401 K: Bolstering retirement benefits.

• Author: Woodland, Steven D.
• Position: Retirement Plans - Brief Article

Tax relief might seem like an oxymoron to some, but beginning in January 2002, large-business and small-business employers will begin to see the realities of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Recent changes to the rules governing qualified plans, only some of which are summarized here, will require employers sponsoring pension or profit-sharing plans to take action before the current plan year is over. If you have employees who are interested in saving money with tax-deferred retirement plans, or as an employer you are interested in maintaining a qualified profit sharing or pension plan for the benefit of your employees, pay attention.

Recently, congress changed some of the rules governing qualified plans with EGTRRA. These changes only some of which are summarized here, will require employers sponsoring pension or profit-sharing plans to take action before the current plan year is over.

A top priority is the opportunity for employees to increase their contributions to 401(k) plans:

Higher "dollar maximum" for pretax elective deferrals. In 2002, the individual employee elective-deferral limit will go up from the current $10,500 cap to $11,000, and then will go up by $1,000 each year after that until reaching S 15,000 in 2006. An employer will want to examine the impact of these changes, paying particular attention to any increase in matching contributions that would result from the expanding limits.

Higher percentage of pay and dollar-amount limits for annual additions. Current law imposes a "25 percent of pay" limit on each participant's annual additions (the sum of elective deferrals, matching contributions and employer contributions). Next year, this 25 percent limit will go to 100 percent.

Current law also caps each participant's annual additions at $35,000. Under EGTRRA, the limit for 2002 will be $40,000, adjusted in future years to reflect cost-of-living increases.

In light of these changes, an employer could redesign its plans to provide greater contributions for employees if desired.

Catch-ups for "50 +" employees. Once an employee who is 50 or older has deferred the maximum amount allowed under elective-deferral and annual-addition limits, catch-up contributions can be allowed in the plan. The catch-up limit will be $1,000 for 2002, $2,000 for 2003, $3,000 for 2004, $4,000 for 2005 and $5,000 for 2006 and onward. Highly compensated employees can take full advantage of these catch-up...