There are many good retirement plan tax planning ideas that you might want to take to your clients this year as a result of EGTRRA. In this issue and the next several issues, we will highlight, in very practical terms, some of the ideas. As always, if you have questions or would like more detailed information, give us a call.

If your client has a money purchase plan, the plan should be terminated in 2002. It should be replaced with or merged into a profit sharing plan.

A money purchase plan is a defined contribution plan with a fixed, mandatory contribution requirement. For example, a typical money purchase plan requires the employer to contribute 10% of eligible payroll each year. The money purchase plan was usually adopted by the employer because the employer wanted to contribute up to 25% of eligible payroll and the profit sharing plan limit is 15% of eligible payroll.

Starting in 2002, the contribution limit for profit sharing plans is increased to 25%. The limit for a combination profit sharing plan and money purchase plan is also 25%. So, why would an employer choose the combination profit sharing plan and money purchase plan with a fixed contribution requirement rather than a single profit sharing plan with total contribution flexibility from year to year?

There are other advantages: only one form 5500 to file, only one plan to amend when the pension laws change and simplified annual administration. Also, it is relatively easy and straightforward to terminate a money purchase plan and merge it into a profit sharing plan.

Starting in 2002, retirement plans can accept rollovers from IRAs, 403(b) plans and 457 plans. We don’t think amending a plan to accept these kinds of rollovers is a good idea.

Prior to 2002, there was a maze of guidelines to follow as to what funds could be rolled over from one kind of deferred retirement plan or account to another. It was easy for the uninformed to make a costly mistake and there was little logic to the rules.

Now, most, but (of course and unfortunately) not all, of the restrictions on rollovers have been removed. In particular, it is now acceptable for a retirement plan to accept rollover of IRA funds. Heretofore, only IRA funds that were originally rolled over from a retirement plan could be rolled back into a plan. So, if a plan is properly amended, it could allow employees to roll their individual IRAs into the retirement plan.

At the very least, this would be a great convenience for the employees. They would have fewer accounts to track. They may be paying fees to maintain the IRA’s that could be eliminated. Maybe they like the investment options in the retirement plan better than their IRA investment options.

But, from the employer’s standpoint, there is little, if anything, to be gained from accepting IRA rollovers. One big concern is the fiduciary responsibility that comes from watching over someone else’s funds. Plus, accepting IRA funds will add another unique level of record keeping to keep up on.

We think a better approach for both employers and employees would be to help the employees understand how to manage their IRAs. There are few investment options that an individual could not get on his or her own through an IRA. For example, the major banks, mutual fund companies and other investment groups that provide investments to retirement plans offer the same or nearly identical investments to their IRA customers. There is no need for the retirement plan to be an intermediary. That’s the bottom line.

In the next issue we will discuss some new law plan features you should consider adding to your plans.