Small business owners have been in a difficult spot for many years when it comes to retirement plans. They were expensive to start, difficult to administer and expensive to fund.
Over the last several years, there have been dramatic changes in the way retirement plans are run. Most have to do with advances in technology and joint ventures by investment managers and plan administrators.
These two factors have caused a dramatic reduction in the cost of administering a retirement plan. They have also allowed small plans to offer most of the benefits of much larger plans.
That’s good news. But the best news is that the government has stepped in to help. On June 7, the Economic Growth and Tax Relief Reconciliation Act of 2001 was passed. This new law, known as EGTRRA, cannot be completely covered in this article, but here are some high points.
* You can now put more money into a 401(k) plan. The current dollar limit is $10,500. Next year it will be $11,000, and it will rise by $1,000 each year until it caps out at $15,000.
* Total contribution to all types of plans for an individual is currently $35,000 per year. Next year that will rise to $40,000.
* Employees over the age of 50 can put an additional $1,000 into the plan.
* Rollovers and transfers have been limited in the past from one type of plan to another. The new rules allow any type of qualified money to be added to your company’s 401(k) plan. If you have individual IRAs, if you came from a nonprofit and have 403(b) money, if you have money in a government 457 plan, all of it can be rolled into the 401(k) plan. This allows consolidation of plan money to make it easy to allocate into the proper investments. It is also a great convenience to show all of your retirement money on one statement.
* The new bill gives a tax credit to lower income employees. It’s difficult for lower income employees to save for retirement. This allows them to contribute to a 401(k), not pay taxes on those contributions and get a tax credit for the amount they put in, which is deducted from the bottom line of their taxes when they file their 1040. This makes it possible for lower income employees to double their savings in the 401(k) while their take-home pay remains unchanged.
* There is a tax credit available to employers for starting new plans. One reason small employers have not started plans is the expense of setting them up. This credit allows an employer to take a tax deduction for the expense of setting up the plan and the expenses of running it for the next three years.
* In the past, if the company had a 401(k) plan, the amount of money employees put into it was deemed company contributions. This rule has changed to allow for larger company contributions if they wish to make them, and makes the plan easier to administer.
* Top-heavy provisions have changed. A plan is deemed top heavy if key employees own 60 percent or more of the total assets in the retirement plan. In the past, if a key employee took his money out of the plan, that money had to be included in the testing for the next five years. New provisions only require it be included for one year. This not only makes the plan easier to administer, but allows the remaining key employees to fully utilize the retirement plan.
* Contributions into 401(k) plans and profit-sharing plans are primarily based on eligible pay. The current rules state that $170,000 is the most compensation that can be used in calculating contributions. The new rules increase this limit to $200,000, which allows owners and key employees to make larger contributions but also allows larger total contributions, which can benefit the employees.
* Under the current rules, S corporation owners were reluctant to start 401(k) or profit-sharing plans because they just didn’t benefit. The new rules allow S corporation owners to take full advantage of 401(k) and profit-sharing plans.
* Total contributions into a profit-sharing plan have been increased to 25 percent of eligible payroll. This will have a dramatic effect on business owners who have a money purchase/profit-sharing plan combination. This eliminates the need for the money purchase plan and the expense of running a second plan.
* In the past, when a company set up a retirement plan, it was sent to the IRS for a determination letter. In many cases, to receive this letter, you had to pay a user fee. The new bill eliminates user fees to set up retirement plans.
These rule changes, which go into effect Jan. 1, 2002, will have a tremendous positive impact on all employers’ retirement plans. These changes do not happen automatically, however.
If you have a retirement plan, now is the time to sit down with a knowledgeable retirement plan expert to determine which of these changes you want to incorporate into your existing retirement plan. If you do not have a retirement plan, determine the design you wish to have, and take advantage of the new rules.
With these changes, increases in technology, efficiency of administration and joint ventures with recordkeepers and investment managers, employers of all sizes can take advantage of the evolution in the retirement plan industry to redesign their plans to reduce costs and increase the benefit to themselves and their employees. David Kulchar is senior vice president and director of Oswald Financial Inc.’s Retirement Plan Services operations. Rollie Beach is a manager of Oswald Financial’s Retirement Plan Services operations. Oswald Financial specializes in retirement planning. The company offers free seminars on major tax law changes in cooperation with The Better Business Bureau and the law firm of McDonald, Hopkins, Burke & Haber. For more information, contact Oswald Financial at (216) 367-8752.