New 401k Contribution Limits for 2002

2001

Effective 2002

Individual annual contribution limit

$10,500 subject to percent-of-pay limit (see below)

- $11,000 a year for 2002
- $12,000 a year for 2003
- $13,000 a year for 2004
- $14,000 a year for 2005
- $15,000 a year for 2006
Beyond 2006 the limit will be adjusted for inflation annually. The increased limits are also subject to the percent-of-pay limit. (see below)

SIMPLE 401k plan individual annual contribution limit

$6,500.

$7,000 in 2002
$8,000 in 2003
$9,000 in 2004
$10,000 in 2005.

Future increases will be indexed to inflation.

Percent-of-pay limit

25 percent of compensation or $35,000, whichever is less.

100 percent of salary or $40,000, whichever is less. The $40,000 limit will be indexed to inflation and will adjust in $1,000 increments.

Maximum includable compensation limit

$170,000

$200,000. This limit will be indexed to inflation and will adjust in $5,000 increments.

Catch-up contributions

Nonexistent

Allowed by all 401k savers age 50 and older. This limit is added to all other limits, and these contributions will not be subject to discrimination tests.

The limit will be:
- $1,000 in 2002
- $2,000 in 2003
- $3,000 in 2004
- $4,000 in 2005
- $5,000 in 2006

Starting in 2007, the limit will be indexed to inflation and will rise in $500 increments.

SIMPLE 401k plan catch-up contributions

Nonexistent

Available to all SIMPLE 401k participants over age 50. The catch-up contribution limits are as follows:
$500 in 2002
$1,000 in 2003
$1,500 in 2004
$2,000 in 2005
$2,500 in 2006
In 2007 and beyond, further increases will be indexed to inflation and the limit will increase in $500 increments.

Low-income savers credit

Nonexistent

Low- and moderate-income savers can claim a non-refundable tax credit on the first $2,000 in contributions. This credit is claimed on your tax return and the amount is based on your adjusted gross income (AGI).

- Individuals with an AGI of $0 to $15,000 and those filing married-jointly with an AGI of $0 to $30,000 may claim a 50 percent tax credit on their contributions.
- Individuals with an AGI of $15,001 to $16,250 and married filing jointly with AGI of $30,001 to $32,500 may claim a credit of 20 percent.
- Individuals with an AGI of $16,251 to $25,000 and married filing jointly with AGI of $32,501 to $50,000 may claim a credit of 10 percent.

This credit can be taken in addition to the standard tax deduction allowed for 401k contributions.

New Portability Rules

2001

Effective 2002

Portability

Limited — rollovers from 401k plans to an IRA could only be rolled back to a new 401k plan (not 403(b) or 457). Money rolled over from an employer plan could not be mixed with contributory IRA funds and earnings. (See item below)

Greatly expanded — 401k rollovers to an IRA may be subsequently rolled to a new employer's 401k, 403(b) or 457 plan.

Portability of IRA contributions to employer plan

Not allowed. Original after- or pre-tax contributions to an IRA could not be rolled to an employer's plan.

Allowed. Savers may roll original pre- and after-tax IRA contributions into an employer's retirement plan, such as a 401k, 403(b) or 457.

Portability of after-tax contributions to employer-retirement savings plan

Rollovers of after-tax contributions to a 403(b) or 401k plan to an IRA were not allowed.

Allowed.

Automatic Rollover to IRAs from Employer plans

Nonexistent

For workers with 401k balances of more than $1,000 and less than $5,000, employers may choose to automatically roll this balance into an IRA account on the employee's behalf.

Vesting and Small Business Rules

2001

Effective 2002

Vesting of employer contributions — maximum time allowed before contributions are fully vested

Cliff vesting: five years
Graded vesting: seven years

Cliff vesting: three years
Graded vesting: six years

Same Desk Rule

Under certain circumstances, if a business was sold, employees who kept the same job with the new employer were not allowed to withdraw money from their former employer's 401k plan because they were not seen to have "separated from service."

The same desk rule is eliminated, as the phrase "separation from service" is replaced with "severance from employment" in the Internal Revenue Code.

Small Business Tax Credit

Nonexistent

Some small employers will be allowed to claim a non-refundable tax credit to help offset plan start-up costs. This credit will apply to 50 percent of the first $1,000 spent for administrative and education costs for three years after starting a new plan. It is only available to employers with 100 or fewer workers.

Top-Heavy Rules

To ensure that an employer-sponsored retirement plan is offered fairly to all employees, the government set certain testing rules for figuring if "key employees" (commonly officers and family members) are receiving an unfair portion of the plan benefits. The government rules require that plans that are characterized as top-heavy make minimum contributions for all non-key employees. Employer contributions must also vest under a special schedule.

The law simplifies the definition of a key employee and changes the rules concerning top-heavy plans.

A key employee is defined as:

A. A company officer with compensation more than $130,000;
B. A 5 percent owner; or
C. A 1 percent owner with compensation greater than $150,000.

The family aggregation rules will not be modified for determining key employees.

Matching contributions will count toward the minimum contribution rules.

Look back rules, used for determining key employees will be shortened, and

401k plans adopting safe-harbors will not be considered top-heavy.