Under prior law, annual additions to defined contribution plans are limited to the lesser of (a) 25% of compensation or (b) $35,000 (for 2001). Annual additions are the sum of employer contributions, employee contributions, and forfeitures with respect to an individual under all defined contribution plans of the same employer. The $35,000 limit is increased in $5,000 increments.

Effective for plan years beginning after December 31, 2001, the $35,000 limit on annual additions is increased to $40,000. The Economic Growth and Tax Relief Reconciliation Act of 2001 also increases the 25% of compensation limitation to 100% effective for plan years beginning after December 31, 2001.

Defined Benefit Plan Limits

Under prior law, the maximum annual benefit payable at retirement is generally the lesser of (a) 100% of average compensation or (b) $140,000 (for 2001). The dollar limit is adjusted in $5,000 increments. Also, currently, the dollar limit is reduced if benefits under the plan begin before the Social Security retirement age (currently age 65) and increased for benefits beginning after normal retirement age.