The Experts

Ask the Expert

	By: Ted Benna Creator of the first 401(k) plan
August 1, 2002 This Week, Ted Tackles: Where can I get information on new 401(k) laws being proposed in Congress? ı Does the $11,000 annual 401(k) contribution limit include any employer match? ı The rollover check just arrived at our company for an employee who we recently laid off. What are the employee's options? ... How can I change my money purchase plan to a profit-sharing plan?

Q: Where can I get information on the new 401(k) laws being proposed in Congress? Specifically, will people have more control to invest in stocks from their 401(k)?

TB: There are many bills that have been introduced during this Congressional session that, if enacted, would impact 401(k)s. This happens every year but most aren't enacted.

Many of the pending bills relate to the Enron collapse. I believe that legislative changes aren't likely this year because it is an election year. Both parties are likely to use Enron and the accounting problems at other companies as an election-year issue. I expect the major focus will be on which party is to blame and which one has the best answers, not on passing legislation.

The Profit Sharing/401(k) Council, located in Chicago, and the American Benefits Council, located in Washington, D.C., are two organizations that follow and report on pending legislation. Links to their sites are provided in the "More Information" sidebar.

Further, given the pervasiveness of 401(k) plans in our society, the progress of pending legislation is regularly covered by national newspapers.

Q: Does the $11,000 annual 401(k) contribution limit include any employer matching contributions?

TB: The $11,000 limit includes only employee pre-tax contributions. All employer contributions, matching and non-matching (such as profit sharing), may be made in addition to this limit.

These additional limits are governed by Section 415 of the IRS code, which defines the maximum amount that employers and employees may contribute to qualified retirement savings plans in a year. This limit is currently the lesser of 100 percent of pay or $40,000.

Q: One of our employees requested a direct rollover from a former employer to our plan. Before we received the check, our company laid off the employee. The check was made payable to our plan trustee. What are the employee's options? Does the 60-day rule apply?

TB: The 60-day rule doesn't apply since the check is payable to the trustee. I recommend depositing this check into your plan immediately even though the employee has been laid off.

If this employee isn't called back to work, the rollover will become part of the benefit distribution from your plan, and such distributions must be made in accordance with the rules of your plan.

Q: I have a qualified money purchase plan with a brokerage firm. They tell me I need to amend and restate it by year-end due to new IRS regulations. Additionally, I want to change it to a qualified profit-sharing plan for 2002. The brokerage firm tells me I can do this in one of two ways: either convert (merge it into the profit-sharing plan) or terminate the money purchase plan.

If I convert the plan, they say I will need to file a form 5500 (Annual Return/Report of Employee Benefit Plan) every year with the IRS. They also say the proceeds from the money purchase plan will continue to follow the distribution rules of the money purchase plan and, in 20 years when I retire, I will need to waive the joint and survivor annuity every time I take a distribution. This seems like an administrative nightmare.

If I terminate the money purchase plan, they say I need to only file IRS Forms 5500 and 5310 (Application for Determination for Terminating Plan) once. Since I am the only one in the qualified retirement plan and do not see that changing, it would appear the best route to go would be to terminate the money purchase plan. Is this correct?

TB: I agree that terminating the money purchase plan is probably your best option. You can transfer this account directly to an IRA or to the profit-sharing plan. In either instance, this should be reported as a distribution and a rollover. This will eliminate the need to retain the annuity features of the money purchase plan.

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.

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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.