| Law |
2006 |
Upcoming |
| Defined |
Contribution Plan Limits |
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| Section 401(a) (17) Compensation Limit |
$220,000 is currently the maximum annual compensation for computing annual contributions or benefits under a defined contribution plan. |
The compensation limit is increased to $225,000 for 2007. |
| Section 402(g) Salary Deferral Limit |
$15,000 is currently the maximum annual salary deferral an employee may contribute to a 401 (k) or 403(b) plan. |
The 401 (k) and 403(b) salary deferral limit is increased as follows:
and then subject to cost- of-living adjustments each year in $500 increments.
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| Section 457(b) Contribution Limit |
$15,000 is currently the maximum annual salary deferral an employee may contribute to a 457(b) plan. |
The 457(b) contribution limit is increased as follows:
and then subject to cost- of-living adjustments each yen in $500 increments.
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| Catch-up Contributions for 401(k), 403(b), 457(b) and SIMPLE Plans |
For 401 (k), 403(b) and 457(b) plans, individuals age 50 or older may make an additional contribution of $5,000 in 2006. The catch-up provision for SIMPLE plans is one-half of the above amounts.
Certain 403(b) plans have a catch- up rule for participants with at least 15 years of service.
The 457(b) plan catch-up rule would not be available if the "last 3 years" catch-up limit of up to $15,000 for the last 3 years preceding the employee's normal retirement age applies.
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For 401 (k), 403(b) and 457(b) plans, individuals age 50 or older will be allowed to make an additional contribution of
and then subject to cost- of-living adjustments each year in $500 increments. The catch-up provision for SIMPLE plans is one-half of the above amounts.
If all participants are eligible to make a catch-up contribution, such amount will not be subject to nondiscrimination testing and will not count against the employer's deduction limit or the individual's 415 annual contribution limit.
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| Annual Salary Deferral Limit for SIMPLE IRAs
and SIMPLE 401(k)s
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$10,000 is currently the maximum annual salary deferral an employee may contribute to a SIMPLE plan. There is also a $500 Catch-up contribution for participants over age 50. |
The salary deferral limit for SIMPLE IRAs and SIMPLE 401 (k)s is increased as follows:
- subject to cost- of-living adjustments each year in $500 increments.
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| Section 415(c) Maximum Annual Addition under a Defined Contribution Plan |
For a defined contribution plan,
the annual contribution limit is the lesser of $44,000 or 100% of compensation.
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Maximum Annual Addition is increased to $45,000 in 2007. |
| Section 403(b) Plan Maximum Exclusion
Allowance (MEA)
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The maximum exclusion allowance is repealed. |
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| "Roth' 401 (k) and 403(b) Accounts |
No provision. |
In 2006 401 (k) and 403 (b) plan sponsors can permit participants to elect after-tax treatment for a portion of their salary deferral contributions similar to Roth IRA contributions. Both the contributions and earnings generally would not be subject to taxation upon distribution from the plan as long as certain conditions are met. |
| Defined |
Benefit Plan |
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| Section 415(b) Maximum Dollar Limitation |
The maximum annual benefit under a defined benefit plan is the lesser of 100% of the participant's 3-year high compensation or $140,000.( For ages 62-65, the maximum dollar limit is $180,000 per year ). The dollar limit is indexed annually for inflation in increments of $5,000. No annual benefit reduction for retirement ages 62-65. Reduction to the limit will only apply before age 62 and an increase in the limit will apply to benefit commencements after age 65.
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| Repeal of Current 150% Liability Funding Limit |
Contributions to a defined benefit plan are not tax deductible to the extent that plan assets exceed the lesser of (1) 170% of the plans current liability or (2) 100% of the accrued liability. |
Applies to Plan years beginning in 2003. For plan years beginning after December 31, 2003, the current liability full funding limit is repealed. |
| Nondeductible Excise Tax |
A 10% excise tax is imposed on employers who make nondeductible
contributions to qualified plans. If the employer so elects, the 10% excise tax will not apply to any contributions to a defined benefit plan up to the accrued liability full funding limit. |
Plan years beginning in 2003 |
| Modification of Timing of Plan Valuations |
The valuation date for a defined benefit plan for a plan year must generally be in the same plan year. Defined benefit plans are permitted to use a valuation date up to one year prior to the beginning of the plan year. This provision is not available to an under-funded plan.
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Plan years beginning in 2003 |
| Modification to Section 415 limit for Multi employer Plans |
Under 415(b), the maximum annual benefit under a defined benefit plan is $140,000. Multi employer plans are not aggregated with other multiemployer plans or single employer defined benefit plans for purposes of applying the percentage of compensation limitation.
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Plan years beginning in 2003 |
| Purchase of Service Credit in Government Defined Benefit Plan |
State and Local government employees have the option of purchasing credit for prior service. State and Local government employees can use funds from their 403(b) or 457 plan to purchase service credits under their defined benefit plan.
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| Treatment of Employer Contributions to a Multiemployer Plan |
Employer contributions may be deducted in the taxable year in which the contribution is actually made but a special rule also permits the employer to take a deduction for the prior taxable year for a contribution that is deemed to have been made on the last day of the preceding taxable year if the contribution is attributable to the preceding year and is made before the deadline for filing the employer's tax return (including extensions). A determination regarding the taxable year for deducting a multiemployer pension plan contribution is not considered a method of accounting. The Treasury may issue regulations to clarify that no taxpayer may deduct more than they actually contributed to a multiemployer plan during a taxable year. |
Plan years beginning in 2003 |
| Employer |
Deduction Limits |
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| Section 404(c) Deduction Limit |
The maximum corporate deduction limit for a profit sharing plan is "20%" of aggregate employees' compensation. Except as provided by regulations, money purchase plans are also subject to this limit. |
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| Exclusion of 401(k) Salary Deferrals from Deduction Limit |
Salary deferrals are separately deductible with regard to the "20%" deduction limit and will not be considered employer contributions for purposes of the deduction limit. |
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IRA Contribution Limits |
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| Increased IRA Contribution Limit |
$4,000 is currently the maximum annual contribution an individual may contribute to an IRA. |
The IRA contribution limit is increased as follows:
- $4,000 in 2006;
- $4,000 in 2007;
- $5,000 in 2008
and then subject to cost- of-living adjustments each year in $500 increments.
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| Catch-up IRA Contributions |
For IRAs, individuals age 50 or older will be allowed to make an additional contribution of
$500 . |
For IRAs, individuals age 50 or older will be allowed to make an additional contribution of
and each year thereafter.
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| IRA Accounts within Defined Contribution Plans |
Effective in 2003, Qualified plans, 403(b) plans and governmental 457(b) plans may allow participants to make IRA contributions to a separate account maintained under the plan. Such contributions must meet the requirements of either a traditional or a Roth IRA. |
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Rollovers |
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| Rollovers Among Various Types of Retirement Plans |
The portability rules allow distributions from qualified plans, 403(b) plans and governmental 457(b) plans to be rolled over into any defined contribution arrangement without restrictions (e.g., a qualified plan distribution can be rolled over into a 403(b) plan and a governmental 457(b) plan distribution can be rolled over into a 401 (k) plan) |
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| Rollovers of After-Tax Contributions |
Employee after-tax contributions can be included in a direct rollover to defined contribution plans or to IRAs (as long as they are separately accounted for after the rollover). |
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| Rollovers from Contributory IRAs to Defined Contribution Plans |
Rollovers of deductible amounts originally contributed to an IRA generally may be rolled over to any qualified plan, 403(b) plan or 457(b) plan. |
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| Disregard Rollovers for Purposes of Cash-out Amounts |
Plans may involuntarily cash-out participants with vested benefits of $5,000 or less. A plan may disregard rollover amounts in determining the $5,000 involuntary cash- out amount |
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| Rollovers for Surviving Spouse |
Rollovers can be made to an IRA as well as to a qualified plan, 403(b) plan or governmental 457(b) plan in which the surviving spouse participates |
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| Time-frame for Rollovers |
Rollovers must be made within 60 days or they are treated as a taxable distribution. The IRS is given the authority to extend the 60-day rollover period for special circumstances. |
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| Automatic Rollovers for Involuntary Distributions |
If a plan makes an involuntary distribution of more than $1,000 but less than $5,000, and the employee does not affirmatively elect to receive cash or make a direct rollover, the default method of payment must be a direct rollover to an IRA. The DOL is directed to issue safe harbor guidance no later than 3 years after the date of bill enactment with respect to the default IRA, so the plan administrator will be relieved of fiduciary liability with respect to such rollover. This will be effective after the safe harbor regulations are issued.
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Portability Provisions |
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| Treatment of Forms of Distributions |
An employee may elect to transfer benefits from one defined contribution plan to another without requiring the transferee plan to preserve the optional forms of benefits if the transfer was a direct transfer, the transfer was authorized under the
terms of both plans, the transfer was pursuant to a voluntary election by the participant upon receipt of proper notice, and the participant could have elected a lump sum.
A form of distribution in a defined contribution plan could also be eliminated if a lump sum distribution is available and such lump sum is based on the same or greater portion of the participant's account as the distribution form being eliminated. |
The IRS is directed to issue regulations by the end of 2003 to provide anti-cutback relief so that certain benefit payment options and subsidies can also be eliminated from a plan if it does not adversely affect the rights of any participant in a more than "de minimize" manner. |
| Repeal of Same Desk Rule |
The 'Same desk rule" has been eliminated from 401(k). 403(b), and 457(b) plans by replacing "Separation from service" with "severance from employment". With respect to a business acquisition, so long as the buyer is not maintaining the seller's plan with respect to the transferred employees, distribution from the seller's 401(k) plan will be permitted to the transferred employees. |
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| Division of 457(b) Plan Benefits upon Divorce |
Qualified plan rules pursuant to a QDRO Will apply to 457(b) plan divorce distributions. |
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| Modification of Minimum Distribution Rules |
The IRS requires certain minimum distributions from retirement plans and IRAs starting at age 70 1/2 or retirement (deferral until retirement
not permitted for IRAs and 5-percent owners). The IRS has been directed to update current life expectancy tables to reflect current life expectancy.
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| 457(b) Minimum Distribution Rules |
457(b) plans will satisfy the minimum distribution rules as long as the plan satisfies the requirements of Section 401 (a) (9). No other special rules will apply.
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| Non-Discrimination |
Testing Rules |
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| Coverage Test May Disregard Employees of Tax-Exempt Entities |
Employees of a tax-exempt entity who are covered under a 403(b) plan may be treat- ed as excludable employees under a 401 (k) plan of a related entity for purposes of the minimum coverage rules if (1) no
employee of the tax-exempt entity is eligible to participate in such 401 (k) plan or 401 (m) plan, and (2) at least 95% of the non excludable employees who are not employees of the tax-exempt entity are eligible to participate in the 401 (k) plan or 401 (m) plan.
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| Modification of Top Heavy Rules |
A plan is top heavy if at least 60% of plan assets are held by key employees (includes prior distributions to key employees over the past year, including prior distributions made after termination of service or plan termination). Key employees, determined over a 1-year look back period, generally include officers earning over $130,000, 5% owners, 1% owners earning over $160,000. Family members of 5% owners are deemed key employees. Top heavy plans must meet a minimum vesting schedule and make minimum (generally, 3%) top heavy contributions to non-key employees. Matching contributions count toward satisfying the top heavy minimum contribution requirement and are counted in the ACP testSafe harbor 401 (k) and 401 (m) plans are exempt from the top heavy rules. Top heavy minimum accruals are not required under a frozen defined benefit plan.
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Compensation used to determine officers is subject to cost-of-living adjustments, in $5,000 multiples, starting in 2003 |
| Excluding Certain Nonresident Aliens in Performing Nondiscrimination Tests |
The recognition of employer-provided benefits for nonresident aliens working on ships docked in the U.S. is no longer considered compensation. These nonresident aliens do not have to be included for purposes of nondiscrimination and other requirements applicable to employee benefit plans. |
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Other Changes |
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| Hardship Withdrawal Rules |
For hardship distributions that follow the "safe harbor" rules, salary deferral and after-tax contributions are restricted for a period of 6 months following the date of the hardship withdrawal. Also, distributions of 401(k) or 403(b) deferrals received on account of hardship are ineligible for rollover, so the mandatory withholding rules do not apply to such withdrawals. |
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| Vesting of Employer Matching Contributions under Non-Top Heavy Plans |
Matching contributions must be fully vested after either:
- 3 years of service ( 3-year cliff ), or
- Vesting in increments of 20 percent for each year beginning with the second year, with full vesting after the employee has completed six years of service (6-year graded schedule).
The accelerated vesting rule applies to someone who has at least one hour of service credited after the effective date of this rule, and applies to contributions from plan years beginning 2003.
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Collectively bargained plan contributions may be subject to a later effective date. |
| Plan Loans for Business Owners |
Plans may make loans to participants, sole proprietors, partners, and Subchapter S Corporation shareholders. |
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| User Fee Waived for New Plans |
New plans established by employers with 100 or fewer employees would not be required to pay a user fee for determination letter requests filed within the first 5 plan years (or the end of the current remedial amendment period with respect to the plan beginning within such 5 plan years, if longer).
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| Tax Credits for New Small Employer Plan Expenses |
Small Businesses with 100 employees or less will be eligible for an annual tax credit of 50% up to $1,000 of administrative costs for the first three years of a new plan. Credit is only available if at least one non-highly compensated employee is participating.
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Effective for plans established after 2001. |
| Tax Credits for Lower Income Savers |
In addition to the tax deduction for plan contributions, eligible people will receive a non-refundable tax credit on the first $2,000 in contributions to an IRA, 401(k), 403(b), SIMPLE, SEP or 457 plan. Single filers with adjusted gross income less than $15,000 and joint filers with adjusted gross income less than $30,000 eligible for a 50% credit. Single filers with adjusted gross income between $15,000 and $16,250 and joint filers with adjusted gross income between $30,000 and $32,500 are eligible for a "20%" credit. Single filers with adjusted gross income between $16,250 and $25,000 and joint filers with adjusted gross income between $32,500 and $50,000 are eligible for a 10% tax credit. |
Expires in 2006 |
| Modification of Section 204(h) Notice Requirements |
Participants in a defined benefit or money purchase plan must be given a written notice of any plan amendment significantly reducing future benefit accruals within a reasonable period of time before the amendment takes effect. The notice can be provided before the amendment is actually adopted by the employer if no material modification of the amendment occurs before it is adopted. Failure to provide the notice will subject the employer to an excise tax equal to $ 100 per day per omitted participant. For failures where reasonable diligence was exercised, the excise tax will not exceed $500,000 in any given year. |
effective date is 3 months after new law enactment, for amendments following the date of the enactment of the new law.
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| Pension Coverage for Domestic Workers |
Employers of household workers
can establish pension plans for their workers but contributions are not deductible and are subject to an excise tax. The 10% excise tax on nondeductible contributions will not apply to contributions to a SIMPLE plan or a SIMPLE IRA that are nondeductible solely because the contributions are not made in connection with an employer's trade or business.
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| Investment of Salary Deferral Contributions in 401 (k) plans |
Certain 401 (k) plans are required to limit the investment of salary deferral contributions in employer stock or real property of the employer to no more than 10% of plan assets. This does not apply to salary deferrals invested in qualifying employer securities or qualifying real property if the assets were acquired before January 1, 1999.
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| Prohibited Allocation of Stock in an ESOP of an S Corporation |
An S Corporation may establish an ESOP. The income of an S Corporation allocable to an ESOP is not subject to tax. |
Effective for plan years after 2004 with earlier effective dates for certain plans; If there is a "prohibited allocation" of stock in an ESOP sponsored by an S Corporation, an excise tax would be imposed on the corporation, and the value of the stock allocated would be includible in the gross income of the employee receiving the allocation. For purposes of this rule, a prohibited allocation generally would be an allocation to an individual who owns at least 10% ("20%" in some cases) of the outstanding stock of the S Corporation |
| ESOP Dividend Reinvestment |
Dividend deductions are generally allowed on dividends paid on employer stock held by an ESOP if dividends are paid in cash. The deduction is denied if the dividends remain in the ESOP for reinvestment. |
Effective for taxable years beginning in 2002; Employers can deduct dividends paid to an ESOP when its employees are allowed to elect to take the dividends in cash or leave them in the plan for reinvestment in qualified employer securities. |
| Employer Provided Retirement Advice |
Employer-provided retirement advice is generally not considered income to the employees. Such retirement advice provided to employees on an annual basis will be a nontaxable fringe benefit to the extent such services are made available on substantially equivalent terms to a reasonable classification of employees
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