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December 17, 2001

2002 COLAs Announced

The Internal Revenue Service has issued its annual cost of living adjustments. Pursuant to Information Release 2001-115, the following limits apply for plan years beginning in 2002:

• Defined Benefit IRC §415 (b) Dollar Limit increased from $140,000 to $160,000
• Defined Contribution IRC §415(c) Dollar Limit increased from $35,000 to $40,000
• Compensation for determination of Highly Compensated Employee status increased from $85,000 to $90,000
• Limit on elective deferrals increased from $10,500 to $11,000
• Deferral limit for SIMPLE plans increased from $6,500 to $7,000
• IRC §401(a)(17) compensation limit increased from $170,000 to $200,000
• Compensation limit for SEP eligibility remains at $450
• IRC §457 deferral limit increased from $8,500 to $11,000

The Social Security taxable wage base has been increased to $84,900 for the year 2002. The current (2001) Social Security taxable wage base is $80,400.

June 7, 2001

Pension Legislation Passes

Highlights of the Pension Legislation contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 recently signed into law (6/7/01) by President Bush include:

1. Increase in the deferral limits for §401(k) and §403(b) plans to $11,000 in 2002 and $1,000 annually thereafter to $15,000 in 2006. After 2006 the deferral limits will be adjusted annually for increases in the CPI in $500 increments.
2. A temporary tax credit for the period 2002-2006 (in addition to deductions) for salary deferrals to qualified plans of up to 50% of the first $2,000 for joint filers with AGI of $30,000 or less, scaling down to 10% for joint filers with an AGI of $50,000.
3. IRS user fees will be eliminated.
4. A tax credit of 50% of the first $1,000 of administrative and educational expenses for small employers (less than 100 employees) for the first three (3) years after starting up a qualified plan, SEP or SIMPLE 401(k).
5. A catch up provision has been added for §401(a) §403(b) and IRA's. For §401(a) and §403(b) plans, this provision will allow annual adjustments of $1,000 until 2006. After 2006, the catch ups will be adjusted annually for increases in the CPI in $500 increments.
6. The §415(c) dollar limit (defined contribution) is increased to $40,000. The §415(b) dollar limit (defined benefit) is increased to $160,000. The Maximum Exclusion Allowance for §403(b) plans is eliminated.
7. Increases the compensation limit for plan to $200,000.
8. Increases the deductible limits for profit sharing plans to 25% of compensation. Deferrals will no longer be taken into account in determining maximum deductibility.
9. Eliminates the 401(k)/401(m) multiple use test.
10. Safe Harbor Hardship Withdrawal Rules will require a deferral prohibition period of six (6) months following the hardship withdrawal. Currently the rules require a deferral prohibition period of twelve (12) months.
11. Owner employees and Sub-S corp. shareholders can take out participant loans.
12. Faster vesting for matching contributions. Top-heavy vesting schedule will have to meet either a six year graded or three year cliff schedule.
13. Extensive revision of top heavy rules by revising the definition of key employees. (1) Key employee top ten owner rules eliminated. (2) Officer compensation level raised to $130,000. (3) 5 year look back rule eliminated. (4) Account balances for any participant who has not performed services during the prior year can be ignored for top heavy testing purposes.

Unless otherwise indicated, these pension provisions are effective 2002.

May 8, 2001

Ramstad Bill Would Allow Participants To Carry Over, Cash Out FSA Benefits

House ways and Means Committee Member Jim Ramstad (R-Minn) introduced a bill (H.R. 1590) on April 25 that would allow participants in a flexible spending account (FSA) plan to carry over $500 of unused benefits to a subsequent year or to receive $500 of unused benefits in cash.

H. R. 1590 would apply to both medical reimbursement accounts and dependent care accounts maintained in a flexible spending account. A participant could make an election before the end of the plan year to carry over or cash out the unused benefits.

Under the current IRC rules, amounts remaining in a participants FSA at the end of the plan year are forfeited and cannot be carried forward or cashed out by the participant.

The provisions of H.R. 1590 are similar to a proposal in President Bush.

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