TB: I answered last week's questions
while I was on the first day of vacation. A reader pointed out that one of the answers was
somewhat incorrect, which proves either that I needed the vacation or that you shouldn't
try to incorporate work and play.
Excess employee pre-tax contributions must be refunded for a calendar-year plan by March
15th (not March 1st) in order for the employer to avoid the 10% penalty tax. The correct
1099 Form for reporting the contribution that is refunded is the 2000 1099-R if the refund
was made after December 31, 1999. The reporting code on the 1099 will indicate the year of
taxation. For example, if the refund was made on February 5, 2000, the participant
receiving the refund should receive a 2000 1099-R indicating the refund was taxable for
1999. Thanks to Wes Stanley for bringing this to our attention.
Question: I have the opportunity to get a job with a new
employer that would pay roughly three times what I'm currently getting. The catch is that
I need to update my education in order to get the new job.
What I'm thinking of doing is taking a loan against my 401(k) to pay for my education.
(It's the only ready source I have for the money I'd need.) I realize that when I leave my
current employer for the new job the outstanding loan balance will be treated as a
distribution.
Since I intend to roll over the rest of my 401(k) balance to an IRA account, at least
temporarily, can I make a deposit to the IRA account within 60 days in the amount of the
loan balance and backup withholding, and claim the loan/distribution was in reality part
of the roll over?
TB: You are permitted to use the
60-day period after you receive the "distribution" from your account to make up
the unpaid loan balance. You may do this by using other funds, which would be added to
your IRA rollover account.
Question: Do you believe that a travel trailer is eligible
for a primary-residence loan, taken over more than 5 years, from a 401(k) plan? IRC
Section 72 (Legislative History) seems ambiguous.
TB: If the trailer will be your
primary residence, you should be able to finance this purchase via a plan loan. The ERISA
attorney we use for technical support discussed this point with a Department of Labor
official last week. He was told that there is a rule limiting the payment period to a
maximum of 10 years when purchasing a trailer as a primary residence. Our attorney asked
this official where this rule appears and he was then told that there isn't any rule.
We cannot find anything that says that a primary residence must be brick and mortar. Such
a requirement would in fact be discriminatory. The cooperation of your employer is needed
to establish a payment period that will extend beyond five years. Because 401(k) loans are
a big administrative pain generally, many plans do not permit loan repayment periods
beyond five years.
I personally would advise a plan sponsor that was willing to go beyond five years for the
purchase of a trailer to limit the repayment period to the maximum period permitted by an
independent, third-party lender.
Question: My company has decided to let the 401(k) plan go
as they are going to shut down operations but keep the corporate charter. Now the
administrator has said everyone must wait for the letter of determination from the IRS.
That could take a year. This was decided on January 1, 2000. On November 1, 1999, I asked
them to send me my money, but somehow it was not processed until after January 1. Now they
say I must wait, too. What can I do? Can the company give me the money and wait on the
letter of determination?
TB: The company may legally
distribute your money to you before they receive IRS approval of the plan termination;
however, it doesn't make sense for them to do so because IRS approval includes the
benefits that are to be distributed. In some instances, adjustments in the proposed
distributions that are submitted to the IRS are required in order to obtain IRS approval.
It obviously is difficult and perhaps impossible to make such adjustments after the
benefits have been distributed. Seeking IRS approval of a plan termination protects both
the employer and the participants. For example, tax-deferred rollovers are permitted only
for distributions from a qualified plan. Delaying the distributions until IRS approval is
received will enable the participants to roll the money over without fear of
disqualification, which otherwise could occur if the employer is audited after the plan
has been terminated.
Question: I work for a company that has a contract with the
federal government. Our company started a 401(k) plan with a 25% employer-matching
contribution. The vesting schedule was 0%, 0% and 100% after 3 years.
After two years, the contract came up for re-bid. My employer lost the bid and terminated
all 150 people who had been working under the contract - about 75% of its entire work
force.
The firm that did win the bid hired all of us at the same salaries and positions, as the
new company simply took the place of our previous employer.
My first question is: shouldn't this situation fall under the partial-termination rules in
which all terminated personnel would become immediately fully vested with no forfeitures
because of the significant dissolution of the company?
We're being told that we're not getting any matching funds unless we satisfied the
three-year vesting schedule.
My second question stems from a "termination fee" or "separation fee"
that employer number one's third-party administrator is claiming that we should be charged
because we're all leaving the original plan to roll into our "new" company's
plan. They want to charge us 3%. The investment representative says that the fee is a
plan-level charge and is only applicable if that employer terminates the plan. Then there
is a fee, but it is to the employer, not the departed employees. What's the straight talk
here?
TB: You are correct that full vesting
is required whenever a "partial termination" occurs, regardless of service.
Generally the IRS considers a work force reduction in excess of 20% to be a partial
reduction. The 20% guideline applies to the total participant base of the plan. In your
type of situation, the employees who are engaged with a specific contract frequently work
for a business unit of a much larger employer. A major issue in your situation is whether
the 75% reduction you refer to applies to just a business unit or the entire employment
base covered by the plan. If indeed there was a 75% reduction of the entire work force
covered by the plan, full vesting would be required.
Some employers select investment vehicles, which have back-end surrender charges, such as
variable annuities. Some contracts waive the surrender fees for normal benefit
distributions but impose them when there is a plan termination or when the employer moves
all the money to a new provider. The specific terms vary by contract. It would appear in
this instance that the provider considers this transaction to be a plan termination, which
triggers the surrender penalty, but your former employer does not consider it to be a plan
termination. If this is correct, there is an obvious contradiction. You and your fellow
employees should seek full vesting if 75% of the plan's total participant base was
involved in this transaction. You should also request a written explanation of the
surrender fee from the provider's representative. If they are applying this charge because
there has been a plan termination under their contract terms, you ask the former employer
to reimburse you for this expense because you had no control over this situation. You
should inform your former employer that you will contact the Department of Labor to
request their help if you do not receive satisfactory results. Their number is
800-998-7542.
Question: I'm planning to retire at age 55, which is about
30 months away. I've been studying up on SEPPs, and I think I have that figured out, but
the phrase "over 55, terminated from service" popped up in the process of my
research. I've been totally unable to find out anything more about it. What help can you
give me?
TB: You must either leave your
employer after you attain age 55 or have your account distributed as an annuity income
stream in order to avoid the 10% early distribution penalty tax. If you wait until age 55
to retire, the early distribution penalty tax will not apply if you take the money out of
the plan.
Question: Is the limit set on contributions to 401(k)
accounts 25% of total compensation from all sources, including profit sharing, etc., based
on gross earnings or adjusted gross earnings after the pre-tax deductions?
TB: The law was changed effective
January 1, 1999 so that the 25% maximum contribution limit applies to gross earnings prior
to employee 401(k) and/or Section 125 pre-tax contributions. It should be noted that the
25% limit applies to the compensation definition that is contained in the plan document
for making contributions. For example, some employers tie contributions to base pay,
excluding overtime, bonus, etc. If your plan document limits contributions to base pay,
then the 25% limit must be applied to this compensation amount before being reduced by
employee pre-tax 401(k) and Section 125 contributions.
 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.
|
