Winter, 2002 Edition

• 2001 Tax Law Raises Contribution Limits
• "GUST" Plan Restatements
• IRS Announces Cost of Living Increases
• "Numbers" Show Value of Long-term Care Coverage
• IRS Simplifies, Liberalizes Minimum Distribution Rules

 

2001 Tax Law Raises Contribution Limits

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) has created dramatic new opportunities in the retirement plan area.

Noteworthy among the changes are the following:

• Increase in individual defined contribution (Pension and/or Profit Sharing) limit to $40,000
• Equality of Profit Sharing Plan deduction limit with Pension Plan limit
• Increase in 401(k) limit to $11,000
• "Catch-up" contributions for age 50 + in 401(k's)
• Includable compensation limit raised to $200,000
• Limits increased for SIMPLE Plans

In 2000, the contribution limit to a Defined Contribution (Money Purchase) Pension Plan or Profit Sharing Plan was $30,000. That limit increased to $35,000 for 2001. The new law raises the limit further, to $40,000 in 2002.

Through 2001, the maximum an employer could contribute to a Profit Sharing Plan was an amount equal to 15% of the total "includable compensation" of eligible participants. Coupled with the applicable $170,000 "includable compensation" limit, this put an effective ceiling on the amounts an individual could receive in a Profit Sharing Plan at well below the theoretical $35,000 level. Effective in 2002, an employer can contribute up to 25% of includable compensation to a Profit Sharing Plan. This brings Profit Sharing Plans to parity with Pension Plans. With the new $200,000 includable compensation limit, it is possible to achieve a $40,000 contribution with a Profit Sharing Plan.

Further, prior to 2002, Salary Reduction contributions to 401(k) Plans were included in the 15%/25% employer deduction limits. Effective this year, Salary Reduction contributions are not included in the employer contribution maximums. This means that, for example, an individual earning $50,000 can contribute $11,000 to a 401(k) Plan on a Salary Reduction basis in addition to any employer contribution, which can be as high as 25% of compensation.

The new law contains a "catch-up" contribution provision which allows those age 50 + to exceed the 401(k) Salary Reduction limit by $1,000 in 2002 and by higher amounts in subsequent years. With the scheduled increases in the Salary Reduction 401(k) limits, the applicable maximums over the next several years are as follows:

	Under Age 50	Age 50+
2002	$11,000	$12,000
2003	$12,000	$14,000
2004	$13,000	$18,000
2005	$14,000	$19,000
2006	$15,000	$20,000

The catch-up contributions may be made in addition to the normal overall dollar limits. Since the catch-up contribution limit for 2002 is $1,000, it is possible for an individual age 50 + to qualify for an overall contribution of $41,000 this year. That amount will increase by $1,000 annually through 2006.

As indicated, the "includable compensation" limit for Plan purposes have increases from $170,000 in 2001 to $200,000 in 2002. This can allow for higher contributions for those in the upper income levels or can be used to achieve the same level of contributions as in the past, but with a lower percentage contribution, thereby reducing costs for other participants.

Section 403(b) Tax-sheltered Annuities are considered to be "Defined Contribution Plans," and thus are subject to the new $40,000 contribution limit.

Salary Reduction Limits under SIMPLE Plans have also been increased, as follows:

	Under Age 50	Age 50+
2002	$7,000	$7,500
2003	$8,000	$9,000
2004	$9,000	$10,500
2005	$10,000	$12,000
2006	$10,000	$12,500

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"GUST" Plan Restatements

For better or worse, each year Congress seems to enact new legislation which makes changes to the Pension Laws. Eventually, your Plan Document, Adoption Agreement and Summary Plan Description become outdated because of these changes. The last time this occurred was the result of the Tax Reform Act of 1986 and all plans were required to be updated to conform to the law in the early 1990s. The IRS has determined that qualified plans have again reached that point and all plans now must deal with the "GUST" restatements.

GUST is the name given because the restatements will be required to add the provisions contained in five laws - General Agreement on Tariffs and Trade (GATT), Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), Small Business Job Protection Act of 1996 (SBJPA), Taxpayer Relief Act of 1997 (TRA) and the Internal Revenue Restructuring and Reform Act of 1998 (RRA). Plans have had to be operated in compliance with these laws for some time, but the formal changes are required with the GUST restatement. Every qualified plan must be completely amended and restated, and, if applicable, submitted to the IRS for approval in the form of a determination letter.

In addition, Plans will have to be updated for some of the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This is not considered part of the GUST restatement, but required to remain in compliance.

Generally, the GUST restatements and the EGTRRA amendments must be done this year. However, there are different rules and deadlines depending on your plan year and what organization has drafted your plan. Please check with your document provider for details on when your plan must be restated. At Mid-Atlantic Benefit Consultants, Inc., we are currently working on the restatements and you can expect to receive new Plan Documents and Summary Plan Descriptions within the next couple of months.

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IRS Announces Cost of Living Increases

The IRS has announced the plan limit increases for 2002, based on the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and annual cost of living increases.

	2001	2002
Taxable Wage Base	$80,400	$84,900
Includable Compensation Limit	$170,000	$200,000
401(k)/403(b) Deferral Limit	$10,500	$11,00
401(k)/403(b), 457 Catch-up Limit	N/A	$1,000
Defined Contribution 415 Limit	$35,000	$40,000
Defined Benefit 415 Limit	$140,000	$160,000
SIMPLE Deferral Limit	$6,500	$7,000
SIMPLE 401(k) & IRA Catch-up Limit	N/A	$500
Highly Compensated Employee	$85,000	$90,000
SEP Compensation Limit	$450	$450
457 Deferral Limit	$8,500	$11,000

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"Numbers" Show Value of Long-term Care Coverage

Long-term Care Insurance has become increasingly popular as both an employer-provided benefit and a personally-paid policy.

Available statistics support this trend. People over age 70 have more than a 50% chance of needing some type of long-term care - be it in a nursing home, assisted living facility, adult day care center, at home, or at a relative's home.

The cost of long-term care now ranges as high as $200 per day in some parts of the country, with the national average being in the $140 to $150 per day range.

Custodial care, the most common form of long-term care, typically lasts the longest and ends up costing the most.

While in the past, long-term care insurance was most often purchased by those age 60 and over, those in their 40's and 50's are increasingly establishing this coverage, to lock into the lower premiums available at those ages.

One of the advantages in the long-term care insurance area is the flexibility involved in structuring a policy. There are a number of variations in daily benefit, elimination period, benefit period, type of coverage, inflation options, etc. Plan design can be used to hold down costs to an affordable level.

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IRS Simplifies, Liberalizes Minimum Distribution Rules

One of the most complicated issues to be faced in the Pension/Profit Sharing/401(k)/IRA areas traditionally has been the "minimum required distribution" (MRD) rules. These come into play when a Plan participant or IRA owner reaches age 70½ or dies.

Until recently, the rules in this area have been complex and unforgiving. If a specific beneficiary designation (or no designation at all) was in effect at the "required beginning date" (RBD) or at age 70½, certain distribution requirements were locked in permanently, regardless of subsequent changes in the beneficiary designation. The result was often that while one individual actually received the death benefits, the rules on how they were to be paid out were based upon the identity and/or life expectancy of another individual.

Further, decisions had to be made as to whether required minimum distributions would be based on the participant's own life expectancy or a joint life expectancy (with a spouse or other individual), and that life expectancy had to be either "recalculated" or not. Failure to make the correct (or what would later become the correct) decision in any of these areas could lead to significant adverse tax consequences.

The IRS - in the form of proposed regulations issued in 2001 - has both simplified and liberalized the important MRD rules. For lifetime distributions, when the Plan participant or IRA owner reaches age 70½, the MRD is determined solely by which of two categories the named beneficiary is in: a spouse more than ten years younger than the participant/owner, or anyone else.

In the case of a designated spouse more than ten years younger than the participant/owner, reference is made to the applicable joint life expectancy. The figure (the "divisor") determined from the table in that manner is divided into the participant owner's account balance as of the end of the prior year, to determine the applicable MRD. The same process is applied each subsequent year on a "recalculation" basis, using the participant's and spouse's attained age each year. Where there is a large disparity in the ages of the participant/owner and spouse, the MRD is lower than it would be with any other type of beneficiary.

Where the named beneficiary is either a spouse less than ten years younger than the participant/owner, or a non-spouse, a single-life expectancy table is consulted. The MRD in such a situation is based solely on the life of the participant/owner. The ability to use this table is very favorable, as in the past it was available only to participants/owners with spouse-beneficiaries at least ten years younger.

For post-death distributions, the proposed regulations changed the measuring period from the beneficiary in effect as of the earlier of the date of death or the "required beginning date" (RBD), to the life expectancy of the beneficiary who actually inherits the funds. Further, the identity of the beneficiary can be changed after the participant/owner's death -- in fact, up to the end of the year after the year in which death occurred. Under the old rules, the beneficiary (and thus the limits on distribution options) was locked in as of the date of death or RBD, whichever was earlier.

Information on the new rules and documents needed to effect beneficiary changes should be available from Plan administrators and IRA custodians.

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This publication is not meant to provide legal or other professional advice. It is suggested that a tax advisor be contacted to review applicable areas discussed herein. All rights reserved.