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By: Ted Benna Creator of the first 401(k) plan |
December 18, 2001
This Week, Ted Tackles:
In June, my employer stopped investing my 401(k) contributions. What should I do? ... Can I roll my outstanding 401(k) loan over to my new employer's plan when I change jobs? ... My employer is changing the rules so matching contributions will only be deposited once a year, and if the employee leaves before Dec. 31 no match will be made. Can my employer do this? ... The new rules say you can make an age-50 catch-up contribution after putting in $11,000. Can I still make one if my plan caps my contributions at $9,000?
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Q: I am currently enrolled in the 401(k) plan at work.
My employer has been taking 5 percent of my gross wages every week and sending them to the
fund manager. Since June 27, 2001, the funds haven't been sent to the fund manager to be
invested. My employer has held the funds since then. His excuse is that he doesn't have
the time to sort the funds for each employee. Could you recommend a course of action?
TB: Your employer is violating the law and this
should be stopped.
You should call the Department of Labor immediately. The
number I recommend calling is 202.219.8776, the Technical Assistance & Inquiries
number at the Pension and Welfare Benefits Administration (PWBA), which oversees 401(k)
plans. If this doesn't get results, go to the Department of Labor Web site (www.dol.gov)
and find some other numbers to try. When you get to the site, look in the left-hand column
and click on "By Organization," then click on PWBA in the "Quick
Links" box. Next click on "Contact PWBA" in the left-hand column. This will
give you access to key phone numbers, including the one for Ann Combs, who heads this area
for the DOL.
If your employer doesn't have time to do what is required
to administer the plan, he shouldn't have one. I am well acquainted with the many demands
involved in running a small business but there isn't any acceptable excuse for what he is
doing.
I would also seriously consider halting contributions to
the plan until your missing contributions are invested. You and the other participants
have a right to pursue the owner to make up any losses that have occurred because the
contributions haven't been invested. In addition, DOL is likely to impose substantial
fines and other penalties upon your employer.
Q: A couple of years ago I took out a $10,000 loan from
my 401(k) plan. I recently left that firm and have been given a 90-day grace period to pay
the outstanding loan balance. I won't have sufficient funds to pay off the loan before the
end of the grace period but I've heard I might be able to do an indirect rollover of the
defaulted loan at a later date. Is this true?
TB: You have three possibilities: withdraw the
remaining balance from your account; try to roll your account over to your new employer's
plan (including the loan) and make payments; or leave your account with your former
employer and try to continue payments.
In the last instance, your employer could accept loan
payments from you but employers usually don't want to do this because the administrative
cost involved with handling personal checks is too high.
Regarding the second option, your new employer could permit
you to transfer your account into its plan, if it has one, including the unpaid loan
balance. You would then be able to continue loan payments via your new employer. Your new
employer probably won't permit this either, but you can check.
In the first possibility I mentioned, if you withdraw the
money, you can do a rollover but it must be completed within 60 days after the
distribution is made to you. The employer will report the entire amount as a taxable
distribution including the unpaid loan balance. The employer will also be required to
withhold 20 percent of the amount paid to you, net of the loan balance.
For example, assume the amount payable to you is $20,000,
including an unpaid loan balance of $9,000. From your remaining $11,000, your former
employer will withhold 20 percent ($4,000, that's 20 percent of $20,000) for taxes and
will deduct the unpaid loan balance from your distribution. While you will receive a net
payment of $7,000 from your employer, it will have to report to the IRS a $20,000 a
taxable distribution. Depending on your income for the year, you may owe additional taxes.
If you don't want to pay all the taxes owed on that amount,
you must then make up the missing $13,000 within 60 days to complete a tax-deferred
rollover to an IRA. If this isn't going to be possible, you can roll over the $7,000 to an
IRA or your new employer's plan. If you do that, you will have resolved the unpaid loan
balance and will have paid $4,000 of taxes toward the taxes you will owe on the $13,000
distribution.
Another alternative, which your former employer may permit,
is for you to do a direct rollover of the $11,000 remaining in your account after
deducting the unpaid loan balance. In this instance, only the $9,000 unpaid loan balance
will be taxable. You will have to come up with the money to pay the applicable taxes.
The problem you are facing is one of the reasons why I tell
participants that before taking a 401(k) loan they should consider whether they could stay
with their current employers until the loan is repaid.
Q: My employer has changed the rules regarding matching
contributions for our 401(k) plan. Currently, they state: 1) the matching funds will only
be deposited once a year, in March of the year following the year of participation; 2) if
employment is terminated for any reason before Dec. 31, then no matching contributions
will be received for that year.
My questions are these:
a) Can the matching contributions be deposited only once a year? b) Can employees be
forced to forfeit the matching contribution even if they are 100 percent vested?
TB: The answer to both of your questions is yes,
with one restriction. Giving the match only to those who are still employed at the end of
the year must satisfy the coverage requirements of the Internal Revenue Code. These rules
are a bit too complex to explain without getting involved in technical material that is
beyond the scope of this site.
It is important that your employer check each year to see
that the applicable coverage requirements are satisfied. A provision that doesn't give
matching contributions to employees who leave during the year usually isn't desirable for
small employers (10 or fewer employees). This is because there is a high probability the
plan will fail to satisfy the coverage requirements during a year when two or three
employees leave near the end of the year.
Q: I have a question about the catch-up contribution
provision contained in the 2001 tax bill. My plan allows me to contribute a maximum of 18
percent of salary. At a salary of $50,000 I will not reach the $11,000 maximum pre-tax
contribution. Can I contribute the $1,000 catch-up contribution for 2002 even though my
"regular" contribution is capped at $9,000?
TB:The short answer to your question is yes, once
your employer amends its plan document to permit catch-up contributions and as long as you
are at least age 50 in 2002.
For the benefit of readers not familiar with this topic,
included in the 2001 tax bill was a provision allowing all 401(k) participants over age 50
to make what are known as "catch-up" contributions. In 2002, qualifying
employees can contribute an extra $1,000 to their plan after reaching their maximum
individual contribution limit.
One point I have been advocating, following the passage of
this bill, is that employers raise plan contribution limits to 75 percent. This should
open additional savings opportunities for folks such as you and won't hurt the other
participants at all.
Hopefully your employer will increase the 18 percent limit
to at least 50 percent starting January 1, 2002, which would enable you to contribute the
$11,000 basic maximum next year. There isn't any good reason why they shouldn't make this
change. The catch-up contribution can be made only if your employer amends the plan to
permit these contributions. If your employer makes this amendment, it will probably also
increase the 18 percent limit.
The catch-up contribution is made after all other plan
maximums have been hit. This would occur after you contribute 18 percent if your employer
adds catch-up contributions but doesn't increase the 18 percent limit. The catch-up
contribution can be made after you hit the $11,000 maximum if the employer increases the
18 percent limit and adds catch-up contributions.
Again, you must reach age 50 some time next year to be
eligible to make a catch-up contribution.
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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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