Tax Relief Act 2001

bsa

I've been scratching my head about President Bush's growth & tax cut package.
1) Where can I go to get more details about the pension plan limit changes?
2) If the 401(k) annual contribution maximum dollars per year (currently $10,500) is increasing, is the 15% maximum deduction increasing also?
3) What are the stipulations for the "catch-up" contributions for older workers?
4) There are several other increases in limits -- what do they impact?

Scott Ruth

There are a number of summaries of the new pension legislation out there. I suggest going to your favorite search engine and typing in "Economic Growth and Tax Relief and Reconciliation" and you'll get a bunch. Also, the "employee plans corner" at [url]www.irs.gov[/url] has some information. IRS Notice 2001-42 explains how these changes interact with the so-called GUST changes currently being incorporated into most plan document before the end of the year. The IRS will be coming out with model amendments to be adopted to implement the new changes, which they expect to be released by the end of August.

As to your specific questions,

2) Yes, the maximum deduction is increasing to 25% of compensation for 401(k) and other profit sharing type plans.

3) The catch up provisions apply to person who reach age 50 before the end of the plan year. It is over an above all other plan limits (11,000, 100%/40,000, etc.) The amount of the catch up is phased in -- it starts at $1,000 for 2002 and increases 1,000 per year to $5,000 in 2006. Your plan will have to make the catch up available to all participants on a nondiscriminatory basis, it will not be subject to the ADP test. If your plan has a match, you will have to decide whether to apply it to the catch up, but such match will be subject to the ACP test.

4) This question is too broad to adequately address in this forum, but here is a summary of some of the more significant changes:

Tax Reconciliation Act of 2001

Many of these provisions will become effective beginning January 1, 2002. Several of the significant changes are listed below:

• The annual additions limitation will be increased to 100% of compensation or $40,000 beginning in 2002.

• The limit on compensation will be increased to $200,000 per year beginning in 2002.

• The maximum annual deferral amount will be increased from $10,500 to $11,000 in 2002, then increasing by $1,000 each year through 2006.
• The vesting schedule for matching contributions cannot exceed six years.

• The black-out period for participant deferrals after a hardship withdrawal will be reduced from twelve to six months beginning in 2002.

• The rollover rules will be relaxed so that qualified plans, 403(b) plans, and governmental Section 457 plans may be rolled over to each other directly or through an IRA.

Note: The above is intended only to alert you to provisions contained in the Bill that may affect you. There may be other provisions that will affect you. Please obtain specific advice before implementing the requirments of the Bill.