Many
salary reduction plans go beyond the premium payment plan format and permit employees to reduce their salaries through a flexible spending account (FSA).
By making these reimbursements tax-free, what the
salary reduction plan does is to convert all of these expenditures that you would normally incur into "deductible" expenses--whether or not they normally would be allowed as a deduction.
The cost of these non-taxable benefits are specifically excluded from an employee's gross income through this
salary reduction plan.
New Mexico argues that the meaning of the term is dear and that a salary reduction agreement excludes arrangements such as New Mexico's in which the employees' participation in the
salary reduction plan is mandated by state statute.
* IRS guidance dealt with the proper sourcing of compensation performed partly within and outside the U.S., employment tax treatment of payments for employment termination, taxation of transferred partnership interests and
salary reduction plans.
Beyond those exceptions, section 409A applies broadly to
salary reduction plans, supplemental employee retirement plans (SERPs), parachute payments, phantom stock plans, severance plans, insurance commissions, discounted stock options, certain SARs, non-excluded fringe benefits, etc.
To avoid immediate taxation, deferred compensation plans--which include
salary reduction plans, 401(k) wrap-arounds and supplemental executive retirement plans--executed after Dec.
The bill would increase the dollar limit on annual elective deferrals under Section 401(k) plans, Section 403(b) annuities, and
salary reduction plans in $1,000 annual increments until the limits reach $15,000 in 2005.
Other provisions would relieve top-heavy rules, streamline the reporting rules and the deduction rules for small businesses in order to afford them the opportunity to offer more generous defined contribution plans, eliminate the IRS user fees for small business plans and provide incentives for employers to establish
salary reduction plans that will automatically enroll employees.
* Increase and index the current catch-up contributions, and allow catch-up contributions under all
salary reduction plans for anyone age 50 and older.
* Catch-up provisions for
salary reduction plans (e.g., 401(k) and TSA) at age 50, which increase from $1,000 in 2002 to $5,000 in 2006 and beyond.
"Employees who aren't contributing to
salary reduction plans should ask themselves, 'Can I afford not to?'" says Charles Ross, an Atlanta-based certified financial planner.