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Author: mwyattea Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 79089  
Subject: Re: Max 401K under Pension reform? Date: 5/14/2001 2:05 PM
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As far as the individual limit goes, the more important change is the change in 415(c)(3) taking the maximum allocation (this includes employee 401k deferrals, employer match, and discretionary employer contributions) from 25% of comp to 100% of comp. Therefore, in your example of the 50,000 employee, he or she could go to the full 10,500 401k deferral. More importantly, this won't affect his or her ability to receive an employer match or profit sharing contributons.

The 15% to 20% increase is an amendment to the current IRC 404 employer deductibility limitation. This applies on an aggregate basis to the total of all contributions by the Employer. This never had a direct impact on a particular employee (although some plans might have cut back on the maximum allowable deferral percentage to make sure that there was enough deductibility room for matches and discretionary profit sharing contributions so the improvement to 20% may make employers more likely to raise their caps on maximum deferral percentages).

As far as reforms to the ADP test (which is really what is applying to HCE limits on deferrals), haven't seen much of anything. 401k plans will still need adequate participation by rank and file employees in order to allow HCEs to defer. Only change of recent is the introduction of "safe harbor" 401k plans which provide that if the employer makes certain guaranteed contributions, then the plan is automatically deemed to have passed ADP test for year.

Note that these changes are to be effective for plan years beginning in 2002 (House bill had 2001 effective year but looks like will be shifting to 2002).
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