New laws make retirment plans more attractive

Whether you are a participant in a 401(k) plan or a plan sponsor, there's never been a better time to begin a retirement plan.

The Economic Growth and Tax Relief Reconciliation Act of 2001 made sweeping changes to retirement plan laws. In addition to lowering marginal tax rates, repealing the estate tax and making many other important tax law changes, the bill made very significant modifications to the rules affecting qualified plans and individual retirement accounts. The new tax law increases contribution and benefit limitations, increases the portability of retirement benefits between retirement plans, provides financial incentives for the adoption and maintenance of retirement plans and provides for individual tax incentives to participants in retirement savings plans.

Administrative expenses

As a plan sponsor, administrative ex-penses are a major concern. Effective Jan. 1 of this year, small employers that establish a new qualified retirement plan such as a 401(k) plan will receive a tax credit equal to 50 percent of the administrative expenses incurred. A small employer is defined as having 100 or fewer employees who had compensation in excess of $5,000 in the preceding year. The 50 percent credit applies to the first $1,000 in expenses for each of the first three plan years.

This would provide an employer as much $1,500 in tax credit over the three-year period.

IRS fee waiver

Another incentive to small employers is a waiver of the fee that the IRS generally charges to review plans and issue determination letters with respect to the plans' qualifications.

The fee is waived during the first five plan years for applications submitted after Dec. 31, 2001.

Employer deduction limits are in-creased commencing in 2002 from 15 percent to 25 percent of gross participant compensation. For 401(k) plans this limit is in addition to the participant elective deferrals.

Other noteworthy changes include a change that allows participant plan loans to partners, sole proprietors, owners of S-corporations and LLC members. Additionally, top-heavy and non-discrimination testing rules have been eased somewhat.

Participant retirement plan contribution limits have increased. Previously a participant could not receive more than 25 percent of their pay from both em-ployer and employee contributions. Under EGTRRA the 25 percent limit was repealed. Participants may now re-ceive the lesser of $40,000 or 100 percent of compensation per year. This limit is indexed for cost of living adjustments. The annual elective deferral contribution limitation for 401(k), 403(b) and 457 plans, increased to $11,000 in 2002. It will continue to increase in $1,000 increments each year until the limitation reaches $15,000 in 2006. After 2006, the limitation will increase based on cost of living adjustments.

The amount of compensation that may be used for allocation purposes in plan allocations has also increased from $170,000 to $200,000. This limit will continue to increase based on cost of living adjustments.

Participants who are or will be age 50 or older in 2002 are eligible to defer additional funds above the normal limits.

Rollovers

Beginning in 2002, participants may rollover pre-tax IRA contributions into qualified plans such as a 401(k) plan or into a 403(b) plan or a governmental 457 plan.

It also permits rollovers between qualified plans, 403(b) plans and governmental 457 plans and rollover from such plans into an IRA.

Surviving spouses will now be able to rollover a death benefit to their qualified plan, 403(b) plan or governmental 457 plans.

To encourage low- and middle-income taxpayers to establish or maintain private savings accounts for retirement, a temporary nonrefundable credit for contributions or deferrals to retirement savings plans has been established. The amount of the credit will be equal to the applicable percentage times the amount of the qualified retirement savings contributions (not to exceed $2,000). The applicable percentage is determined by the taxpayer's filing status and adjusted gross income (AGI).

The maximum credit rate is 50 percent, which is completely phased out at $50,000 for joint return filers, $37,500 for head of household filers and at $25,000 for single and married filing separately filers.

This article was written to provide accurate and authoritative information in regard to employee benefit planning. You are encouraged to seek professional advice in order to take advantage of new retirement laws.

(Susan L. Worley is vice president and co-owner of Qualified Pension Services.)