Question: My employer's 401(k) was
terminated in 1999 with IRS approval. The third-party administrator (TPA) distributed the
funds as directed by each participant. I chose to directly transfer my balance to a
rollover IRA. After all the dollars were distributed from the 401(k), the TPA discovered
that they failed to do the ADP (non-discrimination) test. They ran it and we failed
because the highly compensated employees had made excess contributions.
The TPA sent a notice telling me the amount of the excess contribution plus earnings. I
requested the money be distributed from the rollover because these dollars were not
rollable.
The brokerage where my IRA is kept sent me a check for the excess contribution, earnings
from the 401(k) and earnings from the IRA based from the day the dollars were rolled to
the time of distribution.
I don't have an issue with the amount. The problem is that the TPA issued two 1099's, one
for the allowable rollover dollars and one showing the excess contribution plus earnings
amount using a distribution code of 8.
My thought is that the IRS is going to think I received two distributions and will be
looking for taxes on both. Neither the TPA nor my brokerage will correct the 1099's. What
do I do?
TB: You must report only the amount
that was refunded as taxable income. You should retain all your records so that you will
be able to show the IRS exactly what happened in the event of an audit.
Question: I was one of hundreds of workers laid off because
of a merger. I have a considerable amount of money in my 401(k) and ESOP fund. I was able
to move all funds except my employer matching contributions and the ESOP contributions out
of the surviving company's stock. However, 6,000 of the shares decreased in value by 48%,
during the 7-month blackout period. Do I have any recourse regarding the extended length
of time this plan transfer took?
TB: The answer to your question is
yes, but it's likely to require some patience and effort.
I recommend proceeding as follows. Submit a written request to the human resources
director of your company. In it explain your situation and request a restoration of the
money you have lost. Include in the letter that you will contact the Department of Labor
and/or retain an attorney to help you if the bank refuses to restore the amount you have
lost in a timely manner. You may contact the Department of Labor by calling 800.998.7542.
You will need to contact some attorneys in your area to find one who is knowledgeable
about this subject.
Question: I plan to retire at age 55 from a Fortune 100
company. I'll take my 401(k) and roll it over into an IRA. In the 401(k) there are three
kinds of money:
- Money with no tax owed
- Money with federal taxes owed (before tax), and
- Money with federal and state taxes owed (for capital gains
and dividends, etc.)
How do I prevent mix-ups?
I want to make sure I don't pay taxes twice. I know people at my company who have had
taxes withheld on after-tax contributions to their 401(k).
TB: If you roll the entire untaxed
portion directly to an IRA, your employer shouldn't withhold any taxes. The employer is
required to withhold taxes only when a participant receives a distribution directly from
the plan. So, the key is to not take your taxable money but to open the IRA in advance and
to instruct your employer to transfer the entire taxable distribution to this account.
This is known as a trustee-to-trustee transfer. The money you roll over directly to the
IRA will be taxable as you withdraw it from the IRA.
Any money you have in the plan on which you have already paid federal income tax must be
distributed to you. No taxes should be withheld from this amount since you have already
paid the applicable taxes.
Question: I'll be retired before age 55, on a 25-and-out
plan. Will I face any problems with my 401(k) or taking money out of an IRA?
TB: A problem you will face if you
leave your employer prior to age 55 is the 10% penalty tax that applies to early
distributions. It will be necessary for you to structure the distribution from your 401(k)
and IRA as an "annuity" stream of income in order to avoid this penalty tax.
However, most 401(k) plans don't permit this type of distribution. If your plan doesn't
permit equal, periodic distributions, you should roll the entire amount directly into an
IRA. Before you do this, discuss with the financial organization where you intend to place
the money and exactly how this will work.
Question: My husband was recently terminated from his job.
He had been there eight years and is 100% vested. His account balance is $27,000. I read
the paperwork we have and it states: "The plan permits you to elect distribution as
of any distribution date of the first plan year beginning after you terminate employment
with employer."
The plan year runs from Jan. 1 to Dec. 31. Does this mean we have no right to withdraw the
money until 2001?
TB: The answer to your question
probably is yes. Legally 401(k) plans aren't required to distribute the money accumulated
until retirement age. Most employers want to get rid of the money former employees have
accumulated so they permit earlier distributions. Your husband probably was a participant
in a plan that updates the value of participant accounts only at the end of each plan
year. Distributions from such plans generally aren't permitted until after this updating
process is completed. This usually takes six to eight weeks after the end of the plan
year. The amount distributed is the value as of the December 31 year-end. Your husband
won't receive any investment gains or losses from December 31 to the date his benefit is
paid.
This arrangement is legally permissible so the only thing you can do is wait.
Question: Is it possible to take occasional withdrawals
from 401(k)s (and IRAs) after retirement between age 60 and 70 without triggering the
mandatory withdrawal schedule?
TB: Legally a participant may
withdraw any amount he wishes between the ages of 60 and 70 without having to pay the
early distribution penalty tax. Any such distributions won't trigger the mandatory
distribution schedule. However, your employer's plan may not provide for such
distributions. Some 401(k) plans don't include a provision allowing active employees who
are over age 59ý to withdraw money. You will need to check to see whether your plan
permits such distributions.
 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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