Easing of Restrictions on How Much Can Be Contributed to Employee Benefit Plans

The new law makes a number of changes that will increase how much can be contributed to employee benefit plans, the most important of which are as follows.

• Employee elective deferrals will count as eligible compensation: Under existing law, elective pretax employee contributions to 401(k) plans and cafeteria plans could not be counted as eligible compensation for total contribution limits. Thus, a $30,000/yr. employee contributing $1,000 to a 401(k) plan and $500 to a cafeteria plan was considered to have $28,500 in eligible compensation. Total 401(k)/ESOP contributions, for instance, could then not exceed 25% of $28,500. Under the new law, these deferrals will count as eligible pay, and the entire $30,000 will be eligible. The new law is applicable for plan years starting after December 31, 1997.
• Family attribution rules are eliminated: Under existing law, the compensation of a spouse or lineal descendant covered by the same plan was considered compensation for the other spouse or the parent. A husband and wife each making $80,000 were thus considered to be making $160,000. This could limit the amount they could receive in annual contributions due to the $150,000 limit on compensation eligible for contributions. This rule is now repealed for plan years starting after December 31, 1996.
• Aggregation of defined benefit and contribution plan limits repealed: Under existing law, if a company maintains both a defined benefit plan and a defined contribution plan, it must use a formula to calculate an amount that will be considered an annual addition for the purposes of its defined benefit plan. It must then add that to what it contributes to its defined contribution plans to determine if it exceeds the maximum annual contribution limits. Effective for plan years starting after December 31, 1999, this law is repealed and the two do not need to be aggregated.