Question: Can you define "key employee"
for the purposes of discrimination testing? I
was the interim president of our company for three months and earned more than $65,000.
I was told that I was considered a key employee. What does this mean and do I qualify?
TB: The term "key employee" isn't connected to the special non-discrimination
tests that are
applicable solely to 401(k) plans. Rather this term applies to the "top-heavy"
rules, which are
applicable to all qualified retirement plans. A plan is top heavy whenever more than 60%
of all
assets in the plan belong to the key employees. The rules for determining the key
employees are
rather complex but generally owners are included in this group, and certain officers. The
determination of whether an officer is a key employee is based upon the facts and
circumstances
rather than the title of the individual. One of the key factors is the amount of
decision-making
authority the individual has. Typically the president is considered a key employee.
When a plan becomes top heavy, the company is required to make a minimum contribution for
each
eligible non-key employee. The minimum required contribution is equal to the lesser of the
highest
percentage contributed by a key employee or 3% of pay. You may have been told that you
couldn't
contribute to the plan because the company wanted to avoid having to contribute the
minimum
required percentage for non-key employees. For example, if you had contributed 3% or more
of
your pay, then the company would have been required to contribute 3% of each eligible
non-key
employee's pay.
Question: I'm trying to find out more about 401(k) lite.
TB: I'm not familiar with the term 401(k) lite. Perhaps one of our readers can answer this
for both
of us.
Question: I work in a union shop. We have a 401(k) plan, but there's no company
match. I
earn $50,000 a year and my annual contributions are capped at 15% of salary. That
doesn't equal the government's allowable limit of $10,000 for 1999. I've been told there's
no way I can get the $10,000 in my account. Can I make a contribution weekly from my
check to my 401(k) account so long as I don't go over the allowable limit?
TB: You're limited by the rules that are contained within the 401(k) plan document even if
these
rules are more restrictive than what the law allows. Many 401(k) plan documents require
contributions to be set as a specific percentage of pay rather than a fixed dollar amount
per pay. If
this is what your plan requires, it's legally permitted to do so.
The real problem in your situation is the 15%-of-pay limit that apparently is in the plan
document.
You should ask to have the plan amended to increase this percentage to the 25% maximum
limit.
This change would enable you to contribute the maximum dollar amount. Technically, this
change
must be addressed through the collective bargaining process. So, you should ask your union
representatives to seek this change when your labor contract is re-negotiated. (Keep in
mind that
the 25% of pay limit applies to your contributions and employer matching contributions
combined.)
Question: I have a loan on my 401(k) account. The payment each month is $318.64. A
payment of $79.66 is withheld from my weekly paycheck. My 401(k) contributions are
withheld each week and credited to my 401(k) account every week as well. But, my loan
payment doesn't get credited to my account until the end of the month. Is it normal for
companies to handle loans in this manner?
In addition, my loan balance doesn't decline by $318.64. Last month, my loan balance fell
from $9,794.58 to $9,553.48, a difference of $241.10, not $318.64. This has been the
pattern over the last two years. So my full loan payment doesn't go to work for me. What's
happening here? Our booklet states the principal and interest will be deposited in our
accounts. Bottom line: do I have a reason to be upset?
TB: You're referring to two different processes involved with 401(k) loans. The first is
the actual
process of investing the money that's deducted from your pay to repay the loan. The other
process
is tracking the unpaid loan balance.
With most 401(k) loans, the amount that's deducted from your pay to repay the loan is
invested
back into the funds you've selected. These monies are deposited to the plan and are
invested at the
same time as other contributions to the plan. Assume your contributions to the plan are
being split
equally, with 20% going into each of five different mutual funds. The entire $318.64
deducted to
repay the loan is going directly into these five funds to be invested for your benefit. If
you check
your account statement, you should find the money flowing into these different funds in
this manner.
The next issue is the tracking of your unpaid loan balance. The money taken from your pay
is
applied to repay the amount you borrowed and to pay the required interest. It's necessary
to
allocate the amount deducted from your pay between interest and principal payments in
order to
determine the updated loan balance. Only the portion that's allocated to principal payment
will
reduce your unpaid loan balance. That's similar to what happens when you pay a home
mortgage. In
this instance, $77.54 is the monthly interest payment and $241.10 is the principal
payment. The
unpaid loan balance can be reduced only by the $241.10 principal payment.
Your plan administrator updates the unpaid loan balance monthly because 401(k) loan
administrative systems are based upon monthly repayment. The loan balance updating is
strictly a
bookkeeping function. The fact that the updating occurs monthly rather than each pay
period is not
significant.
Bottom line: you don't have any reason to be upset.
Question: I'm about to retire and roll over my 401(k) and a lump-sum buy out of my
employer's qualified pension plan in to an IRA. The accounts total approximately
$900,000. I'm trying to determine if I'll need liability insurance and how much. Should I
protect the IRAs with insurance?
TB: Excess liability coverage is rather inexpensive. You should consider an umbrella
policy of
perhaps $1 million to give you added security during your retirement years.
Question: My company changed 401(k) administrators back in October 1999 and my
co-workers and I haven't received our quarterly statements for July 1999 or October
1999. We called the company headquarters and were told that the money was consolidated
in one lump sum. Now, they're having problems figuring out what money belongs to what
investor. Who can we take this complaint to?
TB: You should contact the Department of Labor at 800.998.7542. Good luck!
 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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