The NASE backs new incentives for personal savings and new small-business pension plans that are simpler and more financially attractive to micro-business owners.

Background:
As the population of the U.S. becomes increasingly older and the ‘baby boom’ generation begins to reach the age of retirement, the need for reforming pension plans to ensure retirement security becomes critical.

Many of the self-employed and small-business owners are discouraged at the costly and complicated burdens they currently must comply with to start up and maintain retirement plans for themselves and their employees. Over 40 million Americans are employed in businesses with 100 or fewer employees, and only 8 million of them are earning pension benefits.

The creation of the SIMPLE plan came about in the 104th Congress and was intended to remove some of the complexities from setting up a pension plan for small businesses. However, despite the positive attributes of SIMPLE plans they, also restrict flexibility. Also, companies utilizing SIMPLE plans can only contribute $6,000 per year versus the $10,500 limit of 401(k) plans.

Legislative Activity:
The NASE will continue its efforts to promote savings and participation in retirement plans amongst the self-employed and micro-businesses through our efforts with the Savings Coalition of America (www.savingscoalition.org).

In 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 (H.R. 1836) become law. It contained provisions that increased from $2,000 to $5,000 the limit on annual contributions to traditional and Roth IRAs by 2008. The limit will be raised to $3,000 in 2002, $4,000 in 2005 and $5,000 in 2008. After 2008, the limits on IRA contributions will increase with inflation in $500 increments.

A “catch-up” provision increases the amount individuals ages 50 and older are allowed to contribute by $500 in 2002, and additional $500 increments in 2003, 2004, 2005 and 2006.

The legislation permits tax-free withdrawals from IRAs for charitable purposes. It allows workers to qualify for pensions sooner and makes it easier for them to take their retirement benefits with them if they change jobs. Employees will become fully vested in pension plans after three years rather than five.

The law also raises the limit on annual benefits under defined-benefit pension plans to $150,000 in 2002 and $160,000 in 2005, and increases the amounts employers could put into defined-contribution plans.

It also increases the annual employee contribution limits on tax-deferred defined-contribution plans, including:

• 401(k) plans (used by private companies) and 403(b) plans (used by schools and other tax-exempt organizations) from $10,500 to $15,000 over five years, with annual adjustments for inflation in $500 increments thereafter;

• 457 plans (used by state and local governments) from $8,500 to $11,000 in 2002, and then to $15,000 over the next four years, with annual adjustments for inflation in $500 increments thereafter; and

• SIMPLE plans (used by small businesses) from $6,500 to $7,000 in 2002, $8,000 in 2003, $9,000 in 2004 and $10,000 in 2005, with annual adjustments for inflation in $500 increments thereafter.

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