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With the passage of the Act many rules and limitations governing IRAs and employer-sponsored retirement plans have changed. Collectively, these changes arguably amount to the most sweeping changes affecting retirement plans in nearly two decades. The first of numerous phased-in changes will commence in January, 2002.

IRA Contribution Changes

Traditional and Roth IRA contribution limits are increased, from $2,000, as follows:

2002-2004: $3,000
2005-2007: $4,000
2008+ : $5,000

IRA Catch-Up Contributions

IRA holders age 50 and older may contribute the following amounts in addition to the basic annual contribution:
2002-2005: $500
2006-+ : $1,000

"Deemed IRAs" Under Employer Plans

Beginning in 2003, employees will be allowed to make contributions to IRAs within certain employer sponsored qualified retirement plans. The IRA monies will be separately accounted for.

More Types of Qualified Plan Money May Be Rolled to IRAs

Beginning in 2002, (1) after-tax assets held in qualified plans, and (2) assets held in governmental Section 457 deferred compensation plans will be eligible for rollover to IRAs.

Greater Flexibility For Rolling IRAs Into Qualified Plans

Certain IRA balances that did not originate under employer-sponsored plans, will now be eligible for rollover into qualified plans, such as 401(k), 403(b) and Section 457 plans.

Employer-Sponsored Qualified Retirement Plans

A. Changes to Employee-Deferral Driven Plans

Increasing Employee Deferral Limit for 401(k), 403(b)/TSA, 457 and SAR-SEP Plans

Current - $10,500
2002 - $11,000
2003 - $12,000
2004 - $13,000
2005 - $14,000
2006+ - $15,000
(Indexed for inflation beginning 2007)

Catch-up Deferrals for Employees 50 and older Deferring Into 401(k), 403(b)/TSA, 457or SAR-SEP Plans

2002 - $1,000
2003 - $2,000
2004 - $3,000
2005 - $4,000
(Indexed for inflation beginning 2007)

TSA and Section 457 Plans

The Act repeals, effective 2002, the maximum exclusion allowance test for tax-sheltered annuities.
The Section 457 percentage of includible compensation limit is raised from 33 1/3% of compensation to 100%. In addition, deferrals under 457 plans will no longer need to be coordinated with elective deferrals under other plans.

SIMPLE IRA/401(k) Deferral Increases

Current - $6,500
2002 - $7,000
2003 - $8,000
2004 - $9,000
2005+ - $10,000
(Indexed for inflation beginning 2006)

Catch-up Deferrals for Employees 50 and older Deferring Into SIMPLE Plans

2002 - $500
2003 - $1,000
2004 - $1,500
2005 - $2,000
(Indexed for inflation beginning 2007)

B. Changes to Employer-Deduction Driven Plans

Compensation Cap

Under current law, the maximum annual compensation of each participant that could be taken into account for purposes of determining benefits under a plan, applying employer deduction rules and non-discrimination testing, is $170,000. The Act raises this cap to $200,000 (indexed to inflation) beginning in the year 2002.

Section 415 Annual Additions Limits Raised

Under prior law, Section 415 of the Code limited each defined contribution plan participant's annual additions (employer and employee contributions combined), to the lesser of 25% of compensation or $35,000 (for 2001). The Act increases this base amount to $40,000, effective in 2002. In addition, beginning in 2002 there will be in effect no percentage of compensation limitation upon participants' annual additions (the applicable percentage becomes 100%).

Profit-Sharing Plans and SEP Plans: Employer Deduction Limit Increased to 25%

Beginning in 2002, the limit on deductible contributions to all defined contribution plans is increased from 15% to 25% of compensation. This change in the law will allow employers to make larger deductible contributions to the profit-sharing and SEP plans they sponsor.

C. Distributions, Rollovers and Portability

Several miscellaneous "rollover provisions" of the Act make it easier for participants to move retirement monies more freely amongst and between retirement vehicles, in a tax-deferred manner. For instance, (1) the Act grants the IRS statutory authority to extend the 60-day period for completing a rollover, where circumstances beyond the control of the plan participant prevented its completion; (2) a spouse inheriting qualified plan money will now be able to roll those funds into her own qualified retirement plan; (3) IRA-originating assets will be eligible for rollover into qualified retirement plans; and (4) cashed-out plan assets in amounts between $1,000 and $5,000 will be automatically rolled into an IRA in the absence of a participant's election to the contrary.

The 2001 Act essentially grants full portability amongst and between different types of plans. Historically, assets accumulated within retirement plans have been limited to rollover to IRAs, or to similar types of plans. Under the Act, there will be full portability between 401(k), 403(b), Section 457, profit-sharing and money-purchase pension plans.

Printed with permission of Advanced Underwriting Consultants

Last Updated: 12/15/2002 11:10:00 AM