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Employer-Sponsored
Plan Limits Raised: The maximum employee contribution
to 401(k) tax-deferred retirement savings plans offered by
employers will increase from $10,500 this year to $11,000
in 2002. There will be an additional $1,000 increase each
year thereafter, up to $15,000 in 2006. After that, the contribution
cap will be adjusted annually for inflation. The same contribution
rules apply to simplified employee pensions (SEP), 403(b)
annuities offered by nonprofit employers, and government-sponsored
457 plans. The new legislation also raises the maximum amount
a person may put into an individual retirement account from
the current $2,000 to $5,000 by 2008.
Employer
Contributions Vest More Quickly: The new law will also
speed up vesting of matching contributions to employer-sponsored
plans. Employer-matching contributions will now have to vest
100% after three years of service, or 20% per year of service
beginning after the second year and reaching 100% after six
years. The new requirement applies to contributions for plan
years beginning after Dec. 31, 2001. Matching contributions
previously had to vest either 100% after five years of service,
or 20% per year of service beginning after the third year
and reaching 100% after seven years.
Catch-Up
Contributions: Under the new law, employees age 50 and
older can make larger contributions to employer-sponsored
tax-deferred retirement savings plans such as 401(k)s and
IRAs. They can put an extra $1,000 into their employer-sponsored
savings plans in 2002, $2,000 in 2003, $3,000 in 2004, $4,000
in 2005, $5,000 in 2006 and subsequent years.
Small-Employer
Incentives: The new law includes provisions to encourage
small employers to sponsor retirement plans. It provides
an annual $500 tax credit to offset plan start-up costs for
small employers during the first three years of plan operation.
The existing tax deduction for plan administrative costs
often has limited value to small employers with slim profit
margins, but the new $500 tax credit gets subtracted right
off the employer’s tax bill. Costs that exceed the credit
may then be deducted. The credit is effective for costs incurred
after 2001 for plans established after that year.
Education
Assistance Programs: Besides the pension provisions,
the new law also includes a tax exclusion that permits employers
to provide up to $5,250 per year in tax-free education assistance
to an employee. After Dec. 31, 2001, it applies to both graduate
and undergraduate classes.
This
material is a general overview of the subject matter, and
is not meant to provide professional opinions regarding any
specific case, matter, or set of facts, or to substitute
for the professional advice of Waag and Co. Instead, please
contact Susan S. Waag, Esq. for additional information. Use
of this information is allowed, provided that credit is given
to: Susan S. Waag, attorney; Waag and Co.; September 2001
Employer Bulletin; INFO@WaagandCo.com;
(805) 783-2300
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