The Experts

Ted's Table

November 6, 2001

My plan has a 15-percent-of-pay limit that I want my employer to raise, but it won't. What other limits could reduce my contributions, and why? ... If I transfer 200 shares of company stock into my 401(k) account, will it be sold at today's price? ... My co-worker said she can roll her entire 401(k) to an IRA while still working. Is this true? ... If my former employer gets into financial trouble, can it access my 401(k) money?

Q: I have been in a debate with my benefits department over the impact the new tax law will have on my plan's 401(k) contribution limits.

Our plan currently has an employee-contribution limit of 15 percent of salary to keep the employer from running into problems with the maximum percent-of-pay limits for the profit-sharing and ESOP plans. I have asked if they will be revising the 15 percent limit for the employees. So far, the answer has been "no."

My employer acknowledges that the IRS has raised the percent-of-pay limit but says that there is still a 25-percent restriction in place. I keep reading about the percent-of-pay limit being raised to 100 percent "unless the employer's plan has other limits." My question is what other limits would our plan face and why?

TB: The percentage-of-pay limit you are referring to applies to individuals. You are correct that this limit, which includes both employee and employer contributions, has been increased from 25 percent to 100 percent beginning next year.

There is also a limit that is applied at the employer level. Currently a corporate employer may deduct only 15 percent of total covered payroll as a contribution to a profit-sharing/401(k) plan. Assume the total annual pay of eligible employees at your company is $1 million. The company can deduct only $150,000, counting all employer and employee contributions made to a profit-sharing/401(k) plan. The corporate deduction limit has been increased to 25 percent for 2002.

Your employer could change the plan to permit employee contributions in excess of 15 percent of pay unless the employer contributes more than 10 percent of your pay to the plan. Again, assume that your employer contributes 10 percent of each eligible employee's pay. This leaves an average of 15 percent that eligible employees could contribute. Obviously, not all employees can, or do, contribute 15 percent of pay. The average 401(k)-contribution rate by employees is usually in the 4-percent to 8-percent-of-pay range. In fact, there aren't many employees who can afford to contribute more than 15 percent. This fact leaves room for other employees to contribute more.

Your employer should give you and the few other employees who want to contribute more than 15 percent the opportunity to do so. If the plan were amended to permit employees to contribute up to 75 percent of pay, it's unlikely that the combined employee/employer contributions will total more than 25 percent of total eligible payroll.

By the way, the maximum employee dollar limit is another reason why the 25 percent deduction limit isn't likely to be exceeded, because an employee who earns $100,000 can contribute only $11,000, plus the $1,000 catch-up contribution if he is over age 50 in 2002.

Q: In a 401(k) account, how do I sell company stock at a market price? If I transfer 200 shares/units of stock will it be sold at today's market price?

TB: It's impossible for me to say. Each employer with a plan permitting investments in company stock must establish its own set of administrative procedures with the organization that does the recordkeeping. Some plans trade in actual shares of stock and others use stock funds that don't produce the same results as trading exclusively in company stock.

You will have to contact either the person at your company or at the organization that operates your plan to find out exactly how the company stock trades in your plan are handled.

Q: One of my co-workers claimed that:

She can roll over her entire 401(k) account to her traditional IRA while she is still working for the company. (The company's 401(k)-plan administrator confirmed that this is true.)

401(k) deductions from her paycheck would be deposited to her traditional IRA every month.

So, basically, there is no need for a 401(k) account at all. Is that true?

TB: Several times I have had participants tell me they are permitted to take their money out of their 401(k) and to transfer it to their IRA anytime. Some participants who don't like the investments they have in their 401(k) have told me they are permitted to take the money out and put it into their IRA.

The only time this would be legally possible during active employment, from everything I know, is after the worker reaches age 59ı. Under federal law, withdrawals may be made for any reason after this age. Otherwise, access to 401(k) funds during active employment is limited to hardship withdrawals, which aren't eligible to be rolled over, and to loans, which can't be rolled over either.

I wonder if the person you have referred to is covered by a SIMPLE-IRA rather than a 401(k). These plans are very similar to a 401(k) but they are funded using IRAs. What she has told you would be acceptable for such a plan, but the IRA account for such a plan has slightly different rules than a traditional IRA.

Another possibility is that the plan isn't being operated in accordance with the legal requirements for a 401(k), which isn't a good idea.

Q: The 401(k) with my former employer is administered by an insurance company whose monthly reports state "Your most recent contribution was: $X" plus the comment "Contributions are allocated to your account when received."

Does this mean that my former company could not access my money if it were to get into financial trouble?

Since the FDIC does not insure 401(k)s, I am very concerned about this. Although I would prefer to leave the money there because the interest rates are good. I will decide whether to roll over depending on your answer.

TB: The money that is in your plan account must be used solely to provide plan benefits. The employer may not use it. However, laws can be broken. It isn't legal to rob banks but some people do so.

It's highly unlikely that your former employer would violate the law and it is also unlikely that the insurance company would let the employer withdraw the money illegally. Your former employer is also required to carry a fidelity bond to cover up to 10 percent of the plan assets against dishonest acts.

Bottom line: your money should be safe where it is but you should transfer it to an IRA, over which you have control, if you aren't comfortable for any reason.

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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