Contribution limits

Prior to EGTRRA

After EGTRRA

403(b) -- Maximum Exclusion Allowance (MEA)

Contributions subject to MEA.

Effective retroactive to 1/1/2000, elimination of defined benefit attribution in MEA calculation. Effective 1/1/2002, MEA repealed.

415(c) -- Defined Contribution Plan Limit.

The maximum annual addition to a defined contribution plan on behalf of an individual is the lesser of 25% of compensation or $35,000. The $35,000 limit is indexed for inflation in $5,000 increments.

Effective 1/1/2002, the 25% limit increased to 100%, and the $35,000 limit increased to $40,000, with future indexing in $1,000 increments.
Additional 403(b) contribution provisions:

• All 403(b) contracts will be treated as being maintained by the employee, rather than the employer, allowing a separate 415(c) limit without regard to the election of catch-up.
• Employers will be permitted to contribute up to 100% of "year of service compensation" (up to $40,000) to a former employee's 403(b) contract for up to 5 years.

457(b) - Deferred Compensation Plans

Employer and employee contributions limited to the lesser of $8,500 or 33 1/3% of includible compensation.

Effective 1/1/2002, the dollar limit increases as follows:
Year -- Limit
2002 -- $11,000
2003 -- $12,000
2004 -- $13,000
2005 -- $14,000
2006 -- $15,000 (indexed in $500 increments thereafter)

• The dollar limit on contributions to 457(b) plans is no longer reduced by 403(b) or 401(k) salary deferral contributions to other plans in which employee participates.
• The 33 1/3% limit increases to 100%.
• The catch-up limit under 457(b) is twice the dollar limit in effect for the year (e.g., $22,000 in 2002), subject to other requirements applicable to the 457(b) catch-up limit.

Catch-Up Contributions

Catch-up contributions for individuals over age 50 for 403(b), 401(k), 457(b) and SAR-SEP plans

No opportunity to "catch-up" in later years once an individual misses opportunity to make a contribution for a given year.

Individuals age 50 or older are permitted to make annual catch-up contributions as follows:
Year -- Limit
2002 -- $1,000
2003 -- $2,000
2004 -- $3,000
2005 -- $4,000
2006 -- $5,000 (indexed in $500 increments thereafter)

NEW OPPORTUNITIES FOR MORE PORTABLE RETIREMENT SAVINGS

Rollovers of amounts originally contributed to an IRA ("contributory IRA") to another plan type

Rollovers from a contributory IRA to an employer plan are not permitted.

Effective 1/1/2002, contributory IRA amounts may be rolled over to 401(a), 403(b), and governmental 457(b) plans.

Rollovers from Governmental 457(b) plans to other plan types

Not permitted.

Effective 1/1/2002, rollovers are permitted from governmental 457(b) plans to other plan types, including IRAs, 401(k), 403(b) plans, and other tax-qualified plans. Subject to 10% federal penalty for pre-59 ½ distributions, unless rolled over to another 457(b) plan.

Rollovers from tax-qualified plans to 457(b) plans

Not permitted.

Effective 1/1/2002, permitted. Non -457(b) amounts must be tracked separately to apply the 10% penalty for any pre-59 ½ distributions.

Rollover of after-tax contributions

After-tax contributions permitted to 403(b) and 401(k) plans. Rollover distributions of those after-tax contributions to an IRA or another plan are not permitted.

Effective 1/1/2002, after-tax employee contributions permitted to be rolled over to 403(b) and 401(k) plans, as well as to IRAs.

SIMPLIFICATION OF RETIREMENT PLAN REQUIREMENTS

"Same desk rule" repeal

401(k) plan distributions are limited to separation from service with the employer, which has been interpreted to not include a situation where the employee performs the same functions for a successor employer (the "same desk" rule).

The same desk rule also applies to 457(b) and 403(b) plans.

Effective 1/1/2002, the "same desk rule" is eliminated by replacing "separation from service" under section 401(k)(2)(B) with "severance from employment." Conforming changes would be made for 403(b) and 457(b) plans.

Plan loans

Not permitted to certain plan participants (sole proprietors, partners and subchapter S corporation shareholders)

Effective 1/1/2002, permitted to those certain plan participants who are also the business owners.

Safe harbor hardship withdrawals

Salary deferral contributions required to be suspended for 12 months.

Effective 1/1/2002, 12-month suspension period is decreased to 6 months.

95% rule

Section 401(k) plan of taxable subsidiary of tax-exempt entity with section 403(b) arrangement required to include tax-exempt entity's employees in coverage testing.

Prior to 1998 plan years, a special coverage rule applied where a tax-exempt entity with a section 403(b) arrangement had a taxable subsidiary that maintained a 401(k) plan. The tax-exempt entity's employees who are eligible to make section 403(b) elective deferrals could be excluded in applying coverage rules to the section 401(k) plan if (1) no employee of the tax-exempt entity is eligible to participate in the section 401(k) plan, and (2) 95% of the non-excludable employees who are not employees of a tax-exempt entity are eligible to participate in the section 401(k) plan. Rule reinstated retroactive to 1/1/1997.

CREATION OF NONREFUNDABLE TAX CREDIT TO ENCOURAGE RETIREMENT SAVINGS BY INDIVIDUALS

Tax credit for low- and middle-income savers

None.

Effective 1/1/2002 - 2006, a nonrefundable tax credit is provided to low- and middle-income savers who make contributions to eligible retirement savings plans, such as 403(b), 457(b), 401(k) and IRAs. The credit is claimed on the individual's income tax return, and applies to the first $2,000 in savings contributions. The credit amount is based upon the following adjusted gross income schedule:

Adjusted Gross Income Schedule

Joint Filers

$0--$30,000
(credit rate 50%)

$30,001--$32,500
(credit rate 20%)

$32,501--$50,000
(credit rate 10%)

$50,001+
(credit rate 0%)

Heads of Household
$0--$22,500
(credit rate 50%)

$22,501--$24,375
(credit rate 20%)

$24,376--$37,500
(credit rate 10%)

$37,501 +
(credit rate 0%)

Others

$0--$15,000
(credit rate 50%)

$15,001--$16,250
(credit rate 20%)

$16,251--$25,000
(credit rate 10%)

$25,001 +
(credit rate 0%)

• As under former law, contributions to eligible retirement savings plans continue to be deductible or excludable from income.
• The contribution amount upon which the credit is based is reduced by any distributions taken from any plan in the prior 2 years, the tax year of the contribution or the period after the tax year but prior to the individual's tax filing deadline for that year.