If you have a company-sponsored pension plan, now is a good time to meet with your plan’s administrator to review impacts of the Tax Reconciliation Act signed by President Bush on June 7.
“The new law will dramatically affect retirement starting in 2002,” says William Kellog, financial advisor at AXA Advisors. “Everyone should review with their advisor what impact it will have on their plan.” Changes for 2002 include higher employee and employer contribution limits and more pension portability. Employees and employers are now able to combine different pension plans with fewer tax consequences, Kellog says.
Three-year “cliff vesting” is another significant change. Employers may now elect to fully vest employee contributions three years after an employee becomes eligible to participate in the 401(k). Current rules allow employers to vest their contributions up to six years on a gradual basis – 20 percent each year, for example.
If you decide to change to cliff vesting this next year, you must start with contributions prospectively. In other words, the change must deal with contributions in the future and must be changed for everybody in the plan, says David Wray, president of the National Profit Sharing Council of America.
The new tax laws also establish greater contribution limits. Plan participants can now contribute a maximum of $11,000 per year, up from $10,500. An owner, however, can put in only two percent more than the average contribution of all participants, says Todd Sobel, financial planner with Salomon Smith & Barney.
If you do not offer a retirement plan, the new law has tax incentives to help you start. If you have fewer than 100 employees, the new law offers a tax credit up to $500 for new retirement plans. “It’s a dollar for dollar reduction,” Sobel says. With these new changes, you may consider combining different retirement plans and consider an SEP or Simple IRA instead of a 401(k) or vice-versa.