractiveness of plans both for employer and employees.Beginning in 2002, the ruling raises all of the significant dollar limits as follows:
o The includable compensation limit , the amount of compensation that can be considered for pension deduction purposes ,has been dramatically increased from $170,000 to $200,000; and then indexed for cost of living in $5,000 increments.
o The maximum annual employer contribution to a defined contribution plan increases from $35,000 to $40,000 or, if less, 100 percent of compensation , up from 25 percent.
o An employer's deduction limit for a profit sharing plan increases from 15 percent to 25 percent of compensation, which will no longer be reduced by employee elective deferrals.
o Employee elective limit to $11,000 in 2002; then increased $1,000 each year until $15,000 in 2006; and then indexed in $500 increments for cost of living increases.
o There is a new "catch-up" provision. Those 50 or older by the end of the plan year can elect to defer an additional $1,000 in 2002. This limit increases by $1,000 per year until the limit reaches $5,000 in 2006. Increased limits are also applicable to SIMPLE plans, 403(b) and 457 plans.
o Under prior law, contributions to a defined benefit plan that exceeded 150 percent of current liability were not tax deductible. The limit has been increased to 165 percent in 2002 and 170 percent in 2003.
Additionally, the 10 percent excise tax on nondeductible contributions will no longer apply to any contributions to a defined benefit plan up to the accrued liability full funding limit.
Some other favorable changes include:
o IRA contribution limit increased to $3,000 in 2002 through 2004; $4,000 in 2005 through 2007; and $5,000 in 2008; and then indexed thereafter in $500 increments.
o The prohibited transaction rules are modified to allow for participant loans to sole proprietors, partners and Subchapter S corporation shareholders.
o Beginning in 2002, small businesses with 100 employees or less will be eligible for an annual tax credit of 50 percent on up to $1,000 of administrative costs for the first three years of a new plan. The credit is available only if at least one non-highly compensated employee is participating.
Furthermore, the rules regarding rollovers have been liberalized.
o Beginning in 2003, qualified plans will be allowed to have "deemed" IRA accounts. These accounts can either be traditional IRA's or Roth IRA's.
o The multiple use test for highly compensated employees has been eliminated after 2001.
o Employer matching contributions will have to be vested under a maximum 3-year cliff or 6-year graded vesting schedule.
Since many of the new law's pension provisions are effective in 2002, now is the time to take a look at how the new changes will affect your individual or business situation. To take full advantage of these law changes, your plan may need to be amended before the end of 2001.
Just is the pension administrator for Grice, Lund & Tarkington, LLP, CPAs.