Question: I left my job last June when my company was acquired. For cash flow reasons, I elected not to make a deferral from my final paycheck to my 401(k) account. The total amount I've contributed in 2000 is currently $4,500 and my total compensation allows me to reach the maximum $10,500. I've just accepted a new job and will be able to contribute to the 401(k) plan immediately. Must I contribute only a percentage of each paycheck for the rest of the year to reach the maximum? Or, can I direct my entire first paycheck as a lump-sum contribution to my new 401(k), which will place me very close to the maximum amount allowed for the year?

TB: The maximum amount you may have deducted from your pay is dependent upon the plan document and administrative practices of your employer. You are correct that the $10,500 legal limit is an annual limit without regard to a percentage of pay; however, there also is a 25-percent-of-pay limit which includes both employee and employer contributions.

Your new employer could allow you to contribute your entire first paycheck after paying FICA taxes and any other deductions for medical, etc. but, this would likely result in your year-to-date contributions exceeding the 25 percent limit. I advise employers to limit the amount deducted so that the total employee/employer contributions do not exceed 25 percent of year-to-date compensation. For example, if your plan does not have any employer contributions, I would recommend to your employer to limit you to 25 percent of your gross year-to-date pay. This would help them avoid having to refund the excess amount if you were to leave before your contribution dropped to less than 25 percent of your year-to-date pay.

You need to ask your employer what maximum percentage they will allow you to contribute from your first pay. The maximum probably will be in the 15 percent to 25 percent range.

Question: I left my money in a prior employer's 401(k) plan because my balance was over $5,000 and I didn't have a new plan to roll it over into. All of a sudden last month, I received a distribution check with my balance (minus a 10 percent penalty tax!), with no letter of explanation attached, and seemingly no option to roll over now and avoid the tax/penalty. I thought they had to give me the opportunity to roll it over if I wanted. When I called them, they said I didn't have any options because when it was set up, it was set up as a "nonqualified plan" and it's "tainted." What does this mean? And, is he right, that I don't have a rollover option? I don't want to have to take the penalties for early withdrawal when I didn't choose to do so!

TB: The facts involved certainly are a bit unusual. There is a major knowledge gap. You either didn't understand what the plan was when you enrolled or your employer misled you.

The $5,000 limit you refer to is applicable to tax-qualified retirement plans, such as a 401(k). You're correct that terminated employees may not be forced to withdraw their money from a 401(k) if the vested benefit exceeds $5,000. You're also correct that lump-sum distributions from these plans after termination of employment may be rolled over into an IRA or another retirement plan. If your distribution is from a qualified 401(k), you have 60 days to roll the money over into an IRA and you should do so before this deadline.

If the plan is a nonqualified plan, then none of the above is applicable. Typically, these plans distribute the benefit following termination. Terminated employees are required to take the benefit when it is payable and the amount distributed cannot be rolled over into another plan. The entire distribution from a nonqualified plan is taxable in the year it is distributed but there isn't any early distribution penalty tax.

You should have received a written summary of the plan when you enrolled. I strongly recommend reviewing all information you have about the plan to determine whether the misunderstanding is on your side or whether your former employer misled you. Nonqualified plans typically cover only senior managers who earn $100,000 or more. If your former employer is telling employees they're joining a 401(k), but in fact the money is going into a non-qualified plan, that should be stopped.

Question: I'm the 401(k) administrator for my company. Our policy is to let participants start contributing after one month of service.

Recently, I had a situation with a participant who had already contributed $10,500 for the year. If he hadn't told us and had signed up, we would have had to reimburse his contributions later. He wanted to do this so he could receive our company match. His former company did not provide a company match.

Would we have been required to return the company match portion as well as his contributions that exceeded the $10,500 he already contributed?

TB: I tell employers that don't require employees to wait a year to join the plan to include on their enrollment form a section regarding contributions made to a prior plan during the current year. This enables employers to monitor contributions to their plan so that new employees don't exceed the $10,500 limit when contributions to both plans are considered.

When an employee exceeds the limit, he is required to inform his current or former employer of the excess by March 1st of the following year. He actually has the right to pick which plan or plans he wants to make the refund. I've advised employees in similar situations, who have exceeded the maximum limit, to take the withdrawal from the plan that has the lowest level of matching contributions.

Getting to your specific questions, monitoring the maximum limit by considering contributions to the prior plan is a good idea but it does create the dilemma you have described. This employee will lose matching contributions unless you permit him to contribute to your plan. Technically, I'm not sure you can keep him from contributing and getting the matching contribution. He can't keep the match for contributions you are required to return.

His best alternative is to contribute enough to your plan to get the full matching contribution and to allocate the excess to the former employer. This will permit him to keep his contributions in your plan and to retain the match. He must inform the former employer in writing of the excess he wants refunded prior to March 1, 2001. You should also inform him that if the excess isn't returned prior to April 15, 2001, it will remain in the plan and be taxed twice. So, he'll need to keep after the former employer to get the money out before this date.

Having this employee contribute to your plan will also help your plan pass the nondiscrimination test unless he is a 5 percent owner.

Question: I'm 66 years old. I know when I turn 70ý I must start taking money out of my 401(k) and IRA. Should I take the 401(k) and roll it over into an IRA at the same place that I have my IRAs? If I do this, then could I take money from one account at a time?

TB: Having all your tax-deferred retirement savings in one place simplifies things and gives you greater control. Most 401(k) plans permit only lump-sum payments. If this is the case with your plan, you'll want to roll your 401(k) into an IRA prior to age 70ý in order to avoid a lump-sum distribution.

Another problem with a 401(k) is that the employer can change funds at anytime without your approval. Getting administrative support can be difficult years after you leave a company due to personnel changes, corporate restructuring, etc. I recommend transferring your 401(k) money into an IRA so that you will have greater control. I also would do this now, rather than waiting until age 70ý, unless the 401(k) gave me the same or more investment choices than I could get with an IRA. The reverse usually is true — an IRA provides a lot more investment flexibility than a 401(k) plan.

Question: I have an ongoing argument with fellow workers regarding how much workers are contributing from a percentage standpoint into their 401(k) accounts, how much they are receiving, etc.

Do you have any statistical information or Web sites that might have information on these subjects? Also, what do you see as the biggest mistakes that people make with their 401(k)'s?

TB: A Web site (in addition to ours) that you may want to check for 401(k) information is PSCA. This site is maintained by the Profit Sharing/401(k) Council of America, an industry trade group.

Studies I have seen show average contribution rates in the 5 percent to 6 percent of pay range. I think the biggest mistake is the failure to plan for retirement. Most workers have a desire to retire but few have used one of the many retirement calculators that are available to determine whether their savings rate and investment strategy will enable them to meet their goal. The biggest failure is failing to plan.

Question: Our union local is the administrator of our 401(k) plan. Recently there has been talk of breaking away from the national or breaking up our union.

It may just be the ranting of a disgruntled union member; but at a particular Web site regarding our industry, I read that should this happen, the union would have the legal right to confiscate our local's entire 401(k). Is this crazy talk, or should I be concerned?

TB: I think it is crazy talk. The assets of any retirement plan must be used exclusively for the benefit of participants and their beneficiaries. The individuals who are responsible for managing your plan are legally bound to manage the plan assets solely in the best interest of participants. Failure to do so could lead to fines and other penalties, including personal liability. Those who are running your 401(k) plan can make these threats — but if they in fact violate this standard and abuse their power, they are liable for the results.

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.

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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.

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