The limit for voluntary deferrals will increase to the lesser of $13,000 or 100% of compensation in the year 2004, increasing by $1,000 per year thereafter, going up to $15,000 by 2006.
Catch up contributions will be permitted for those who reach age 50 by the end of the plan year. The additional pre-tax contributions can be up to $3,000 in 2004, increasing by $1,000 per year thereafter, going up to $5,000 by 2006.
In this manner, those age 50 and older can make total 401(k) contributions of $16,000 in 2004, increasing by $2,000 per year thereafter, going up to $20,000 by 2006.
In the case of corporations, 401(k) plans that benefit the owner-employee can be established in addition to a Defined benefit Plan. If there are non-owner employees, then the standard ADP/ACP Test requirements must be met.
Participant loans to owner-employees have been permitted only on behalf of those participants in plans that were sponsored by C-corporations. As of January 1, 2002, participant loans have been permitted to all owner-employees regardless of the type of plan sponsor. Loans are still subject to a maximum equal to the lesser of $50,000 or 50% of the participant’s vested accrued benefit or $10,000 if applied for under the de-minimus rule. Unless the loan is for the purchase of the participant’s principle residence it must be repaid within five years with payments amortized not less than quarterly at an appropriate rate of interest, which is currently acceptable to IRS as “prime plus two.”
Although not generally known, ERISA qualified plans (those that cover at least one non-owner employee) have creditor protection which means that the plan assets are protected and exempt from attachment.
In 2004, the maximum permissible compensation for purposes of calculating benefits or contributions is $205,000. What this means is that future contribution or benefit formulas can be reduced without decreasing benefits or contributions for the highly paid.