The recently passed Tax Relief Reconciliation Act was the centerpiece of President Bush’s election campaign. In addition to reducing income taxes an average of 10% over the next five years, the most publicized aspects of this bill were the estate tax repeal (in 2010) and the increase in IRA and 401(k) limits to $5,000 and $15,000 respectively by 2006. A number of other major changes in pension law were also included in that bill. Many of those changes are summarized on the later in the newsbrief.  The bad news for clients is that many of you will need to have studies and amendments done in order to determine the best way to utilize these changes. The good news is that many of our clients will be able to contribute more to their retirement programs, find it easier to pass the non-discrimination tests, have more flexibility and, in some cases, save money on ongoing administration. Over the next few months, we will be contacting those of you whom we believe can benefit from having CAI perform a study of the plan designs available to you under the new tax law.

Despite the major pension reform provisions contained in the 2001 Tax bill, the deadline for amending and restating plans for the 1995-1999 changes in law has not been extended and remains the last day of the 2001 plan year. The one major exception is that for plan sponsors maintaining a prototype or volume submitter plan, the deadline is extended until 12 months after the master prototype or volume submitter plan is approved. Most plan sponsors do maintain this type of plan and most of these plans have not yet been approved by the IRS. Accordingly, the 12/31/01 deadline is extended for most of CAI’s clients. We will keep you informed of changes in this deadline so as to make sure your plan is amended and restated on a timely basis.

CAI’s standard retainer agreement calls for fee increases equal to the increase in the cost of living index whenever that increase exceeds 4%. Those increases are generally effective as of either January 1 or July 1. Although the cost of living has increased by more than 4% since our last general fee increase in July, 1999, we are holding the line on fees for several reasons. First, with the slowdown in the economy, we do not feel that an across the board fee increase is appropriate at this time. Second, recent changes in law have impacted on different plans in different ways. Some plans are now easier to administer than they once were, others are more difficult. In setting our fees, it has always been our goal to provide the level of service needed and desired by each client without charging for something they don’t need. Proposing plan design studies to clients who may be able to benefit from the recent changes is an example of how this approach works. Finally, we will continue to monitor the amount of time spent for each client and let you know whenever adjustments to our flat fees (either up or down) must be made.

The following law changes are contained in the Tax Relief Reconciliation Act of 2001. Unless otherwise noted, all changes are effective for years beginning January 1, 2002

	Maximum 401(k) contributions are increased to $11,000. The maximum will continue to increase by $1,000 per year until it reaches $15,000 in 2006
	Workers age 50 or older may make an additional 401(k) contribution of $1,000. This catch-up contribution will be gradually increased to $5,000 by 2006.
	Defined contribution plan individual maximum increased to the lesser of $40,000 or 100% of compensation. Previously it was $35,000 and 25% of compensation.
	Maximum deduction for profit sharing plans increased from 15% to 25% of compensation. 401(k) contributions will no longer count toward the maximum.
	Maximum defined benefit increased to $160,000 payable at age 62. For those who are 62 and younger this represents a 52% increase in the maximum benefit.
	Compensation limit increased to $200,000. Previously at $170,000, the increase will have a significant impact on non-discrimination testing and deductibility.
	IRA limit increased to $3,000 in 2002, $4,000 in 2005 and $5,000 in 2008
	SIMPLE limit increased to $7,000. The maximum will continue to increase by $1,000 per year until it hits $10,000 in 2005.
	Tax Credits of up to $1,000 available for lower income savers. Provides additional incentive for low paid employees to contribute to 401(k) and IRA’s.
	Tax credits of up to $1,500 offered for small businesses who start new plans. The credits only apply to companies with at least 1 non-highly compensated employee.
	Loans permitted to Sole Proprietors, Partners, and Sub S owners. Beginning in 2002 loans of up to $50,000 (or 50% of the total account, if lower) made to these individuals will not be considered prohibited transactions.
	Top heavy minimums will not apply to frozen defined benefit plans. This change allows sponsors to freeze defined benefit plans without additional benefits accruing.
	Matching contributions count toward satisfying top heavy minimums. Matching contribution safe harbor 401(k) plans are not considered to be top heavy.
	IRS user fees eliminated for most plans with less than 100 employees. Additional regulations are needed to determine when the exceptions apply.
	Rollovers between 401(k), 403(b), government plans and IRA’s are permitted. A major liberalization in these rules was included to increase pension "portability."

Other recent major changes not included in the Tax Relief Reconciliation Act are as follows:

	Minimum distribution requirements changed. For most individuals over age 70 ½, the required minimum will be reduced under the new rules. Retirement plans can adopt these changes for 2001 if the plan is amended prior to the end of the year.
	Increases in employee contributions required for New Comparability Plans. Discussed in prior Newsbriefs, employees will be required to receive the lesser of 5% of pay, or 1/3 of the percent of pay allocated to Highly Compensated Employees. As proposed, these new rules will apply to plan years beginning in 2002.
	Elimination of combined plan limitations. Many employers who terminated defined benefit plans many years ago will now be able to maintain a retirement program and receive additional benefits under either a defined benefit or a defined contribution plan.