Ted's Table

Technical Terms Adjusted gross income (AGI) Summary plan description

TB: You may be able to make a tax-deductible contribution to an IRA for 2000. As you may be aware, if you participated in a work-sponsored 401(k) plan, your ability to make a tax-deductible contribution could be limited. An IRA contribution may be deducted if your adjusted gross income is below the applicable threshold. It's not the contribution that you made to a 401(k) plan that could limit an IRA contribution but rather your income.

In your case, your income should keep you below the threshold, unless you have a spouse and your combined incomes push you over the limit. In that instance, a portion of the amount you contribute to an IRA may still be deductible.

If your combined income pushes you to a level where no portion of your contribution to an IRA can be deducted, I recommend contributing to a Roth IRA. The contribution will not be deductible but the money will grow without being taxed. And, here's the real bonus, you won't have to pay any tax on the investment income when you withdraw it from your account.

Remember, you can make a tax-deductible IRA contribution or open a Roth IRA for the 2000 tax year up until April 15, 2001.

TB: An employer is permitted to define compensation to count only base pay excluding overtime, commissions, bonuses, etc. All contributions to the plan, including employee contributions, are tied to the plan's definition of compensation. Most employers use total pay because a special compliance test must be performed whenever the plan uses some other definition of compensation.

I cannot determine from the information you have provided whether your employer is operating within the terms of the plan document or whether the person who handles payroll just doesn't want to be bothered deducting contributions from your bonus. The employer's refusal to withhold 401(k) contributions from your bonus is legal if this agrees with the plan's definition of compensation. Otherwise, what they are telling you is not correct.

You should have received a summary plan description when you joined the plan, which may contain a definition of compensation for contribution purposes. You also have a legal right to see the plan document, which contains the actual definition of compensation. It is up to you how far you want to push this issue.

TB: This one comes up at least once every year around this time. You can leave the excess amount in the plans but you will pay tax on this amount twice if it is not withdrawn prior to April 15, 2001 along with the applicable investment income the contribution generated. The amount in excess of $10,500 will be taxable when you file your return for 2000 and the same amount will be taxed again when it comes out of the plan if it isn't withdrawn prior to April 15, 2001.

You must determine the amount of the excess and decide how much you want refunded from each plan. You may withdraw the excess from one plan or split it between the plans. One factor to consider when making this decision is the applicable employer contribution and the vesting requirements applicable to the employer contribution. You will lose any employer-matching contributions that apply to the excess amount if you withdraw it.

You are supposed to inform your employer (current or prior) of the excess that is to be refunded prior to March 1, 2001 and the employer is to refund this amount, adjusted for investment income, prior to April 15, 2001.

Related Reading Stay in Your Protective Shell How Much Is Your Employer-matching Contribution Really Worth?

I recommend taking the excess from the former employer's plan if all economic factors are equal because this is best for your current employer. However, your former employer may not be very cooperative; you may have to keep after them to get the excess distributed prior to April 15th.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every week. 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.

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.

Ted's Table

Technical Terms Adjusted gross income (AGI) Summary plan description

TB: You may be able to make a tax-deductible contribution to an IRA for 2000. As you may be aware, if you participated in a work-sponsored 401(k) plan, your ability to make a tax-deductible contribution could be limited. An IRA contribution may be deducted if your adjusted gross income is below the applicable threshold. It's not the contribution that you made to a 401(k) plan that could limit an IRA contribution but rather your income.

In your case, your income should keep you below the threshold, unless you have a spouse and your combined incomes push you over the limit. In that instance, a portion of the amount you contribute to an IRA may still be deductible.

If your combined income pushes you to a level where no portion of your contribution to an IRA can be deducted, I recommend contributing to a Roth IRA. The contribution will not be deductible but the money will grow without being taxed. And, here's the real bonus, you won't have to pay any tax on the investment income when you withdraw it from your account.

Remember, you can make a tax-deductible IRA contribution or open a Roth IRA for the 2000 tax year up until April 15, 2001.

TB: An employer is permitted to define compensation to count only base pay excluding overtime, commissions, bonuses, etc. All contributions to the plan, including employee contributions, are tied to the plan's definition of compensation. Most employers use total pay because a special compliance test must be performed whenever the plan uses some other definition of compensation.

I cannot determine from the information you have provided whether your employer is operating within the terms of the plan document or whether the person who handles payroll just doesn't want to be bothered deducting contributions from your bonus. The employer's refusal to withhold 401(k) contributions from your bonus is legal if this agrees with the plan's definition of compensation. Otherwise, what they are telling you is not correct.

You should have received a summary plan description when you joined the plan, which may contain a definition of compensation for contribution purposes. You also have a legal right to see the plan document, which contains the actual definition of compensation. It is up to you how far you want to push this issue.

TB: This one comes up at least once every year around this time. You can leave the excess amount in the plans but you will pay tax on this amount twice if it is not withdrawn prior to April 15, 2001 along with the applicable investment income the contribution generated. The amount in excess of $10,500 will be taxable when you file your return for 2000 and the same amount will be taxed again when it comes out of the plan if it isn't withdrawn prior to April 15, 2001.

You must determine the amount of the excess and decide how much you want refunded from each plan. You may withdraw the excess from one plan or split it between the plans. One factor to consider when making this decision is the applicable employer contribution and the vesting requirements applicable to the employer contribution. You will lose any employer-matching contributions that apply to the excess amount if you withdraw it.

You are supposed to inform your employer (current or prior) of the excess that is to be refunded prior to March 1, 2001 and the employer is to refund this amount, adjusted for investment income, prior to April 15, 2001.

Related Reading Stay in Your Protective Shell How Much Is Your Employer-matching Contribution Really Worth?

I recommend taking the excess from the former employer's plan if all economic factors are equal because this is best for your current employer. However, your former employer may not be very cooperative; you may have to keep after them to get the excess distributed prior to April 15th.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every week. 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.

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.