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By: Ted Benna Creator of the first 401(k) plan |
May 16, 2002
This Week, Ted Tackles:
What information must an employer report to its employees about their 401(k) accounts? ý I have two jobs, one full-time and one part-time. Can I have two 401(k) plans at the same time? ý I am 61 and was told that I would be considered 100 percent vested in my 401(k) when I retire at age 65. Is this correct? ý I took a $24,000 withdrawal from my 401(k) plan to use in a real estate deal. I have the money back. Can I roll it into an IRA without paying taxes?
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Q: I have grown very suspicious of how my husband's
401(k) is being administered and managed.
While I have never had a 401(k), I have participated in
several 403(b) plans. For each I received quarterly statements that detailed the dates of
each contribution, how many shares of each mutual fund were purchased, the price per
share, etc. These statements came directly from the company that managed the mutual funds
in which my contributions were invested. I had a unique account number and could track the
performance and value of my contributions over time.
My husband's employer offers four funds in its 401(k)
plan. He began contributing to these funds in June 2001, but has yet to see any statements
at all about his account. Other employees report receiving a single page that only lists
the total contributions, gains/losses, forfeitures, distributions and ending amounts, with
no details whatsoever about shares and share prices. These one-pagers are issued once a
year by the employer, not the mutual fund company. What kind of information must an
employer report to its employees about their contributions to the 401(k) and the
performance of their account? To what state or federal authority can I direct my concerns?
Should we stop contributing until I get some answers?
TB: Federal regulations require employers to give
statements only once per year. The information your husband's fellow employees are
receiving satisfies the minimum reporting requirements for a 401(k). As a result, there
isn't any point complaining to the Department of Labor unless he doesn't receive a
statement for 2001 shortly.
I should note that it is possible for the statement for
last year not to be issued until after September 15, 2002. That is the last day the
employer is allowed to file its tax return for 2001, if the company's fiscal year is
concurrent with the calendar year. Employers have until the date they file the tax return
to make their contributions. It is possible that your husband's company still has an
employer contribution to make for last year.
In such instances, it is common to delay sending out the
participant statements until all contributions have been made for the year. This isn't the
norm but it is permissible.
Participants in most 401(k)s do receive statements at least
quarterly (even though they aren't legally required) and many participants are able to
obtain current account values daily via the telephone or Internet. My view is that your
husband's 401(k) plan is outdated. But, his employer may have some reasonable explanation
why it hasn't changed with the times.
Your husband should continue to contribute unless there is
some reason to suspect his contributions aren't going into the plan or that the company is
doing something illegal.
I wanted to add there is a structural reason why reporting
is typically different for 403(b)s. In most 403(b) plans, the employee enters into a
direct relationship with the financial organization. You actually own the applicable
assets -- they are held in your name. Your contributions go directly into an account that
is registered in your name.
In contrast, the assets of a 401(k) are typically owned by
the trustees. They are registered in the name of the trust rather than the individual
participants. These assets are then tracked in a computer system that records how many
shares or dollars each participant has in his "account". This account is merely
a bookkeeping entry on the computer system, not a legal entity that owns the assets. The
reporting of how many shares are purchased each time money is invested is made to the
trustees who own the shares, rather than to the participants.
For example, your husband's company could decide to invest
in mutual funds offered by another mutual fund company. Because the shares would be owned
as a block of shares by the trustees rather by each participant, the reporting to
participants would be the same as it is now rather than what you have experienced with
your 403(b).
Q: I have two jobs, one full-time and one part-time. Can
I have two 401(k) plans at the same time?
TB: You may contribute to more than one plan,
providing you are eligible to contribute to each. Some employers don't allow part-time
employees to contribute to their 401(k) plan.
If you do contribute to both, your total contributions
during any calendar year may not exceed the maximum ($11,000 for 2002) plus the catch-up
contribution if you are over age 50. That means if you contribute to both, you will be
responsible for maintaining the bookkeeping to make sure you stay within the government's
limits.
Q: When I began working at my current employer in
January 2000, I was 60 years old. There is a one-year waiting period to participate in the
401(k). I joined the plan as soon as I could in January 2001. I asked about vesting since
the plan had a seven-year vesting schedule for the company contributions and I would reach
retirement age before the vesting schedule allowed me to be fully vested. I was told that
I would be considered 100 percent vested when I retire at age 65. Is this correct?
TB: Each plan is required to have what is known as a
normal retirement age. Many plans typically pick age 65. Full vesting of employer
contributions occurs at this age, regardless of your years of service. So, what you have
been told is correct providing 65 is your plan's normal retirement age.
By the way, included in the 2001 tax law are new vesting
rules. Your employer is required to change its plan to provide full vesting of matching
contributions after six years, instead of seven, if it uses a graded vesting schedule.
Under a graded vesting schedule your ownership of employer contributions increases over
time. Profit-sharing or other employer contributions still are allowed to vest over a
maximum of seven years.
Q: I am over 65 and still working. I recently had to
take $24,000 out of my 401(k) plan to use in a real estate transaction. When this
transaction is finished in about 10 days, I will have that money back into my hands. Can I
then roll that money into an IRA without paying taxes on it? And, do I even qualify for
the IRA tax-deferred?
TB: I am assuming your plan includes a provision
that permits withdrawals for any reason after reaching age 59 1/2. If this is a single
distribution withdrawn under this provision, you should be able to roll the entire amount
into an IRA but you must do so within 60 days after receiving the distribution.
The rollover should not be taxable, which will enable you
to recover any taxes that were withheld when you file your next tax return. But, you
should be aware that your employer was required to withhold 20 percent of your withdrawal
for taxes. You must make that up out of your own pocket when you complete the rollover,
otherwise that portion of withholding will be considered a taxable distribution and in
turn subject to taxes. In other words you need to put into the IRA the exact amount
withdrawn from the 401(k) before taxes in order to avoid paying taxes. You can reclaim the
withholdings when you file your tax return.
Because you are older than 59 1/2 you are exempt from the
10 percent early withdrawal penalty, so that shouldn't be a concern.
When you roll this money into an IRA it will continue to be
tax-deferred, including the growth. Your eligibility to do the rollover will have passed
if you are beyond the 60-day period.
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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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