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By: Ted Benna Creator of the first 401(k) plan |
March 21, 2002
This Week, Ted Tackles:
Why was my mother told that she needed to provide a financial statement in order to participate in her employer's 401(k) plan? ý How are 401(k) safe harbor employer contributions determined? ý I've been with my company a year. When I retire at age 65, in three years, will I get my entire 401(k) balance including the employer's contribution (which vests over seven years) or only my contributions? ý I'm Irish but have a green card. May I consolidate my 401(k) into a retirement plan I have in the U.K.?
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Q: My mother was told by the company hired to administer
her employer's 401(k) plan that in order for her to remain in the program (or even to
join) she must provide a financial statement to them. They told her this was the
"law." I am the administrator of my employer's 401(k) and I have NEVER heard of
such a law. Can you explain?
A: Just when I thought I had heard of everything
…
As far as I know, the only instance when a financial
statement may be needed is when a participant applies for a hardship withdrawal. Plans may
use one of two methods to screen hardship withdrawal applications, certification or
suspension.
Plans that grant hardship withdrawals based on the
certification method, rather than the suspension method, are required to obtain sufficient
financial information about the applicant to determine whether outside funds are not
otherwise available. In other words, the facts must warrant the need. Under this method,
an employee is allowed to resume 401(k) contributions immediately.
The suspension method, which requires that employee
contributions be suspended for a minimum of six months following the hardship withdrawal,
has a much lower evidence-of-need threshold. With this method, the employee is not
required to prove a need. However, I recommend that employers using this method gather
minimum evidence of the expense, such as the bill of sale of a house or a college tuition
bill.
Perhaps your mother's employer is requesting the financial
information when an employee joins the plan and then annually thereafter, so it will be
available if the employee subsequently applies for a hardship withdrawal. This procedure
could enable it to expedite the processing of a hardship withdrawal application at some
future point. Getting financial statements from each participant, rather than just those
who apply for a hardship withdrawal, however, involves a lot of extra work. In addition,
the merit of a participant's financial emergency must be made based upon the participant's
financial condition at the time the application for the hardship withdrawal is submitted.
As a result, the financial information should be current.
In my opinion, your mother's employer either misunderstands
the law or may have some other reason for gathering this information.
Q: My company has a safe harbor 401(k) plan. There seems
to be confusion over whether the match is based on contribution or compensation. Our
401(k) administrator states that the match is based on annual compensation due to IRS
regulations. I am researching this topic and finding conflicting data to support this. Is
it possible our 401(k) summary plan description states this rather than an IRS regulation?
If we change our SPD, could we only pay based on employee contributions?
A: There are two types of employer contributions
that will satisfy the safe harbor design requirements. Each employer that uses the safe
harbor design must select the applicable contribution method and it must be
included in the plan document. (By the way, in a safe harbor plan all employer
contributions are 100 percent vested when made.)
One method is to have an automatic employer contribution
equal to at least 3 percent of each eligible employee's compensation. All eligible
employees receive this contribution including those who don't contribute to the plan. For
example, an eligible employee who is paid $30,000 must receive at least $900 of employer
contributions.
The other method is for the employer to contribute at least
4 percent of pay as a matching contribution. In this instance, only employees who
contribute to the plan get the employer contribution. There are a number of different ways
the employer match may be determined. One is to fully match ($1 for $1) the first 4
percent of pay an eligible employee contributes. An eligible employee who earns $30,000
and contributes at least $1,200 will receive $1,200 of matching contributions in this
instance.
As you can see, the answer to your question is governed by
the type of safe harbor contribution your employer selected. This selection must be
contained in the plan document and it must also be explained to participants in the
summary plan description. You must also administer the plan in accordance with the method
that you have selected. The law and IRS give you some flexibility. It is up to you to nail
down your specific contribution arrangement.
The employer may change the contribution formula used. But
in order to do so, the plan document and SPD must be amended. And, such a change will only
affect the contributions made after the documents have been amended.
Q: I am 62 years old. I have been in the company 401(k)
for one year. There is a seven-year vesting requirement, which I cannot meet when I reach
normal retirement age. When I retire at age 65, do I get my entire 401(k) balance or only
the vested portion?
A: Full vesting is required when you reach the
normal retirement age, as set in the plan document. Many plans usually use age 65 but it
is also possible to require a minimum number of years of service. You should check to see
if this is spelled out in your summary plan description. If not, you should ask the person
at your employer who oversees the plan what the normal retirement age is for your plan.
By the way, the law changed effective Jan. 1, 2002,
reducing the maximum number of years required for full vesting of graded employer matching
contributions from seven to six. Other employer contributions are allowed to vest over a
maximum of seven years, if they use a graded vesting schedule.
Q: I have a 401(k) plan from when I worked with an
agency in New York. I am a green-card holder but an Irish citizen. I have pension plans
from several countries and would like to consolidate them into a U.K. pension fund. Can I
transfer my 401(k) funds to a U.K. pension fund?
A: I think your eligibility to transfer the money
from your 401(k) tax-deferred into a U.K. pension fund will depend upon the tax treaties
between the U.S. and U.K.. You will probably need help from an international tax expert.
(Note: Do any readers have any more specifics?)
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Ted Benna, creator of the first 401(k)
retirement savings plan, answers intriguing questions twice a month. With over 40 years of
experience as an employee benefits consultant, Ted is a nationally recognized expert on
benefits issues. He has authored three books, Helping Employees Achieve Retirement
Income Security, Escaping the Coming Retirement Crisis, and Tips for
Successfully Managing Your 401(k), 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. |
 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.
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