P R O B A T E   &   P R O P E R T Y
January/February 2002
Other articles from this issue
Articles from other issues of Probate and Property

Articles

Retirement Benefits Planning Update

Retirement Benefits Planning Update provides information on developments in the field of retirement benefits law. The editors of Probate & Property welcome information and suggestions from readers.

EGTRRA Stretches the Limits

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Pub. L. No. 107-16, 115 Stat. 38, increases the limits on the maximum amounts that may be contributed to tax qualified plans (if the plans are amended) and to IRAs for 2002 and future years. EGTRRA further increases the rate at which the new, higher limits for tax qualified plans will be increased in future years by lowering the amount of the minimum increment (the cost of living adjustment) that permits the limits to be increased for CPI increases from year to year. Individuals who have attained at least age 50 in any plan year potentially have the opportunity to make additional elective deferrals without regard to the usual contribution limits if the plan extends the opportunity to all age 50 participants. The chart on page 34 describes some of these limits for the years 2001 through 2008 and, in italics, projects hypothetical cost of living adjustments assuming a 2.5% annual CPI increase. Cost of living increases are scheduled to continue through 2010 but, as with all EGTRRA provisions, the sunset rule of EGTRRA § 901 will cause all provisions of the act to revert to pre-EGTRRA law in 2011, unless revised by interim legislation.

Contribution Limits

EGTRRA increases the percentage of covered compensation that an employer may contribute to a profit sharing plan or stock bonus plan from 15% to 25%—the percentage that continues to apply to money purchase pension and target benefit plans. Moreover, under new Code § 404(a)(12), an employer’s deduction equals 25% of the employee’s covered compensation unreduced by elective deferrals and, under amended Code § 404(n), elective deferrals are also disregarded (that is, not treated as employer contributions) in determining whether the 25% deductible limit has been exceeded. The 25% maximum rate also applies to determine contributions to Code § 403(b) tax sheltered annuities and to Code § 408(k) simplified employee pension plans (SEPs), but the 25% rate applies to covered compensation reduced by the amount of any elective deferrals.

Increased Elective Deferrals

The dollar limit on annual additions ($40,000 for 2001) caps the total amount of employer contributions, employee contributions, and forfeitures that may be added to a participant’s account in any limitation year. Although all plan participants potentially may defer greater amounts of compensation under the new limits, the greatest marginal benefit will inure to participants in the middle income range, particularly those age 50 or older who have the opportunity to make elective deferrals. For example, if a § 401(k) profit sharing plan provides for maximum employer contributions for all participants, an age 50 participant with compensation (including elective deferrals) of $116,000 can defer:

 

2001

2002

Employer

$17,400

$29,000

401(k)

11,000

Age 50

1,000

Deferral

$17,400

$41,000

The increase in the percentage of compensation limit for annual additions (from 25% to 100% of covered compensation) coupled with the inclusion of elective deferrals in the compensation base under Code § 415(c)(3)(D) now potentially permits an employee who is a family’s second wage earner to elect to defer all of his or her compensation.

Defined Benefit Plans

Already made more attractive for more highly compensated employees by the repeal, effective in 2000, of the former Code § 415(e) limit on the combined benefits for participants in both defined benefit and defined contribution plans, EGTRRA further increases the appeal of defined benefit plans by increasing benefit levels and by providing, in amended Code § 415(b)(2)(C), that the new maximum benefit will be increased for participants retiring after age 65 (rather than after the Social Security retirement age) and reduced only if retirement occurs before age 62 (rather than before the Social Security retirement age).

Conclusion

The increased contribution limits represent only a part of the changes EGTRRA adopts, most of which tend to permit plan sponsors to adopt more easily administrable provisions and to permit plan participants to maximize and preserve tax deferred benefits.

Retirement Benefits Planning Update Editor: Harvey B. Wallace II, Joslyn Keydel & Wallace, LLP, Albert Kahn Building, 9th Floor, 7430 Second Ave., Detroit, MI 48202-2717, wallace@jkwlaw.com.

STRETCHING THE LIMITS
QUALIFIED PLANS AND IRAs
(assuming 2.5% annual CPI increase)

 

2001

2002

2003

2004

2005

2006

2007

2008

A. Defined contribution plans, § 403(b)

        

annuities, and SEPs (DC plans)

        

    1. Annual additions—§ 415(c)(1)

        

       a. Dollar limit

35,000

40,000

41,000

42,000

43,000

44,000

45,000

46,000

   COL ratchet (3rd Q, 2001 base)

5,000

1,000

      

       b. % of covered compensation limit

25%

100%

      

     2. Covered compensation—

        

           §§ 401(a)(17)/404(b)/408(k)>

170,000

200,000

205,000

210,000

215,000

220,000

225,000

230,000

COL ratchet (3rd Q, 2001 base)

10,000

5,000

      

     3. % of covered compensation deductible

        

—§ 404(a)(3)(A)(i) and (v)/404(h)

15%

25% 1

      

B. Defined benefit plan—§ 415(b)

        

Maximum annual benefit

140,000

160,000

160,000

165,000

170,000

175,000

180,000

180,000

COL ratchet (3rd Q, 2001 base)

5,000

5,000

      

C. Elective deferrals

        

1. DC plans—§ 402(g) 2

10,500

11,000

12,000

13,000

14,000

15,000

15,000

15,500

COL ratchet (3rd Q, 2005 base)

     

500

  

• Age 50 catch up—§ 414(v)

1,000

2,000

3,000

4,000

5,000

5,000

5,000

COL ratchet (3rd Q, 2005 base)

     

500

  

2. SIMPLE—§ 408(p)(2)

6,500

7,000

8,000

9,000

10,000

10,000

10,500

10,500

COL ratchet (3rd Q, 2004 base)

    

500

   

• SIMPLE catch up—§ 414(v)

500

1,000

1,500

2,000

2,500

2,500

2,500

COL ratchet (3rd Q, 2005 base)

     

500

  

D. Traditional/Roth IRAs

        

1. Contributions—§ 219(b)(5)

2,000

3,000

3,000

3,000

4,000

4,000

4,000

5,000

ratchet (3rd Q, 2008 base)

       

500

2. Age 50 catch up

500

500

500

500

1,000

1,000

1,000

E. Educational IRA—§ 530

        

1. Total contributions for one individual 

500

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2. Phased out—married

160,000

220,000

220,000

220,000

220,000

220,000

220,000

220,000

3. Phased out—other

110,000

110,000

110,000

110,000

110,000

110,000

110,000

110,000



 
1 In the case of SEPs, § 402(h)(2)(A) limits the employer contribution excludable from the employee's income to 15% of compen-sation, including elective deferrals, as compared to the new deductible amount under § 404(h) equal to 25% of compensation, excluding elective deferrals.

    2   Section 457 plans will have the same post-2001 elective deferral limits, including age 50 catch ups (the 2001 elective deferral amount being $8,500), but in the three years preceding retirement, participants may elect instead to double the regular limits—§ 457(b)(2)(A); § 457(e)(15)(A).

 

Advertisement