Question: In your Feb. 13, 2001 column, you said charitable giving is not possible with a 401(k) plan. Isn't it possible to name a charitable organization as beneficiary? Would doing this have potential tax benefits to your estate or beneficiaries?

TB: Yes, you may name a charity as your beneficiary. In my earlier answer, I was referring only to gifts while you are living. If you name a charity as beneficiary of your plan, it will only get whatever money is left in the account after you have died. I should probably have touched upon post-death charitable gifts.

It is my understanding that post-death gifts from a 401(k) or IRA are excluded from both federal estate tax and federal income tax. Tax benefits may also be gained by naming a charitable remainder trust as a beneficiary. This vehicle will enable designated family members and one or more charities to receive benefits. Those of you who have large balances may want to explore these tax-saving strategies with a good estate-planning attorney and/or the development office of your favorite charitable institution.

An attempt was made last year to change the law so that nontaxable gifts could be made from a 401(k) plan while the participant is living. This change was not enacted, but there will probably be future attempts to add this feature to the law.

Question: I took a loan from my 401(k) in August. I didn't notice that my employer wasn't deducting my loan payments from my paycheck until recently. Now that I brought this to their attention, they want me to pay, all at once, all the payments that they never took. This adds up to a lot of money. Can't they just amortize the loan as of now instead of going back to August? What are the laws regarding this? Who governs this type of issue?

Also, I have not signed any actual loan papers, agreements, or promissory notes yet. At this time, I have not agreed in writing to any re-payment schedule or other variables as my employer forgot to process this loan on their side.

TB: You should be prepared to pay the full amount, unless you are willing to characterize the unpaid amount as an early distribution from your plan. But, in that case, you would owe all the applicable federal and state taxes on that money and a 10 percent early withdrawal penalty.

When you took out the loan, you agreed to a re-payment schedule based on a certain loan balance, interest rate and loan term. Employers are not in the business of running a lending operation and they don't have the flexibility or resources to re-characterize loans.

There is a burden of responsibility here that rests both on you and your employer. You should have been paying attention to your pay stubs and 401(k) statements to make sure that your loan payments were being deducted.

But, your employer also had the responsibility to deduct your payments from your paycheck. I suggest, and this could be a long shot, that you point out to your employer that their mistake will result in a financial hardship for you. You could ask if your employer would advance you the money that should have been re-paid. And, then you re-pay the company for that money over time. The problem is that you will be re-paying two loans at once.

The law that's applicable here is the Employee Retirement Income Security Act (ERISA) and the plan document. The Department of Labor (DOL) is the federal agency that administers ERISA.

The fact that you haven't signed the applicable paperwork for the loan doesn't change the fact that re-payment must satisfy the legal requirements to avoid a taxable distribution. The IRS and DOL examine loans extensively when they do plan audits. Failure to properly administer loans jeopardizes the qualified status of the plan. Bringing this loan into compliance is important for your employer to do to avoid this possibility, which would create serious tax problems for all participants and the employer. As a result, it is imperative that the worker who has received the loan and the employer get this loan into compliance immediately.

A separate loan outside the plan is not bound by the same legal requirements as a loan inside the plan. If your employer agreed to do this, the added flexibility would enable the employer to structure this loan on a favorable basis such as a lower interest rate, longer re-payment period, etc.

TB: I can understand your dissatisfaction because it sounds like the current (Company X) plan is badly outdated, particularly for its asset size. The size of the assets in the newly combined plan should make it an attractive prospect for the major providers. Since the features that providers offer are often related to the size of the assets held in the plan, with a newer, larger plan to tempt them, you should find them offering more attractive features at a lower cost.

Regarding your specific points, note the following:

1. All the leading providers maintain accounts on real-time systems, which permit you to obtain information and to conduct transactions on a 24/7/365 basis, similar to what you are able to do on the outside. You shouldn't accept anything less.
2. Most plans use 1 percent increments for new investments and don't have any restriction on transfers. For example, new contributions may be split in any multiple of 1 percent. Transfers of existing money can either be made as a specific dollar amount or in percentages. This flexibility gives participants the opportunity to re-balance their accounts periodically in order to re-establish their targeted allocations among the applicable funds and keep their risk level steady.
3. Resolving the investment alternatives will probably be the biggest challenge. If you have been following my recent comments, you are aware that I have come to the conclusion that the structure of 401(k) plans should change so that participants have essentially the same investment flexibility they get from financial services companies outside the plan. Your employer may not be ready to go there yet. One of the features that I suggest be included is a brokerage window, which gives participants some added flexibility. The brokerage window should offer a wide range of investment alternatives, preferably from multiple fund families, including funds with institutional pricing. I would also look for the provider to include investment advice to help participants with their investment selections.

There are many factors to be considered when a plan is being re-designed and a new provider selected. You have a unique opportunity to influence the design of the new plan. The most important issue to keep in mind is that the new plan must be designed in the best interests of all employees. And, remember, many of them may not be as well-informed or interested in the plan as you are. I can tell from your letter that you already have some insight as to some of the features that would be desirable.

To make an informed decision, I recommend that you ask some of the vendors soliciting your business to provide examples of the plans they have provided to other employers with similar assets. Additionally, I recommend you talk with friends and relatives who also have 401(k) plans to find out what they like and dislike about their plans. Ask to see a copy of their summary plan description if they have one.

I recommend your employer consider using an independent consultant who has experience helping plans of your size make these decisions. Using an internal committee to evaluate the alternatives is a good idea but someone also has to guide the process.

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

Ted's Table Archives 

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.

401Kafe.com is the premier online community resource for 401(k) participants
Copyright ý 1996 - 2000 mPower. All Rights Reserved.

 

Section Guide | Feature Articles | The Experts | 401(k) ABC's Wall Street 101 | The Bear's Cave | 401(k) Frequently Asked Questions | Retirement Calculator