| ISSUE | PREVIOUS LAW | EGTRA AMENDMENT |
| Tax Credits for New Small Employer Plans | An employer's costs related to the establishment and maintenance of a retirement plan were basically deductible as business expenses, but there was no tax credit for such expenses. | For the first three years of sponsoring a 401k plan, an employer can now take a tax credit of up to 50% of the first $1,000 spent on retirement education and administration. The employer's 401k MUST have at least one non-highly compensated employee, and the company cannot have more than 100 employees who received $5,000 or more of compensation in the preceding year. |
| Participant Loans for Small Business Owners | Generally, plans can make loans to participants, but sole proprietors, partners and subchapter S corporation shareholders were prohibited from taking out 401k loans. | Sole proprietors, partners, and subchapter S corporation shareholders can now take out 401k loans; the provision also applies prospectively to pre-existing loans. |
| Repeal of Multiple Use Test | In addition to satisfying the ADP and ACP nondiscrimination tests, some 401k plans also needed to satisfy the Multiple Use Test, which compared the two. | The Multiple Use Test is repealed as of 2002. |
| Tax Credits for Lower Income Savers | There were no tax credits for low and/or moderate income savers. | Eligible persons will receive a
nonrefundable tax credit of up to 50% on up to $2000 in contributions to
an IRA, 401k, 403b, SIMPLE, SEP, or 457 plan. Credit is in addition to
the tax deduction already associates with contributions to such plans. Individuals whose adjustable gross income is less than $30,000 are eligible for a 50% credit; joint filers with adjusted gross income between $30,000 and $32,500 are eligible for a 20% credit; joint filers with income between $32,00 and $50,000 are eligible for a 10% credit. The threshold for single filers is one-half the threshold for joint filers. |
| Catch-up Contributions for Older Workers | Was limited to the amount that can be contributed to a defined contribution plan on behalf of an employee for any year. In the case of elective deferrals, the limit was $10,500 per year, with no separate limits for older workers. | Persons age 50 or older can make an
additional contribution to a 401k, 403b, or 457 plan of $1,000 in 2002,
then increased by $1,000 each year until $5,000 in 2006, and then
indexed in $500 increments. The catch9-up amount for SIMPLE plans is
half the above. The amount of the catch-up contribution will not be subject to nondiscrimination testing provided all participating employees over age 50 are eligible to make a catch-up contribution. The catch-up contribution will not count against the employer's deduction limit under section 404 or against the individual's overall 415c dollar limit. |
| Modification of Top Heavy Rules | A plan is generally considered top heavy if more than 60 percent of plan asset are held on behalf of key employees
(view definition).
Due to the design of this test, top heavy rules essentially affect only
small businesses. Key employees generally include officers earning more
than half the Section 415 defined benefit plan dollar limit ($70,000 in
2001), 5 percent owners, 1 percent owners earning over $150,000, and
the 10 employees with the largest ownership interest in the business (as
long as they earn more than $30,000 a year). Also, family members of 5
percent owners are deemed to be key employees under family attribution
rules. Top heavy plans must meet a special vesting schedule and make minimum contributions to all non-key employees to the extent that contributions are made on behalf of key employees. |
Limits were raised in 2002 to... 1. Annual compensation taken into account raised to $200,000 and then indexed in $5,000 increments. 2. Elective deferrals maximum raised to $11,000 3. 415b annual benefit limit raised to $160,000 and then indexed in $5,000 increments (for years ending after 12/31/01) 3a. 415b annual benefit limit no longer need be reduced for retirements ages 62 thru 65 (for years ending after 12/31/01) 4. Maximum defined contribution plan contribution raised to $40,000, then indexed in $1,000 increments 5. Elective deferral contribution limit raised to $11,000 in 2000, then increased $1,000 a year until $15,000 in 2006, then indexed in $500 increments 6. The maximum elective deferral in SIMPLE plans increased to $7,000 in 2002, then increased $1,000 a year until $10,000 in 2005, then indexed in $500 increments |
| Deduction Limits | A sponsor of a profit sharing plan could not deduct contributions to the plan in excess of 15% of aggregate employees' compensation. In stand-alone money purchase plans, the deduction limit was the minimum funding requirement for the plan. | The deduction limit for profit sharing plans increased to 25% of aggregate employees' compensation. Money purchase plans are now treated as profit sharing plans in this instance and thus also now have the 25% limit. |
| Increase in 25% of Compensation Limitation | Under section 415c, the total annual contributions to a defined contribution plan could not exceed the lesser of 25% of compensation or $35,000. | The 25% of compensation limitation increased to 100% of compensation, with the same $35,000 dollar limit stilly applying. The maximum exclusion allowance for 403b plans was repealed. |
| Repeal of "Same Desk Rule" | A distribution to a terminated employees was not allowed if the employee continued performing the same functions for a successor employer (applied to 401k, 403b and 457 plans). | The rule was eliminated by replacing "separation from service" with "severance from employment" in the IRC language. The changes apply to distributions made after 12/31/01, regardless of when the severance from employment occurred. |
| Employers Can Disregard Rollovers for Purposes of Cash-out | Terminated participants' benefits could be cashed out if the non-forfeitable present value of such benefits did not exceed $5,000. | A plan can now ignore amounts attributed to rollover contributions when determining the cash-out amount. |