ONE-PERSON 401(k) PLANS

Even though the SEP limit has increase to 25% for 2002, sole-proprietors should still consider replacing their SEP-IRA with a one-person 401(k) plan. In order to contribute the $42,000 maximum to a SEP-IRA, a sole-proprietor must have self-employment (s/e) earnings of at least $218,600. Conversely, a sole-proprietor only needs s/e earnings of $150,000 in order to contribute $42,000 to a 401(k) Plan. Following is a comparison of contribution amounts at various s/e earnings amounts: Maximum contribution & deduction:

s/e earnings:	50,000	100,000	150.000	218,600
SEP-IRA	9,294	18,615	28,000	42,000
401(k) Plan	23,294	32,615	42,000	42,000
$ difference	14,000	14,000	14,000	0
% difference	150%	75%	50%	0%

Individuals age 50 or older may defer an additional 401(k) $4,000 catch-up contribution on top of the amounts shown above.

DEFINED BENEFIT PENSION AND 401(k) PLANS

401(k) deferrals are no longer considered for determining deductible limits. This change allows employers with rich defined benefit (DB) plans to institute 401(k) plans. For example, a sole-proprietor (with no employees) with a DB plan could establish a 401(k) plan and defer $14,000 into the plan in 2005, plus a catch-up contribution of $4,000. This would be in addition to the required DB contribution for 2005.

• 401(k) limit increased to $14,000 in 2005. For those age 50 and older, the 401(k) limit includes a $4,000 catch-up for $18,000 in 2004.
• Defined Contribution Limit increased to the lesser of $42,000 or 100% of compensation, $46,000 with catch-up.
• Compensation limit increased to $210,000 in 2005.
• Defined Benefit Limit increased to $170,000 for limitation years ending in 2005.
• Simple IRA limit increased to $10,000 in 2005.
• IRA contribution limit increased to $4,000 for 2005-2007, and $5,000 for 2008 and after. For those age 50 and older, the IRA limit is $4,500 and $5,000 in 2006.

• Profit sharing plans, including 401(k) plans, have an increased deduction limit for employer contributions from 15% to 25% of compensation.
• 401(k) deferrals will be deductible in addition to the employer 25% deduction limit.
• Compensation for deduction purposes will no longer be reduced for employee deferrals to a 401(k) plan or Section 125 cafeteria plan.

• The Multiple Use Test for 401(k) plans with employer match is repealed.
• The Same Desk Rule is replaced with a "severance from employment" standard.
• The IRS is directed to revise 401(k) hardship distribution regulations for a six-month suspension of participation.
• Matching contributions vest under a faster vesting schedule, either 3-year cliff or 6-year graded.
• Participants may elect Roth IRA treatment for elective contributions effective in 2006.

• Key Employee status based on the current year without regard to the four-year look-back.
• The Officer category of Key Employee will require at least $130,000 compensation.
• The top-ten owner rule is repealed.
• The 5-year look-back for distributions is shortened to one year.
• Matching 401(k) safe harbor plans are deemed to satisfy the top-heavy plans.
• Matching contributions will count toward satisfying the top-heavy minimums.
• Frozen defined benefit plans need not provide minimum accruals for non-key employees.

• Rollovers between retirement plans, 403(b), and 457 plans are permitted, subject to special rules.
• After-tax employee contributions are now also eligible for rollover.
• The IRS is given greater authority to waive the 60-day rollover period requirement.
• Involuntary cash-out rules, rollover accounts may be disregarded in determining whether an accrued benefit exceeds $5,000.
• Involuntary cash-outs that exceed $1,000 and are eligible for rollover will be rolled over automatically to an employer-designated IRA, unless the participant elects otherwise.

• IRS User Fees for determination letter requests will be waived for plan sponsors with 100 or fewer employees.
• For new plans, a tax credit equal to 50% of the expenses incurred by a small business with 100 employees or less for the first $1,000 in expenses for each of the first three plan years.

• Modification of minimum distribution rules - the IRS will update the life expectancy tables to reflect current longer life expectancies. This should result in smaller age 70½ required minimum distributions.
• 150% of Current Liability Deduction Limit for defined benefit plans is repealed.
• Tax credits for low-income savers to IRA, 401(k), 403(b), SIMPLE, SEP or 457 for up to $2,000 in annual contributions.
• Expanded Notice Requirements under IRC Section 204(h),
• Participant Loans allowed for owner-employees and Sub-Chapter S shareholders,
• New rules for ESOPs and multi-employer plans.
• The Defined Benefit Dollar Limit is actuarially reduced for benefits before age 62, rather than the Social Security retirement age.