NFIB

Revamping Retirement Plans
04/ 03/ 2002

by Milt Zall

The tax legislation President Bush signed into law on June 7, 2001, contains significant changes that apply to virtually every type of retirement plan. Most of these changes took effect on January 1, 2002. Here's the scoop on the changes most likely to affect you:

Loans allowed

Previously, loans to participants who were "owner-employees" were prohibited. An "owner-employee" includes a sole proprietor or a partner or S corporation shareholder with a significant ownership interest in the partnership or corporation.

Limit on annual additions raised

Effective in 2002, the amount that can be contributed to a participant's retirement plan during the year increases to the lesser of $40,000 or 100 percent of compensation. Also raised, to $11,000, is the limit an employee can contribute to a 401(k) plan.

Employer's tax deduction increased

Previously, employers sponsoring a profit sharing plan or a 401(k) plan were not permitted to take a tax deduction for contributions to the plan in excess of 15 percent of the total annual compensation of the plan's participants. Beginning with 2002, the deduction limit is raised to 25 percent of participants' total plan-year compensation. Secondly, 401(k) contributions by participants won't be included in the employer's contribution limits to the plan.The employer can still deduct these amounts as business expenses, so the 25 percent limit on deductions only applies to matching and non-elective employer contributions.

Increased limit for defined benefit plans

Effective for years ending on or after January 1, the maximum annual benefit permitted under a defined benefit plan is the lesser of 100 percent of a participant's average compensation or $160,000, up from $140,000.

Increased compensation limits

The Tax Code limits the amount of annual compensation that can be taken into account for a number of purposes. The compensation limit has increased to $200,000 for retirement plans begun after Dec. 31, 2001, and is indexed to inflation in $5,000 increments for subsequent years.

Small business tax credit

The new law gives small employers a tax credit equal to 50 percent of the employer's administrative expenses incurred in the first three years following the adoption of a qualified defined benefit or defined contribution plan, a simple IRA or a SEP-IRA. A "small employer" is one with fewer than 100 employees who earned $5,000 or more in the preceding year. The maximum credit in any one year is $500. The credit is effective for costs paid or incurred in the three taxable years beginning after December 31, 2001.

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This article originally appeared in the April/May 2002 issue of MyBUSINESS magazine.

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