August 2001 Bulletin
New tax law has changes for retirement plans
Analysis will show whether current scheme is most economical approach
The Economic Growth and Tax Relief Reconciliation Act of 2001 makes significant changes to the operation of retirement plans. These changes will require an analysis of whether your current plan structure and approach is still the most economical approach for the practice. This analysis will be in terms of the cost of maintaining and funding the plan vs. the benefits that would accrue to the physicians as additional compensation without the plan.
- The 401(k) Profit Sharing elective contribution limit will be increased to $15,000 (currently the maximum amount is $10,500) with the $15,000 maximum being phased-in with a $500 increase in 2002 and a $1,000 increase for each of the next four years.
- Defined Section 415 Limit will be increased to the lesser of $40,000 (currently the maximum contribution is $35,000) or 100 percent of compensation. This will be effective beginning in the year 2002.
- The eligible compensation for determining the amount eligible for contribution to a retirement plan will be increased to $200,000 beginning in the year 2002 from the current $170,000 compensation limit. This will be a benefit to high-income earners as it aids in contributing more on behalf of the physicians at a lesser cost for contributing for the benefit of employees. This will be an even greater benefit for those plans that are integrated with social security.
- Individuals age 58 and older will be permitted to make additional contributions to 401(k) plans which are known as catch-up contributions starting at $1,000 per year in the year 2002, increasing $1,000 each year until it reaches a maximum annual catch-up contributions of $5,000 in the year 2006 and thereafter.
- Profit sharing plans including 401(k) plans will have an increased deduction limit for employer contributions equal to 25 percent of compensation. The deductions are currently limited to 15 percent of compensation. The benefit of this provision is that previously where a business needed to utilize a profit sharing plan and a money purchase plan to maximize the contribution on behalf of the high earners, this provision will now allow for a single profit sharing plan to do this. In addition, since the profit sharing plan is totally an elective or discretionary contribution, there is more flexibility for the practice, whereas a money purchase plan requires mandatory contributions.
Other tax changes during the course of the past 18 months include the elimination of the 15 percent excise tax on what was at the time determined to be the accumulation of excess retirement plan benefits, and a change in how retirement plan benefits can be paid out to beneficiaries upon the death of the eligible participant. This change now allows for the beneficiaries of the retirement plan to receive benefit distributions in equal amounts over their estimated lives, thus enabling the recipients to better manage the tax implications of the receipt of these retirement plan benefits. These types of changes continue to reinforce the value of utilizing a retirement plan as one means of accumulation of your investment asset.