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Newsletter
March
2002 Volume
19 - Number 1
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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:
California Non-Compliance
With 2002 Law Changes: California
has not adopted the federal increases in retirement plan contribution limits
effective in 2002.
Combined Defined Benefit
Pension and 401(K) Plans: Effective
in 2002, 401(k) deferrals are no longer considered for determining deductible
limits.
“Part-Time” Employees Need
Careful Consideration: What you
and I consider a part-time employee may not be the same as what a qualified
retirement plan considers a part-time employee.
SEP-IRA Limit Increased To
25% For 2002: On March 9, 2002, the President signed into law the Job
Creation and Worker Assistance Act (JCWA) of 2002.
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.
Tired Of
Withholding Income Taxes? Want to save time, money & reduce your
fiduciary liability?
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California
Non-Compliance With 2002 Law Changes
California
has not adopted the federal increases in retirement plan contribution limits
effective in 2002. As of March 11,
2002, the CA Senate approved bill (SB 657) to conform the CA personal income
tax law to EGTRRA’s retirement provisions.
This bill is now awaiting action by the General Assembly. While no one knows for sure, we do expect
CA to comply before year-end.
However, unless or until CA complies with EGTRRA, here are a few
precautions: ·
The CA deduction limit for 401(k) deferrals is still
$10,500. 401(k) catch-up deferrals
are not deductible for CA. ·
Do not rollover money from 403(b) or 457 plans or the
rollover could be taxable for CA income tax purposes. ·
The CA deduction limit for profit sharing plans is still
15%. ·
Sole-proprietors, partners, & subchapter S-corporation
owners should not take participant loans. |
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Combined
Defined Benefit Pension and 401(K) Plans
Effective in 2002, 401(k) salary
deferrals are no longer considered for determining deductible limits to
qualified retirement plans. This
change allows employers with rich defined benefit plans to institute 401(k) plans. For example, a sole-proprietor, with no
employees, and a defined benefit plan could establish a 401(k) plan and defer
$11,000 into the plan in 2002, plus a catch-up contribution of $1,000. This would be in addition to the required
defined benefit contribution for 2002.
Please call Jack Tapson at 650-696-9609 for more information. |
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“Part-Time” Employees Need Careful Consideration What you and I consider a part-time employee may not be the same as what a qualified retirement plan considers a part-time employee. For all practical purposes, a qualified plan may not require more than 1000 hours of service for purposes of eligibility, vesting and benefit accrual. As such, an employee who is credited with at least 1000 Hours of Service in a plan year is considered to be a full time employee (IRC Section 410(a)(3)). Furthermore, consider that all hours for which the employee is paid must be included when determining the total hours credited for the plan year. “Hour of Service” means each hour for which an Employee is directly or indirectly paid or entitled to payment by an Employer or Affiliated Entity. This means that hours of service associated with paid vacation, sick leave and back pay must be credited as hours worked. Also
consider that an individual reemployed under USERRA is treated under the plan
as not having incurred a break in service because of the individual's period
of “qualified military service”, which is
considered to be service with the employer for the purpose of determining
eligibility, vesting credit and accrual of benefits under the plan. (See the article “Uniformed Services Reemployment And Plan Benefit Rights” in our
December 2001 Newsletter for more information on qualified military service. Now lets
take a look at a typical “part-time” employee who works 20 hours per week. If
such an employee is paid for 20 hours per week for 52 weeks, the total hours
of service credited for the year is equal to 1040 hours. A retirement plan regards this “part-time”
employee as a “full-time” employee who has earned a year of service for
eligibility, vesting and benefit accrual. “Part-time”
employees, who are not properly credited with 1000 or more hours may not
enter the plan when required, will not receive their fair share of the plan
contribution nor receive proper vesting credit. Also consider the reverse situation where an employee who is
credited with less than 1000 hours of service is reported with over 1000 hours. In this case the employee may erroneously
enter the plan and receive an allocation of contribution. In either case the correction process can
be complicated and will generate additional expenses for plan administration.
All these factors must be considered when reporting employee information used for plan administration purposes. To reduce the chances of misreporting employee information, it is recommended that all employees, including those who are considered “part-time” be included when reporting employee information for plan administration. In addition, complete employee information must be reported each year, even if no contribution is made to the plan. Eligibly, vesting credit, determination of Highly Compensated and Key Employees all depend on accurate current and prior year information. |
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SEP-IRA
Limit Increased To 25% For 2002
On March 9, 2002, the President
signed into law the Job Creation and Worker Assistance Act (JCWA) of
2002. This law increases SEP contributions
from 15% to 25% beginning in 2002.
JCWA made a technical correction to Internal Revenue Code (IRC)
Section 402(h) allowing the increase. |
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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 $40,000 maximum to a SEP-IRA, a sole-proprietor must have self-employment (s/e) earnings of at least $208,050. Conversely, a sole-proprietor only needs s/e earnings of $152,304 in order to contribute $40,000 to a 401(k) Plan. Following is a comparison of contribution amounts at various s/e earnings amounts:
We charge
$550 to set up a one-man 401(k) plan and $550 for annual administration. If you have any questions regarding 401(k)
plans, please call Mark Neumann at 650-696-9616. |
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Tired Of Withholding Income Taxes? Want to save time, money & reduce
your fiduciary liability? You can
eliminate having to deal with depositing income tax withholding, writing
distribution checks, and filing payroll tax returns for your retirement
plan. Whether your assets are pooled
or self directed, you can hire an asset provider or custodian to handle all
withholding responsibilities for pension distributions. Please call Mark Neumann at 650-696-9616
for more information. |
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