Question: I'm a member of a union and
a highly compensated employee (HCE). The 401(k) plan that I belong to is only for union
members. My supervisors and upper management belong to a different plan. When the company
did the discrimination tests for highly compensated employees, they applied the test to
each plan separately. I found my weekly contribution rate was greater than the 2% allowed.
How can you get a fair test if they test both groups separately? TB: Labor laws generally prohibit
employers from offering the same retirement benefits to union employees as to other
employees. Your employer is required to provide the benefits agreed to through the
collective bargaining process. To do otherwise would violate labor laws.
So, each plan must be considered separately when HCE tests are conducted.
The fact that you are able to contribute only 2% of your pay is due to IRS law, which has
placed you into the HCE category. Employees who earned more than $80,000 during 1999 are
HCEs. The amount these employees can contribute is tied to the average percentage that the
other eligible employees contribute.
Your problem stems from the fact that many of your fellow union employees aren't
contributing to the plan. You and other participants need to encourage them to do so.
Question: I'm in a 401(k) plan into
which I make salary contributions and my employer makes matching contributions. Recently,
I realized that for the last six months my contributions hadn't been deducted from my
salary and put in my 401(k) account.
I didn't notice the increase in my salary check because I received a nice raise at about
the same time. Also my 401(k) account was continuing to grow since the employer
contribution was still being deposited.
The Human Resources department says I was mistakenly marked ineligible for the 401(k) and
salary deductions were stopped. HR has restarted my salary contributions, but I'm missing
a substantial amount of funds. I want to write a check and have it deposited in the 401(k)
for the amount that wasn't contributed from my salary.
What are my rights? Can you give me a specific regulation or law? Can the Department of
Labor help with this? I paid taxes on the increase in salary, how do I file with the IRS
for reimbursement if the check is accepted?
TB: Legally, your contributions to
the plan must come from your paycheck before taxes are deducted. You can't make up the
lost contributions by giving your employer a check to put into the plan. Your employer
goofed and the options for correcting this error are limited.
I recommend increasing your future contributions to make up the difference, assuming you
are contributing less than the maximum permitted. This should enable you to catch up over
time. Of course, the investment results will be somewhat different than if the money went
in when you intended.
If you aren't able to put this money into the 401(k) due to the various contribution
limits, then I would request the employer to make up the loss outside the plan. For
example, you can put the money into an IRA. You won't be able to get a tax deduction if
your adjusted gross income exceeds the applicable threshold for deductible IRA
contributions. The money will enjoy tax-deferred growth in any event. If you aren't able
to deduct the IRA contribution, you can ask your employer to make up the tax loss.
Regarding your final questions, this is an administrative error, which isn't specifically
covered by law. You can contact the Department of Labor at 800.998.7542, but I
don't think they will have much interest in this matter. You can't file a claim with the
IRS for a tax refund on money you intended to contribute to the plan. Tax breaks are given
only for money that is actually contributed. You received the money, which made it
taxable, and this fact can't be reversed.
Your employer goofed and any resolution must be made going forward rather than attempting
to go back. You won't like my final comment, which is that you also have some
responsibility to review your paycheck to see that the correct amount is being deducted.
Each paycheck should show your current and year-to-date 401(k) contributions.
Question: I have been with my employer
for the last three-plus years. I haven't yet enrolled in the 401(k) plan because the
matching was not attractive. Now, they are matching only 25% of the employee
contribution—maximum up to 6%. Our company's policy is: 25% of their contribution
becomes mine after one year, 50% after two years, 75% after three years, and 100% after
four years.
So, my questions are:
1) If I start contributing to the 401(k) now, can I be eligible for 100% of the employer's
contribution for the year 2000?
2) Since I haven't yet started 401(k) contributions for the current year (2000), as of
April, can I still make a contribution for the whole year, such that they don't exceed 15%
of my gross pay?
TB: I'm sorry to hear that you
decided to give up a 25% match for the past three years. These contributions would already
be 75% vested and in another year they would be 100% vested. Unfortunately, you can't make
up what has already been lost but you should get into the plan ASAP to avoid additional
losses.
The employer contributes the 25% match regardless of the plan's vesting schedule. When you
leave the employer, the plan administrator must determine whether you are eligible to
receive the matching contributions that have been contributed to your account. You will
receive 75% of this contribution, adjusted for investment gains or losses, if you have
completed three years of service when you leave. You will get 100% of all employer
contributions if you leave after completing four years. I'm unable to tell from the
information you provided when you will complete four years of service, but 75% of the
match is better than nothing, so you can't lose.
If you start contributing now, you should be able to contribute the maximum percentage
that your plan allows, counting your pay for the entire year. You need to check with the
person who oversees your plan to see whether this is how your employer administers the
plan.
Question: In my 401(k) I pay a fee
(management/custodial) based on the value of my holdings in the fund. This is deducted
monthly. In a standard mutual fund, this fee would be part of the cost basis when it came
time to calculate the tax burden. Because the taxes on a 401(k) aren't based on the
capital gains calculation, how is the fee addressed in a 401(k) situation? Is it a tax
deduction in the year in which it is deducted? Or, do I just "eat" it.
TB: The fees that you pay within your
401(k) ultimately impact the amount you accumulate. Distributions are fully taxable when
you receive benefits from the plan. Your tax liability is reduced when you receive the
money from your plan account, due to the deduction of these fees. This is the only
"tax break" you get for these fees.
Question: I have a 401(k) sponsored by
an employer that has gone out of business. I was with this employer for four years. To be
vested in the employer account required five years of service. Thus, I'm not vested in the
employer balance portion of my account. However, with every quarterly statement, I see
both the employee balance and employer balance. When I ultimately withdraw my employee
balance, what will happen to the unvested portion of my account? Will it be forfeited?
If there are no other plan participants, it can't be allocated to them. Since the plan
sponsor no longer exists, the unvested portion can't go to the company. What will happen
to this money?
TB: The normal vesting schedule is
overridden when a plan is terminated. The law requires full vesting of all benefits when a
plan is terminated. Cessation of all contributions is considered a plan termination even
though the assets may remain in the plan for some period thereafter. The IRS also has the
latitude to require full vesting at an earlier point. This enables them, in situations
like yours, to protect employees when a business gradually declines, reduces the number of
employees, and ultimately ceases to exist. It's quite possible that you were fully vested
if you left this company when it was in its final days.
The plan assets must be used to provide benefits to participants and to pay administrative
expenses. Those who have money in the plan are still participants even though they are no
longer employees. All funds remaining after paying reasonable administrative fees must be
allocated to participants in a manner that is acceptable to the IRS. Generally, the IRS is
asked to approve the final benefit distributions when a plan is closed, to protect the tax
benefits of participants. Such approval isn't required, but the fiduciaries involved are
still required to follow the law.
Question: I handle the 401(k)-plan
enrollment at work and the feedback I'm getting from employees who work for tips is that
the 401(k) wasn't structured for them. The question is how can a tip employee participate
in a 401(k) plan with mostly a $0 paycheck each pay period. Also, how can they avoid owing
Uncle Sam on April 15th?
TB: Your tip employees are correct.
That's because it can be difficult for them to make contributions. My experience with this
type of situation is limited. I remember one client had to create a deduction priority
list to follow for employees who receive tips. This covered deductions such as taxes,
medical benefits, 401(k) contributions, and a couple of other items. It was the employee's
responsibility to see that there was enough income to cover the deductions. When there
wasn't, the items with the lower priorities didn't get funded.
You should check with other similar employers in your area to see what they do. We will
also ask our readers who have experience with tip employees to send any suggestions they
have.
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 |
