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Previous Questions & Answers
1. What is a 401(k)?
401(k) is a section
of the Internal Revenue Code that gives a special tax
break to help people save for retirement. With 401(k),
you delay taxes on the amount you save, so your employer
withholds less taxes today. Your money earns interest,
your interest earns interest, and you delay taxes on
all of those dollars until you start receiving benefits.
2. How much can I defer into my 401(k) plan?
For the next few years, the amount
the law will allow will change. For 2004, the maximum
amount that can be deferred is $13,000. However, your
employer's plan may limit you to a lesser amount.
3. Does my employer have to match my
deferral?
No. An employer match is not required
unless your plan is a "Safe Harbor 401(k)".
4. Can
I stop and start contributing to your employer's 401(k)
plan?
You may stop making contributions
to you plan at any time for any reason. If you stop
contributing, the money you've already contributed
will stay in the plan and continue to be tax-deferred.
You can typically resume making contributions on the
next plan entry date as defined by your plan.
5. What is Vesting?
Vesting simply means
you cannot forfeit your benefits. The vested amount
in your retirement plan is how much money you could
take with you if you terminate employment. You are
always fully vested in the contributions you make.
Vesting of company contributions are typically based
on your years of service and also may require a minimum
number of hours worked.
6. What is a Profit Sharing Plan?
A profit sharing plan
is a "pat" on
the back for your hard work. An employer funds the
entire contribution.
Generally, a contribution is made from company profits.
But it can be made regardless of how much
profit has in a given year.
7. When can I get my money out of my retirement
plan?
For a pension
plan, you may get your money only upon retirement/termination,
death, or disability. Other
plans, such as profit sharing plans or 401(k) plans
may also allow for a "Hardship" withdrawal.
You need
to review your plan's "Summary Plan Description" to
determine if this is allowed by your plan.
8. What
is meant by "early withdrawal"?
If you take a distribution before 59
and don't roll over your retirement funds to another
qualified plan or
an IRA within 60 days, you'll typically be required
to pay a 10 percent IRS early-withdrawal penalty. You
will also pay regular income taxes.
9. When I take a distribution from my employer's
plan, am I taxed?
It depends. A distribution
made to another qualified plan or IRA is considered
a "Trustee to Trustee" transfer,
and, consequently will not be taxed. A distribution
directly to you must have 20 percent federal income
tax of the distribution withheld. If you then keep
the distribution you will still face income taxes
and early-withdrawal penalties, if they apply.
10. Can I leave my money in my employer's salary
deferral plan if I change employers?
Yes. You can leave your money in the
plan if the balance is greater than $5,000. If you
have more than $5,000 in your account, your employer
would need your written consent before paying the money
to you. However, if your vested account is less than
$5,000 your account can be paid without your signature.
11. How is a 401(k) loan affected by a participant
who goes on active military duty?
Loan repayment may
be suspended for the entire period of the leave period
for active duty. The term of the loan may be extended
beyond the normal five-year limit to the “latest
permissible term of the loan" plus the
period of military leave. When participants return
from military service, loan repayments must resume
and
be made in substantially level payments. The Soldiers’ and
Sailors’ Civil Relief Act of 1940 provides that
a plan may not charge more than a 6 percent annual
interest rate on the participant’s loan during
the period
of military service.
12. Must a 401(k) plan allow participants returning
from military leave to makeup deferrals they missed?
The Uniformed Services
Employment and Reemployment Rights Act of 1994 (USERRA)
provides that employees who leave their current employment
to serve in the military, and who are re-employed by
the employer following their military service, have
the right to make up any elective deferrals that could
have been made had there been no intervening military
service.
13. How long must a plan keep documentation about
a profit sharing /401(k) plan?
Plans are required to keep records
to verify, explain, or clarify the accuracy and completeness
of reports that have been filed with the government
for six years after the filing date. It is important
to keep
everything that shows the plan was properly administered,
not just for filing and tax purposes but to
demonstrate fiduciary compliance also.
