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The Economic Growth and Tax Relief Reconciliation Act of 2001 signed into law last summer contains many provisions that will change the way you save for your retirement. Unlike many of the non-pension portions of the bill that have delayed implementation dates, most of the pension changes are effective in 2002. The following will explain some of the changes that will affect your law firm’s plan, which will in turn affect its associates. FIRM-SPONSORED PLANS Most law firms sponsor a 401(k) plan. With such a plan, a participant can elect to put away up to $10,500 of his or her own money into the plan. The maximum amount one can contribute to a 401(k) will increase gradually over the next few years, starting at $11,000 in 2002, increasing annually in $1,000 increments until a maximum annual contribution of $15,000 is reached in 2006. If a firm’s plan had problems passing the discrimination test (ADP test) in prior years, this increased contribution will not help matters. Firms that have failed the discrimination test may want to consider a “safe harbor 401(k) plan.” If a firm puts in a certain amount of fully vested contributions on behalf of employees, the discrimination test is eliminated. Associates 50 years of age and older will be able to make an extra “catch-up” contribution to their 401(k) plan. The catch-up contribution is $1,000 in 2002, and increases to $5,000 in 2006. Thus, by 2006, for participants over 50 years of age, a total contribution of $20,000 can be made to a 401(k) plan, a hefty increase over today’s limit of $10,500. The IRS limits the amount of compensation considered when figuring allowable contributions to a plan. For instance, if a highly paid associate is making $250,000, the IRS treats the individual as if they are making $170,000, the maximum compensation limit for 2001. For years beginning in 2002, that maximum compensation will increase to $200,000 and will be indexed for inflation in $5,000 increments. Thus, for an associate making in excess of the compensation limit, if a firm was making a 3 percent contribution to a plan for employees, the contribution would increase by $900 (3 percent of the extra $30,000 of compensation considered). In 2001, an individual plan participant could have no more than $35,000 or 25 percent of compensation, whichever is less, contributed to their defined contribution retirement account. Under the new law, effective in 2002, an individual plan participant could have contributed to their account the lesser of $40,000 or 100 percent of compensation. Additionally, for those who are fortunate enough to participate in a defined benefit (pension) plan, the maximum annual payout one could receive will increase from $140,000 per year to $160,000 per year. Both of these provisions are more likely to effect highly compensated partners in a firm (something to look forward to). A plan sponsor is limited to the amount it can contribute and deduct to a defined contribution profit sharing plan. For 2001, that limit was 15 percent of eligible compensation. Any amount contributed in excess of that will be nondeductible and subject to an excise tax. In 2002, the 15 percent limit increases to 25 percent. Also, in 2001 and prior years, if an employee contributes his or her own money to a 401(k)/profit sharing plan, that employee contribution counts as if it is an employer contribution for the 15 percent deduction limit. In 2002, employee contributions to their 401(k) accounts no longer count towards the deduction limit. These two changes will allow law firms making generous contributions to their plans to make more contributions without worrying about these limits. ROLLOVERS Over the last several years, the IRS has attempted to improve the portability of benefits among plans. Effective in 2002, the new law will allow rollovers between qualified retirement plans (401(k), profit sharing, pension plans, etc.) and 403(b) and 457(b) plans. Additionally, rollovers of traditional IRAs into employee sponsored plans will be permitted even if the IRA is not a pure conduit IRA. These provisions will offer employees changing jobs more flexibility in transferring their retirement funds. Many law firms have recently put in place retirement plans referred to as cross-tested, age-based or new comparability plans. These are types of profit sharing plans which allow partners or older, more highly compensated employees to put away more money than rank-and-file employees without running afoul of the discrimination rules. Although not part of the new legislation, a recent change to the IRS regulations may result in more funds being contributed to associates and rank-and-file employees’ accounts in 2002 of firms that sponsor such plans. In 2001, the minimum amount that was set aside for employees in this type of plan was typically 3 percent of pay. In 2002, under the newly finalized regulations, most of these types of plans will be required to put away a minimum of 5 percent of pay for employees. IRA CONTRIBUTIONS If you do not participate in a company plan, or if your income is below a certain level, you may be making a deductible contribution to a traditional IRA or a nondeductible Roth IRA contribution. The maximum that can be contributed to either of these accounts for 2001 is $2,000. The limit increases to $3,000 in 2002 and increase gradually to $5,000 in 2008. Like the 401(k) plan changes mentioned earlier, a special catch-up contribution will allow people age 50 and older to contribute to their IRA an extra $500 in 2002, increasing to an extra $1,000 in 2006. When fully phased in, an individual 50 or older can contribute $6,000 to a traditional or Roth IRA, $12,000 if his or her spouse is also eligible. For those earning $25,000 or less (hopefully your pro bono clients and relatives, not you), the act creates a tax credit for 50 percent of the contribution up to $2,000 made to a 401(k), 403(b), 457(b) plan or IRA. In order to encourage savings for retirement at the lower level of the income scale, the government will subsidize a portion of the contribution. This credit is available in the years 2002 through 2006. Clarence G. Kehoe is tax partner and director of Anchin, Block & Anchin’s Pension and Employee Benefits Practice, as well as a member of the firm’s Law Firm Service Group.

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