CHANGES IN PENSION LAW THAT AFFECT YOU

The "Economic Growth and Tax Relief Reconciliation Act of 2001" included substantial changes in laws governing retirement plans. The following is a brief summary of the rules that affect defined contribution plans:

• Change in the way minimum distribution amounts are calculated for older participants
  This change actually was part of proposed regulations that came about last fall. The new rules simplify the method for calculating the required minimum distribution. If you have any owners who are 70 ½ or have terminated plan participants who are older than 70 and still have money in the Plan, call Benefit Planning Consultants for information about the benefits being paid to those participants

• Increased deduction for retirement plan contributions beginning in 2002
  Under the old rules, an employer’s deduction for profit sharing plan contributions was limited to 15% of "eligible compensation." "Eligible compensation" was reduced by amounts contributed by employees under a 401(k) or a Section 125 cafeteria plan. Under the new rules:

  - Employers can deduct up to 25% of eligible
  compensation for contributions to profit sharing plans

- 401(k) and Section 125 deferrals by employees are no longer deducted from "eligible compensation."

• Annual compensation limited increases to $200,000 for 2002
  For 2001 this figure was $170,000. In the future it will increase in $5,000 increments.

• Annual addition limit in increased
  Under the old rules, the contributions and forfeiture allocations that an employee could have added to their retirement plan account for any plan year could not exceed the lesser of 25% of compensation or $30,000. Under the new rules:

  - The dollar limit increased to $35,000 for plan years
  ending in 2001 and then to $40,000 for plan years
  ending 2002. After that the limit will increase in $1,000 increments.

- The % limit is increased from 25% to 100% for plan
years ending in 2002.

• 401(k) contribution limits increased
  For 2002, the dollar limit for amounts that employees can contribute under a 401(k) plan is increased to $11,000. This limit will increase by $1,000 per year until 2006 when the limit will be $15,000

• 401(k) "Catch Up" Contributions
  The new law contains a special provision allowing employees who have attained at least age 50 by the end of the year. For plan years beginning in 2002, for such employees the dollar limit referred to above is further increased by the lesser of the following amounts:
  1. 100% of compensation, reduced by any other salary deferral contribution made by the employee during the plan year, or
  2. For 2002, $1,000
     For 2003, $2,000
     For 2004, $3,000
     For 2005, $4,000
     For 2006 and later, $5,000

• Matching contributions subject to shorter vesting schedule
  If your plan’s matching contribution vesting schedule is not already one of the following schedules, you will be required to adopt one of these schedules beginning in 2002:

3-Year Cliff Vesting			6-Year Graded Vesting
Year 1	0%		Year 1	0%
Year 2	0%		Year 2	20%
Year 3	100%		Year 3	40%
			Year 4	60%
			Year 5	80%
			Year 6	100%

• Changes in Hardship Distribution Rules for 401(k) Plans
  Under the old rules, an employee taking a hardship distribution was prohibited from making additional 401(k) contributions for 12 months following the hardship distribution. The new rules shortened this time period to 6 months.

  Also under the old rules, an employee hardship distribution from 401(k) contribution could not be rolled over to another qualified plan or an IRA. The new rules do not allow ANY portion of a hardship distribution to be rolled over.

• 401(k) Testing Rules Modified
  The "Multiple Use" rule for testing 401(k) salary deferral and matching contributions has been repealed. This allows greater flexibility in ability of plans to pass discrimination testing.

• Top-Heavy Rules Modified
  401(k) plans that use a safe harbor design and matching contributions that satisfy the safe harbor formula will not be considered as top-heavy plans subject to additional contributions by employers.

  Distributions (other than in-service distributions) made from a plan will be taken into account for only one year rather than the current five in determining whether or not a plan is top heavy. In-service distributions will continue to be included for five years.