Why can't I roll it over into an IRA? If I have to take a distribution, is there any way to delay paying the tax?

TB: From the information you've provided, I think you were contributing into what's known as a nonqualified retirement plan. There are many different types of nonqualified plans. One is a plan which permits HCEs, who must limit their contributions into the qualified 401(k), to make contributions into a nonqualified plan beyond the limits of the qualified plan.

There are many differences between qualified and nonqualified retirement plans. One is that distributions from a nonqualified retirement plan can't be rolled over into an IRA in order to postpone the tax bite. Only qualifying distributions from a qualified plan may be rolled over into an IRA.

The timing of distributions from a nonqualified plan aren't as flexible as with a qualified plan. The timing and the method in which the distribution will occur were established at the time you entered the nonqualified plan. Changes can't be made without triggering a taxable event. The plan you contributed into probably requires payment to be made in a lump sum within a specific time period after leaving the company. You should ask the human resources person whether distribution can be delayed until next year or be split between the two years. The answer may be negative, but there isn't any reason why you shouldn't ask.

For those who are not familiar with the terms qualified and nonqualified, a qualified plan must satisfy the many laws and regulations that are imposed by the government to qualify for special tax breaks. Most qualified 401(k)s must limit the amount HCEs contribute to somewhere between 4 percent and 8 percent of pay, limited to the $10,500 maximum amount, in order to pass the nondiscrimination tests that apply to these plans. Non-HCEs are typically permitted to contribute between 15 percent and 20 percent of pay, subject to the $10,500 maximum.

Some employers establish nonqualified, or HCE, 401(k) plans to enable the HCEs to contribute more than they are legally able to contribute into the qualified plan. This is apparently what your employer did. This plan enabled you to contribute a larger portion of your pretax income during the years you were working for your employer than would have been permitted with the qualified 401(k).

Question: Will the $10,500 cap on 401(k) contributions be raised due to inflation? If so, when will this happen? Will it be raised even if the pending legislation in Congress isn't passed?

TB:The $10,500 cap won't increase for 2001. The next increase, to $11,000, is likely to become effective for 2002. However, there may be even better cap increases ahead. Among the laws likely to be passed by Congress before it adjourns this year is one that will increase the maximum annual 401(k) contribution limit to $15,000. This and other changes were passed by Congress last year but they were included in the broad-based tax bill which President Clinton vetoed.

It appears at this point that this year's retirement plan legislation will go to the President without other tax breaks. If this happens, the President will be hard pressed to veto it because the bill has broad-based support from members of both parties.

By the way, this year's retirement legislation proposes to index any contribution cap increases to inflation by the year 2005, so we may not have to wait for Congress in the future.

Question: I'm contributing into my 401(k) at a rate sufficient to exceed the $10,500 limit. My employer is crediting 1/26th of my biweekly contribution into the 401(k) and the remainder to my 401(k) on an after-tax basis. Is there really a way to contribute beyond the $10,500 limit in some after-tax vehicle? My former employer credited all my contributions, but discontinued the 401(k) deduction when the statutory limit was reached.

TB: Most 401(k) plans do not permit after-tax contributions. They limit employees to the maximum pretax amount. The only way you can exceed the $10,500 limit is if your employer establishes a nonqualified plan (my answer above addresses this issue). You can make pretax contributions into a nonqualified plan in excess of the $10,500 limit but a nonqualified plan has some disadvantages. Among them is the fact that the assets of the plan continue to be an asset of the business, which means your money is at risk in the event the business fails.

Instead of overfunding your 401(k), you should consider making a maximum $2,000 a year contribution into a Roth IRA. This is a better alternative than making after-tax contributions into the 401(k). In both cases (a Roth IRA and after-tax contributions into a 401[k]), the investment income you earn is not taxed during the accumulation period. But, your 401(k) money is taxable when it is distributed, whereas there isn't any tax on money distributed from the Roth IRA.

You also mention that your employer allows you to contribute 1/26th of the $10,500 maximum pretax each pay period, but any additional amount you contribute is after-tax contributions. Your employer is legally permitted to operate the plan in this manner. Many employers permit the entire amount an employee contributes to come from pretax income and then to stop contributions when the $10,500 limit is reached. This method can result in the loss of employer-matching contributions.

Question: I'm 28 years old and earn $70,000 a year. I contribute 15 percent of my pay into my 401(k) with my company matching the first 6 percent. I also began contributing into an IRA, and currently have one year's contribution in, for a total of $2,000. Should I continue to contribute into my IRA if I am saving 15 percent of my income through 401(k) plus 6 percent from my employer? Is it really necessary? In addition, my wife, who currently earns approximately $40,000 a year, also contributes 15 percent with no company match.

TB: My hat is off to both of you because you have made saving a high priority. You should pursue opportunities to become role models for your generation. You don't mention whether you are also saving outside these retirement-oriented programs. The need for nonretirement savings depends largely upon your future family plans including housing. You should factor these other needs into your savings plans, if you haven't already done so.

I assume the money you are contributing into the IRA is not deductible. I suggest contributing into a Roth IRA instead of a traditional IRA if this is the case. Your contributions are taxed in either instance, but by investing in a Roth IRA, you will avoid tax on the investment income at retirement.

Question: I worked for a small company that was bought by a larger one. As of Jan. 1, 2000, our 401(k) was discontinued. I was done working for them as of July 13, 2000.

I was wondering how long it should take to get a rollover or a distribution from your 401(k)? I have heard people say it has to be done within 30 days. One co-worker went as far as contacting a lawyer to get his money. Should I be concerned? I have called and talked to people at the company and get the run around every time.

TB: The money doesn't have to be distributed by any particular date. There are a number of reasons why the delay may be reasonable but the plan representative should explain exactly what is happening. For example, the Internal Revenue Service (IRS) may have been requested to approve the termination of the plan. It can take up to a year to obtain IRS approval. Plan assets usually aren't distributed until after IRS approval is received.

If the co-worker who contacted a lawyer has received his money and the rest of you have not, I would be concerned. In that case, I would contact the same attorney.

If this co-worker hasn't received his money yet, I would keep in touch with him to see what answers his attorney gets. I would also inform the people at the company in writing that you are going to request help from the Department of Labor (DOL) if you don't receive a satisfactory explanation of why the money hasn't been distributed and when distribution can be expected. To contact the DOL, go to their Web site and get the location of the nearest office. Ask for a benefit advisor when you call this office.

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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