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IRS catches up on rules for
“catch-up” retirement contributions
Starting January 1, 2002, the Economic
Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) will allow
employees who are age 50 or older to make additional tax-deferred
contributions toward their retirement nest egg. Just in time for the
January “kickoff”, the IRS has developed detailed rules that will help
employers of all sizes quickly add language into their plan’s documents
allowing these “catch-up” contributions.
New IRS
rules help plan administrators
The IRS recently issued detailed rules to
cover the new catch-up contributions. None too soon, however, since,
although contributions can start promptly on January 1, 2002, employees
can only make them if their employer’s retirement plan contains language
that allows them to. The new IRS rules help employers – whether a small
business or a giant corporation -- implement catch-up contribution
language into their retirement plans.
According to the Treasury Department, "This
catch-up contribution is a great opportunity for individuals age 50 and
above to put away additional money for their retirement ... We have
provided simple and straightforward rules that plan administrators will
be able to use in order to implement catch-up contribution provisions in
their plans by the January 1, 2002 effective date."
“Catch-up”
contributions allow additional pre-tax salary to be stashed away by
those age 50 and older who are still working will amount to $1,000
during 2002, rising by $1,000 per year thereafter until reaching the
$5,000 level in 2006. One exception --- employers covered by a SIMPLE
401(k) or a SIMPLE IRA plan will be limited to smaller catch-up
contributions: $500 in 2002, $1,000 in 2003; $1,500 in 2004; $2,000 in
2005; and $2,500 in 2006 and thereafter.
Caution:
Employees who do not participate in a
retirement plan that allows catch-up contributions can still make
deductible catch-up contributions into their own personal individual
retirement account (IRA), but only if their income level is low enough –
for 2002, that means $54,000 for joint filers and $34,000 for single
taxpayers. Those who are self-employed without an employer-sponsored
plan, of course, can set up regular deductible IRAs no matter what their
income level. In either case, however, deductible catch-up
contributions to regular IRAs are allowed only at a much lower level:
$500 each year from 2002 through 2005, and $1,000 annually thereafter.
Some of
the rules
The new IRS rules on catch-up contributions
literally go on for pages on the details needed to make sure everyone
implements catch-up payments correctly. Here are some of the
highlights:
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Any employee who will turn age 50 or
older during 2002 will be eligible to start making catch-up
contributions starting on January 1st , 2002, no matter
when the employee’s birthday falls during the year, and even if the
employee dies in 2002 before his or her 50th birthday.
Employers offering multiple retirement
plans must either offer catch-up contributions in all their plans or
in none of them.
All plans offering catch-up
contributions must comply with certain "universal availability
requirements" to prevent excluding specific groups of employees.
However, a plan will not fail the universal availability
requirements solely because an employer-provided limit does not
apply to all employees. As under current law, a plan can provide
for different employer-provided limits for different groups of
employees, as long as each limit satisfies certain general
nondiscriminatory availability requirements.
The new catch-up contribution rules
obviously offer a great opportunity for those eligible individuals to
get some additional traction towards their retirement savings goals. If
you think that you may benefit from these rules as an individual or you
are an employer or plan administrator who needs some guidance as to how
to integrate the new language into your retirement plans, please contact
the office for additional assistance.
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