Question: I'm a 401(k)-plan participant, as well as
an employee who works in the
administration of a 401(k) plan. My question relates to 70ý-year-old participants who
want to roll their money to another institution.
I have an issue with a participant who is 75 years old, who rolled over his $500,000-plus
account to a brokerage firm. Our company has a policy that when a participant who is at
least 70 1/2 years old rolls over their account, we automatically withhold the minimum
required distribution and send a check to the participant. We also withhold the 10%
federal taxes on the taxable portion.
We told him this would happen. However, he said the IRS told him that we shouldn't have
withheld the MRD for him. Do you know of any IRS regulations or documentation saying
it's the plan sponsor's discretion to do this?
TB: If the employee in your example left the company during 1999, he or she has until
April 1,
2000, to roll the distribution over. That date is the required minimum distribution (RMD)
deadline.
Your action resulted in the withdrawal of a portion of the money from a tax-sheltered
account
sooner than was necessary. This action also probably created a taxable distribution one
year earlier
than was necessary. Most of us don't like to pay taxes any earlier than necessary.
Plan sponsors are only required to correctly identify to the participant the portion of
the distribution
that is an eligible rollover. If the rollover is made before the expiration of the time
for making RMDs,
then the entire distribution is eligible for rollover. I'm not aware of any IRS
regulations or
documentation giving the plan sponsor the discretion to withhold RMDs from a rollover
being made
on behalf of a participant who is over age 70 1/2 before the RMDs due date.
If the participant is rolling over his entire 401(k) account into an IRA and the
participant has other
IRAs, the participant may choose to have the RMDs taken out of the other IRAs. There may
be
reasons why the participant would prefer to do this.
Your plan document probably doesn't permit you to deduct the RMDs before making the
rollover
since such action does not comply with the requirements of Sections 401(a)(9) and
401(a)(31) of
the Internal Revenue Code. This practice would appear to be a disqualifying defect, which
should
cease. You may also need to consider corrective action for your past actions. I recommend
consulting an ERISA attorney.
Question: I asked my employer to include a provision in our company 401(k) plan to
invest
in individual stocks. He says the third-party 401(k) plan administrator told him that the
company will be held liable if I trade stocks in my 401(k) account and lose all the money.
Since my employer doesn't want anyone to sue him, he said he wouldn't allow us to trade in
individual stocks in our plan. Is it true that an employer can be sued for the losses
because
of an employee's bad investment in his or her account?
TB: Your employer has good reason to be concerned. There have been instances where
participants who made very bad investments have sued either the third-party trustee or the
employer, claiming that they should have been prevented from making such investments.
Permitting participants to pick individual stocks also significantly complicates the
administration of
the plan, which is another reason most employers don't permit this type of investment.
Question: When I got my last statement from the Social Security Administration,
the
annual salary reflected for 1998 was my salary less my contributions to a 401(k). Are the
wages reported to Social Security reduced by 401(k) contributions so that you will get
fewer benefits as a result of contributing to a 401(k)? I ask this because benefits are
based on average earnings. If earnings were reduced by 401(k) contributions, wouldn't you
get smaller Social Security payments?
TB: Your 401(k) plan contributions are subject to Social Security taxes. Apparently Social
Security
taxes have been deducted incorrectly from your net income after making your 401(k)
contributions.
During the early years of 401(k), the pre-tax contributions weren't subject to Social
Security tax but
the law was changed during the 1980s.
To answer your specific question, contact your employer and tell them about the error.
Make sure
that they correct your withholdings from this point forward. That takes care of the
future.
As to the past, your options are limited. If your employer tries to fix this with the
Social Security
Administration the company will likely be subject to an IRS audit that leads to penalty
fees and
taxes. What many employers choose to do is let the past go and correct going forward. The
employer figures it will take a chance the IRS won't run an audit. And if the IRS does,
the employer
just pays the back taxes at that time.
Question: If I take early retirement at age 55, I understand I can start making
withdrawals
from my 401(k) without the 10% penalty since I will have terminated my employment.
Assuming this is correct, what effect, if any, would there be if my former employer asked
me to come back to handle special projects on a part-time basis? Also, what if I took a
part-time job with some totally unrelated company? Obviously, before age 59ý I don't
want to trigger the 10% withdrawal penalty.
TB: Working for another employer, part-time or full-time, won't impact how the
distribution you
receive from your current employer is taxed. The key is to leave your current employer
after
attaining age 55. The distribution won't be subject to the early distribution penalty tax.
The situation
is somewhat different if you continue to work for your current employer. You must leave
your
employer after attaining age 55 in order to avoid the early distribution tax. Continuing
to work for
your current employer, even part-time, could negate your eligibility for this tax break. I
recommend
not working for your current employer until after you receive the distribution and the tax
reporting
form showing that the distribution was for early retirement, not as an early distribution.
Question: I'm 47 and have a 403(b) plan with my company. It uses a variable
annuity as an
investment vehicle. I could max out the account by contributing 15%, and my tax status
will be the same after retirement.
I want to invest in an S&P 500-index fund in the plan, which charges 1.5% as a total
expense fee due to 1% "mortality & risk fee." Does it make sense to max out
in the plan
if I can invest the same amount in an index fund outside the plan with very low expense
fees?
TB: If you won't be in a lower tax bracket after retirement, you should probably avoid the
extra
1.5% annual fee and put the money into the S&P 500 fund outside the 403(b) plan. You
will also
have greater flexibility on withdrawing the money both pre- and post- retirement with this
type of
investment outside the plan.
If a trustee is leaving a company, can he withdraw his own money or does he have to name
a new trustee and have that trustee sign off on the withdrawal? Can his former employer
hold back his money and not roll it over into an IRA?
TB: One doesn't have to be an employee to be a trustee; therefore, a trustee who is an
employee
isn't required to resign trusteeship if he terminates employment. A trustee may resign by
submitting
his written resignation to the employer. The board of directors also may remove a trustee.
The
board is responsible for selecting a new trustee. It's common practice for the board to
remove a
trustee when he ceases to be an employee. Until this occurs, the trustee continues to have
the full
power of a trustee.
Regarding the distribution of the trustee's benefit, he may direct the financial
organization that holds
his money to distribute it to him if this agrees with the administrative provisions of the
plan document
and the authorization requirements that have been established with the financial
organization. More
specifically, if the plan document and the authorization procedures require the signature
of only one
trustee, then this individual may direct the financial organization to distribute his
benefit. It may be
desirable to change the procedures to require two signatures for distributions in the
future but this
will make it more difficult if the trustees are frequently unavailable.
 Read Ted Benna's Biography
Ted's Table Archives
Ted Benna, creator of the first 401(k) retirement savings
plan, answers 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.
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