Beginning next year, participants in the 401(k) and 457 savings plans may contribute an additional $1,000 to their accounts. The U.S. tax law has boosted the annual contribution limit from $10,000 to $11,000.

Furthermore, participants who are 50 or older will be allowed to contribute an extra $1,000 each year above the annual contribution limit.

The amounts will increase each year until 2006, when the basic limit will be $15,000 and the limit for those 50 and over will be $20,000.

Many members are taking advantage of the 401(k) benefit, which the city's Deferred Compensation Plan started to offer this year under a major 2001 benefits agreement with municipal unions.

Both 401(k) and 457 plans allow participants to save for retirement with before-tax dollars.

Participants' contributions reduce their current taxes. They can accumulate potential earnings that are not taxed until the funds are withdrawn.

The 401(k) plan is an important addition to the array of benefits enjoyed by municipal employees, said Rosaria R. Esperon, administrator of the DC 37 Health and Security Plan.

Warning on 401(k) plans
"The recent stock market debacle and the Enron scandal have pointed to a weakness of 401(k) plans as a primary vehicle for retirement savings," Ms. Esperon said.

"For public employees like our members who have good traditional pensions, the 401(k) should be seen as a supplement to their principal retirement savings plan. But always keep in mind that unlike our pensions, 401(k)s are subject to the risks of the marketplace. You are not guaranteed a return."

The 2001 agreement responded to the long-standing desire of members. Many wanted the 401(k) option because it is more flexible than the 457 plan, which doesn't allow for loans, noted DC 37 Research and Negotiations Director Dennis Sullivan.

The city expects that participants will be able to borrow from their 401(k) accounts next year.

Another tax law change now permits rollovers (transfers of assets) from government 457 and 401(k) plans into qualified plans, tax-sheltered annuity plans or IRAs.

But city 457 assets may only be rolled into a city 401(k) plan at separation of service.

Hardship withdrawals are available from 457 plans only in the event of an unforeseeable emergency. And such withdrawals are subject to income tax.

In 401(k) plans, hardship withdrawals are only permitted for an immediate and heavy need and only in the amount necessary to satisfy the need. Withdrawals before the age of 59½ are subject to income taxes plus a 10 percent penalty.

The tax code requires 457 and 401(k) participants to begin taking distributions by April 1 of the calendar year in which they reach 72½. But participants in the city's deferred compensation program who are 72½ or older are not required to take distributions until after they leave city service.

To sign up, call (212) 306-7760 and request enrollment material or order on-line by clicking on the City of New York Deferred Compensation Plan icon on the city's home page at www.nyc.gov/html.

The plan assigns applicants a Personal Identification Number about a week after receiving the application. The quarterly fee for the 401(k) and 457 plans is $12.50.