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Newsletter
December
2003 Volume
20 - Number 4
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This newsletter is addressed to
our clients their attorneys, accountants and other professional advisors. Citations
may be included for those who want to refer directly to the source material. IN
THIS ISSUE:
Retirement Plan Limits for 2004: Many of the limits will increase for 2004
either by virtue of being indexed with the cost-of-living increase or by
statute.
401(k) Catch-Up Contributions To Your Profit
Sharing Plan: Consider adding a 401(k) provision simply to take advantage of the
catch-up 401(k) contribution feature.
Qualified Domestic
Relations Order (QDRO): The rate of divorce in the United States
has increased over the years; and, in many cases, qualified retirement plan
benefits represent the major marital asset.
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RETIREMENT PLAN LIMITS FOR 2004Many of the limits will increase for 2004. Some of the limits will increase due to
both the increase in the cost-of-living index and meeting the statutory
thresholds that trigger adjustment. Several of the limits are scheduled to
increase due to the statutory requirements of the Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRRA).
The FICA rates remain unchanged since 1990. For both employers and employees the FICA Tax is 7.65% (6.2% for Social Security Tax plus 1.45% for Medicare Tax). For self-employed individuals the FICA Tax is 15.3% (12.4% for Social Security Tax plus 2.9% for Medicare Tax). FICA Tax applies to earnings up to the Taxable Wage Base. |
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401(k) CATCH-UP CONTRIBUTIONS TO YOUR PROFIT
SHARING PLAN Employers that
sponsor profit sharing plans may want to consider adding a 401(k) provision
simply to take advantage of the catch-up 401(k) contribution. The catch-up
401(k) allows individuals age 50 or older to contribute an additional $3,000
in 2004 above and beyond any other dollar limit imposed by the IRS. For example, if the business owner will
receive the maximum $41,000 profit sharing contribution, the owner could
contribute another $3,000 for a total of $44,000 in 2004. As shown below,
the advantage of adding the 401(k) provision increases each year as the limit
on catch-up 401(k) increases.
401(k)
catch-up contributions were created in 2001 by the passage of the Economic Growth
and Tax reform and restructuring Act (EGTRRA). The 401(k) catch-up provisions
of EGTRRA are effective for contributions made after December 31, 2001. A
participant is considered to be age 50 for the purpose of making catch-up
contributions if they are age 50 as of the close of the plan year in which
the contributions are made. This is an individual participant limit and is
applied separately to participants and their spouses. |
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QUALIFIED DOMESTIC
RELATIONS ORDER (QDRO) The rate of divorce in the United States has increased over the years; and, in many cases, qualified retirement plan benefits represent the major marital asset. To address this issue the Retirement Equity Act of 1984 established a new category of plan benefit recipients called “alternate payees” under qualified domestic relations orders (QDROs). What is
a qualified domestic relations order?
A QDRO is
a domestic relations order 1) that creates or recognizes the existence of an
alternate payee’s right to, or assigns to an alternate payee the right to
receive all or a portion of the benefits payable with respect to a
participant under a qualified retirement plan and 2) that complies with
certain special requirements as described in (IRC section 414(p)(1)(A). What is
a domestic relations order?
A DRO is
a judgment, decree, or order (including approval of a property settlement
agreement) made pursuant to a state domestic relations law (including a
community property law) that relates to the provision of child support,
alimony payments, or marital property rights to an alternate payee. (IRC
section 414 (p)(1)(B). Who is
an alternate payee?
An
alternate payee is a spouse, former spouse, child or other dependent of a
participant who is recognized by a DRO as having a right to receive all or a
portion of the benefits payable under the qualified retirement plan with
respect to the participant. (IRC section 414 (p)(8). Payments made from a Retirement
Plan. The QDRO
requirements apply to all qualified retirement plans and also apply to
tax-sheltered annuities. The QDRO rules have also been extended to
governmental plans and church plans; however, distributions from such plans
are treated as made pursuant to a QDRO without the necessity of satisfying
special QDRO requirements. Although the QDRO rules do not apply to IRAs or
Roth IRAs, the transfer of an individual’s interest in an IRA or Roth IRA to
the individual’s spouse or former spouse under a divorce or separation
agreement is not considered a taxable transfer made by such individual; and
thereafter, the IRA or Roth IRA is treated as maintained for the benefit of
the spouse or former spouse. 401(k)
plans have some special distribution requirements, but a qualified retirement
plan will not be treated as failing to satisfy the general qualification
requirements and the restriction on distributions under a 401(k) plan solely
because of a payment to an alternate payee pursuant to a QDRO. This is the
case even if the plan provides for payments pursuant to a QDRO to an
alternate payee prior to the time the plan may make payments to a
participant. Tax consequences of a QDRO
distribution. If the alternate payee is the
spouse or former spouse of the participant, any distribution from a qualified
retirement plan to such alternate payee pursuant to a QDRO will be included
in the alternate payee’s gross income for the year of distribution. However,
the distribution is usually eligible to be rolled over to an IRA or to
another qualified retirement plan. As such, any portion that is an eligible
rollover distribution is subject to mandatory 20 percent income tax
withholding if the distribution is not rolled over. If a
spouse or former spouse alternate payee rolls over to an IRA from a qualified
retirement plan and commences distributions from the IRA prior to age 59 ½,
the 10 percent tax on early distributions may apply. However, the alternate
payee can commence distributions from the IRA prior to age 59 ½ in a series
of substantially equal periodic payments and avoid the 10 percent tax on
early distributions. The distribution to an alternate
payee who is not the spouse or former spouse of the participant (e.g., a
child) may not be rolled over to another qualified retirement plan or to an
IRA. The 10 percent tax on early
distributions from qualified retirement plans does not apply to any
distribution to any alternate payee if the distribution is
pursuant to a QDRO. |
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