Reprinted from the “Orange County Lawyer,” March 2004
DEDUCTION, DEDUCTIONS AND MORE DEDUCTIONS By Stanley Weisleder President, Actuaries Unlimited, Inc.
Our experience shows that of our 2,000 plus clients we found that at least two thirds of them have only one question when it comes to their qualified retirement plan: “What is my contribution/deduction?” When we explain that the plan also provides valuable retirement benefits they are not nearly impressed as they are with the amount of their contribution/deduction for the current plan year.
Prior to the Employee Retirement Income Security Act of 1974, (ERISA) enacted into law on Labor Day of that year, plan contributions/deductions could never be predicted prior to receiving approval from the IRS of the plan documents and the benefit formulas contained therein. The reason being that the various IRS Districts did not adhere to the same set of rules. In some Districts you could get a 35% Money Purchase Plan approved but not in others. Sometimes you were able to get an 85% Defined Benefit Plan formula approved, but not always. Approval of the plan formula was contingent solely upon the opinion of the local District Director and whether or not it was deemed to be “proper.”
With the advent of ERISA, and since then, all of the IRS Districts have had to comply with the same set of rules and regulations. The ERISA limits were set at the lesser of 25% of compensation or $25,000 for a Money Purchase Plan and the lesser of the high three-year average of compensation or $75,000 for a Defined Benefit Plan. The 1.4 rule permitted one to have a full Defined Benefit Plan and a Money Purchase Plan equal to 40% of the maximum Money Purchase benefit or $10,000. Profit Sharing Plans were limited to 15% of compensation. Defined Benefit Keogh Plans (for the self-employed or S-Corporations) generated contributions of up to $15,000 per year.
Over the next eight years, cost of living adjustments (COLAS) brought these limits up to $45,475 for Money Purchase Plans and $136,425 for Defined Benefit Plans. When taken in combination one could have an annual pension of $136,425 commencing at age 55 plus a Money Purchase contribution of $18,190.
For the twelve-year period from 1982 to 1994 the government, commencing with the Tax Equity and Fiscal Responsibility Act, (TEFRA) passed a series of pension laws that were designed to reduce benefits and cut back on contributions/deductions. If you put in too much or too little, or did it too soon or too late, or if you took out too much or too little, too soon or too late, you would be penalized. Such was the order of the day. The only advantage to TEFRA was that it put Defined Benefit Keoghs on the same benefit level as C-Corporation sponsored plans.
Starting in 1996, the pendulum began to swing back the other way with the passage of the Small Business Job Protection Act, (SBJPA) followed by the Taxpayers Relief Act, (TRA) in 1998. On June 7 of 2001 President Bush signed the Economic Growth and Tax Relief Reconstruction