Question: My husband and I work full time. The money I earn goes directly into savings while we live off of his income. I have just become eligible to contribute to my company's 401(k) plan. Beginning Jan. 1, I would like to front-load my 401(k) — meaning put my entire paycheck into my 401(k) until I reach the $10,500 limit and then stop contributing for the rest of the year. Is this legal? Can you suggest where I can find documentation to show my employer?

TB: As long as your plan permits you to make deferrals using this method, the government doesn't prohibit it. Yet, there may be a couple of problems with what you want to do.

The first involves the fact that your annual contributions, including any employer-matching contributions, may not exceed 25 percent of your gross pay for the year. Employees who front-load by contributing more than 25 percent of their year-to-date pay put the employer in a position where the contributions could exceed the permitted limit if the employee leaves before the contributions drop to less than 25 percent of pay. This would create a serious compliance problem that would have to be fixed, or the plan could be disqualified. Consequently, I advise employers to only permit front-loading up to a maximum of 25 percent of pay, including employer contributions.

Second, you must also consider how your employer makes its matching contributions if your plan allows you to front-load. Some employers will contribute the full matching amount regardless of when you make your contributions during the year — this would be ideal for you.

But, others make matching contributions only during pay periods when employees actually contribute. If your employer uses this method, you may lose a substantial chunk of employer contributions by front-loading.

I will use an example to illustrate this latter problem:

Assume you earn $70,000. Your employer permits you to contribute up to 20 percent of your pay to the plan and the employer matches the first 6 percent of pay that you contribute at a 50 percent rate. In other words, the employer will contribute 3 percent of pay if you contribute at least 6 percent.

Next, assume the employer contributes only while you are contributing. You start the year by contributing 20 percent of your pay to get the maximum in as soon as possible. You will stop contributing when you have contributed the $10,500 maximum amount. Yet, you will have only earned $52,500 by this point.

Here's where the penalty part comes in. The employer-matching contributions will also stop at this point. Hence, you will receive only $1,575 of employer contributions (3 percent of $52,500) instead of $2,100 (3 percent of $70,000).

A better solution, in this case, is to contribute only 15 percent so that you will be getting the match for the entire year and will still contribute $10,500 for the year.

You should check with your employer so you know which matching arrangement is used before you decide your contribution percentage.

Question: I administer a 401(k)/ESOP plan. I have an employee who should currently be receiving required minimum distributions; however, I haven't been able to find this person after several attempts. Are there any legal provisions that I should be concerned about that deal with outstanding distributions or ones that would be returned to the plan unclaimed?

TB: I am not aware of any such exemptions to the required minimum distribution rules.

The tax penalty for failing to satisfy the minimum distribution requirements falls on the participant not the employer. You might check with the Social Security Administration to see if they can help you find the participant.

Question: My employer has a profit-sharing plan that allows "in-service withdrawals." No loans ... no hardship ... just a withdrawal of the employer contributions after I've been in the plan for two years. Does the pre-59ý tax penalty apply if I plan to spend the money? Could I roll the money into an IRA if I don't like the employer's investment options? Are there any trouble spots I should know about?

TB: Any distribution that you take while still employed that occurs prior to age 59ý is subject to the 10 percent penalty tax, unless you roll the money over into an IRA. It is my understanding that you can roll over these distributions to an IRA. You should have the money transferred directly from the plan to the IRA using a procedure known as a trustee-to-trustee transfer to avoid the mandatory tax withholding.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Tuesday. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

Read Ted Benna's Biography

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The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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