ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, January 20, 1997 TAG: 9701210022
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF/STAFF WRITER
SEVERAL changes spread out over the next three years should make it easier for employees to be covered under 401(k) retirement plans.
The 401(k) program "is probably the most popular plan out there," said Donald Potter Jr. of the Roanoke office of PR Taylor Benefit Strategies, a pension and investment consultant.
The latest changes to the 401(k) plan, which is named for its section in the federal tax code, "really make it a little easier to access, really make it a little more user friendly," Potter said.
The Institute of Certified Financial Planners said 401(k) plans are a type of defined contribution plan in which employees can defer portions of their paychecks into a retirement account, sometimes with matching contributions from employers.
Defined contribution plans, as their name suggests, allow for a specific amount of money to be set aside for retirement. The amount available at the time of retirement depends on the performance of the funds in which the money is invested.
Defined benefit plans, on the other hand, are like traditional company pensions. Retiring employees receive a specific monthly payment, usually based on salary and years of employment.
Despite their popularity, however, 401(k) plans are not as common among smaller companies as they are in larger corporations. The planners said this is because 401(k) rules have been cumbersome and restrictive.
One big hang-up is that the higher-paid employees and owners of small businesses have been severely restricted in how much they can set aside under a 401(k) plan.
The Small Business Job Protection Act, more popularly known as the minimum wage bill, loosened some of those restrictions when it was passed last August.
Potter said the act also created the new Simple IRA that can be used instead of the simplified 401(k) provisions. He said the new Simple IRA is easier to deal with and requires less compliance than the 401(k) does, so it should be even more attractive to small businesses.
One change in the 401(k) program involves the calculation of contributions.
The financial planners said 401(k) plans have had a complex formula to ensure that the top-paid employees and owners of the company can't defer a significantly greater percentage of their salaries than can lower-paid employees.
This so-called "nondiscrimination" testing has created a lot of quarterly and year-end adjustments of deferrals. Sometimes, the rules required the plan to return excess deferrals to the owners and executives.
Faced with this headache and expense, the planners said, many small-business employers simply gave up on having a plan.
Since Jan. 1, however, this deferral formula is based on the average percentage of deferred income of the lower-paid employees for the previous year instead of for the current year.
This change should make planning and nondiscrimination testing much easier and less expensive for employers because it can be done accurately at the start of the year.
A second change simplifies the definition of a highly-paid employee.
Highly compensated employees now are defined as those who own 5 percent or more of the company or who were paid more than $80,000 during the preceding year. This pay cap will be indexed for inflation.
Before Jan. 1, the pay cap was $66,000.
In the alternative, the employer can choose to define highly compensated employees as those who make more than $80,000 and who are in the top-paid 20 percent of the company. The financial planners said this is good news for companies with substantial numbers of highly paid employees.
Starting in 1999, employers can satisfy even the simplified nondiscrimination rules by electing so-called "safe harbor" options.
In this third change, for example, the employer can either:
Match dollar for dollar the deferred pay of all lower-paid workers up to 3 percent of pay and 50 cents on the contributed dollar between 3 percent and 5 percent of pay.
Contribute 3 percent to 6 percent of pay equally for all plan participants regardless of how much (or if) they defer their income.
The financial planners said this change will make administration of 401(k) plans easier. But they said many employers may balk at having to match deferrals.
The fourth change affects the rules for a family owned business.
Under the old 401(k) and other qualified retirement plan rules, family run businesses in which two or more family members worked, or where family members of one of the top 10 paid employees worked, found their pay lumped together as if it were earned by a single member.
This lumping of pay often restricted how much could be set aside in a retirement plan for a given individual, the planners said.
The new law repealed that rule, and now each family member will be treated separately. Again, this should make 401(k) plans more attractive to owners.
Finally, many tax-exempt organizations such as trade associations, chambers of commerce and charitable organizations - but not government bodies - can now sponsor 401(k) plans.
The planners said most of these new rules will require amendments to existing plans, as well as encourage companies lacking plans to consider adopting them. Any employer using or contemplating such a plan should see a tax or pension specialist.
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