Annual additions limit in 2002 under EGTRA

[AndyH]

On first read, the annual additions limit for a PS/K plan for a 51 year old in 2002 appears to be $51,500 for 2002 ($40K + $11K + $500 catchup), or 100% of pay if less.

Is that correct, or have I misread something?

[stephen]

It seems to me that the 415 limit for 2002 for a 51 year old would be $41,000 (or 100% of pay if less). $40,000 limit plus the $1,000 make up contribution.

The deferrals won't count against 404 limit, but are still included in 415 limit.

[AndyH]

Thanks, stephen. I think you're right, and that makes a lot more sense.

[MGB]

One technical change to stephen's is the order of logic:

The limit would be $40,000 or 100% of pay if less, plus $1,000. (So, there can be more than 100% of pay.)

The catch up contributions are not subject to ANY limitation, testing, etc., including 415.

However, elective deferrals are subject to a 100% of compensation limit themselves. So, if the person's compensation is $12,000 or less, then the maximum is 100% of compensation.

(Andy's reference to $500 is applicable to SIMPLE plans only.)

[AndyH]

MGB, thanks much for the elaboration. Your insights into these issues have been tremendously helpful.

[Guest sampat]

We are a two person husband/wife company. Currently we put 10% of our salary for money purchase and 15% of our salary for profit sharing plan with a combined max tax deduction of 25% of compensation. Our compensastions are $55K each so we do not run against the dollar limit. What is the maximum contribution and deduction we can make in 2002 onwards with the new law. How would we have to re-structure our retirement plan to allow for the maximum?

Would we be able to set up something like 401K Roth to defer taxes with after tax conributions?

[Tom Poje]

it appears you will be able to do the following:

terminate the money purchase plan, roll all the $ into the profit sharing plan, and simply have the one plan accomplish what you have the two do presently. At least everything I have read seems to indicate that. That would be a savings from the fact you only have 1 plan instead of 2.

Ideally handled, would be in late December, to know your compensation, make your 10% contribution for 2001, then roll all the $ into the profit sharing before 12/31/2001 and file a final 5500 for the mp plan.

whew! lots of stuff right at the close of the year.

[Guest sampat]

Would I be able to contribute $40000 per person next year if I carry both Profit sharing and money purchase plan or I will still be limited by 25% of compensation for tax deduction purposes? I am getting confused as to when the 100% limit applies and when 25% limit applies.

[wmyer]

If you just have a P/S plan, or have a P/S with pension, the most that can be contributed as an employer contribution is 25% in 2002 for deductibility purposes. That means, that based on combined comps. of $110,000, only $27,500 total, or $13,750 each. If you add a 401(k) feature, you could each contribute an additional $11,000 (totalling $24,750 each) because the $11,000 would not count towards the deductible limit. Also, it seems you could make post-tax contributions (although not Roth 401k contributions until 2006) of $15,250 each. This would take you to 40,000. If it's a plan with only HCEs, there's no discrimination testing, so you wouldn't have a problem with these high post-tax or deferral contributions.

[Guest sampat]

Thanks All. The messages explain my choices for 2002.

One question though: Is the $11,000 per person by adding the 401K feature deductible by the corporation or by the individual or does it get included in employee gross income on W-2?

[wmyer]

The 11,000 would still be deductible for the corporation, but starting in 2002 it will no longer count against the §404(a) 25% deductibility limit.

If the participant's comp. is 55,000, the participant would receive a W-2 with 44,000 in box 1 (federal wages) and 55,000 in box 5 (medicare wages). Thus the 11,000 would be deferred income for the participant.

I could also mention the catch-up contribution if you're over 50 -- this would allow you to do more than $40,000.

[Guest sampat]

Wmeyer,

Do you know of anyone offering a prototype profit sharing plan with 401-K(salary deferral) option?

Looks like based on what you detailed, my best course of action is to make year 2000 contributions to momey purchase and profit sharing then close these to start contributing at a Profit sharing with 401K option from 2002 onwards for max tax deduction.

[Guest JBlair]

Another question: If the plan year and limitation year for a defined contribution plan are both 4/1/01 to 3/31/02, is the maximum annual addition limitation for the plan $35,000 or $40,000? It sounds as if EGTRRA states that the new limitation is for years beginning in 2002, thus not including non-calendar year plans ending in 2002?

Can anyone verify what the 415 limit is for a 4/1/01-3/31/02 plan year??

Thanks.

[AndyH]

Yes, you are right. It's $35,000 for 3/31/2002, although it seems that may have been an oversight, so you never know if it'll change, but it is $35,000 now.

[Earl]

Tom -

Do you think that the contrib. has to be deposited before 12/31?

A receiveable contribution would prevent a merger...

If the benefit accrued, would it matter if you met the obligation by a contribution to a "successor" plan.

I am thinking of having people execute Board minutes to merge the plans as of 12.31.01 and just dump the money into the surviving Trust.