New planning strategies with retirement plans.

• Author: Lusby, Roger W., III

One factor that influences the decision of an employer (particularly a small business) to adopt a retirement plan is the extent to which the business's owners will benefit. Recognizing this, Congress enacted the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which increased the maximum annual amount that employers can contribute to a defined contribution plan, from the lesser of $35,000 or 25% of compensation in 2001 to the lesser of $40,000 or 100% of compensation in 2002. (The $40,000 threshold will be indexed in $1,000 increments.) The EGTRRA also increased the annual compensation that may be taken into account for purposes of determining Contributions and benefits under a plan and for nondiscrimination testing, from $170,000 in 2001 to $200,000 in 2002. (The $200,000 threshold will be indexed in $5,000 increments.)

The above increases have drawn much attention to the fact that employees can now reach the maximum contribution level through a defined contribution plan, so that any existing money-purchase pension plan (MPPP) could be terminated in 2002 without sacrificing contribution levels.

Conversions of MPPPs are popular with plan sponsors, because they require annual contributions of a set percentage of participants' compensation. Contributions to profit-sharing plans, on the other hand, are discretionary and can be based on whether the plan sponsors can...