Ted's Table

TB: If the employee in your example left the company during 1999, he or she has until April 1, 2000, to roll the distribution over. That date is the required minimum distribution (RMD) deadline. Your action resulted in the withdrawal of a portion of the money from a tax-sheltered account sooner than was necessary. This action also probably created a taxable distribution one year earlier than was necessary. Most of us don't like to pay taxes any earlier than necessary.

Plan sponsors are only required to correctly identify to the participant the portion of the distribution that is an eligible rollover. If the rollover is made before the expiration of the time for making RMDs, then the entire distribution is eligible for rollover. I'm not aware of any IRS regulations or documentation giving the plan sponsor the discretion to withhold RMDs from a rollover being made on behalf of a participant who is over age 70 1/2 before the RMDs due date.

If the participant is rolling over his entire 401(k) account into an IRA and the participant has other IRAs, the participant may choose to have the RMDs taken out of the other IRAs. There may be reasons why the participant would prefer to do this.

Your plan document probably doesn't permit you to deduct the RMDs before making the rollover since such action does not comply with the requirements of Sections 401(a)(9) and 401(a)(31) of the Internal Revenue Code. This practice would appear to be a disqualifying defect, which should cease. You may also need to consider corrective action for your past actions. I recommend consulting an ERISA attorney.

TB: Your employer has good reason to be concerned. There have been instances where participants who made very bad investments have sued either the third-party trustee or the employer, claiming that they should have been prevented from making such investments.

Permitting participants to pick individual stocks also significantly complicates the administration of the plan, which is another reason most employers don't permit this type of investment.

TB: Your 401(k) plan contributions are subject to Social Security taxes. Apparently Social Security taxes have been deducted incorrectly from your net income after making your 401(k) contributions. During the early years of 401(k), the pre-tax contributions weren't subject to Social Security tax but the law was changed during the 1980s.

To answer your specific question, contact your employer and tell them about the error. Make sure that they correct your withholdings from this point forward. That takes care of the future.

As to the past, your options are limited. If your employer tries to fix this with the Social Security Administration the company will likely be subject to an IRS audit that leads to penalty fees and taxes. What many employers choose to do is let the past go and correct going forward. The employer figures it will take a chance the IRS won't run an audit. And if the IRS does, the employer just pays the back taxes at that time.

TB: Working for another employer, part-time or full-time, won't impact how the distribution you receive from your current employer is taxed. The key is to leave your current employer after attaining age 55. The distribution won't be subject to the early distribution penalty tax. The situation is somewhat different if you continue to work for your current employer. You must leave your employer after attaining age 55 in order to avoid the early distribution tax. Continuing to work for your current employer, even part-time, could negate your eligibility for this tax break. I recommend not working for your current employer until after you receive the distribution and the tax reporting form showing that the distribution was for early retirement, not as an early distribution.

TB: If you won't be in a lower tax bracket after retirement, you should probably avoid the extra 1.5% annual fee and put the money into the S&P 500 fund outside the 403(b) plan. You will also have greater flexibility on withdrawing the money both pre- and post- retirement with this type of investment outside the plan.

TB: One doesn't have to be an employee to be a trustee; therefore, a trustee who is an employee isn't required to resign trusteeship if he terminates employment. A trustee may resign by submitting his written resignation to the employer. The board of directors also may remove a trustee. The board is responsible for selecting a new trustee. It's common practice for the board to remove a trustee when he ceases to be an employee. Until this occurs, the trustee continues to have the full power of a trustee.

Regarding the distribution of the trustee's benefit, he may direct the financial organization that holds his money to distribute it to him if this agrees with the administrative provisions of the plan document and the authorization requirements that have been established with the financial organization. More specifically, if the plan document and the authorization procedures require the signature of only one trustee, then this individual may direct the financial organization to distribute his benefit. It may be desirable to change the procedures to require two signatures for distributions in the future but this will make it more difficult if the trustees are frequently unavailable.

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

TB: If the employee in your example left the company during 1999, he or she has until April 1, 2000, to roll the distribution over. That date is the required minimum distribution (RMD) deadline. Your action resulted in the withdrawal of a portion of the money from a tax-sheltered account sooner than was necessary. This action also probably created a taxable distribution one year earlier than was necessary. Most of us don't like to pay taxes any earlier than necessary.

Plan sponsors are only required to correctly identify to the participant the portion of the distribution that is an eligible rollover. If the rollover is made before the expiration of the time for making RMDs, then the entire distribution is eligible for rollover. I'm not aware of any IRS regulations or documentation giving the plan sponsor the discretion to withhold RMDs from a rollover being made on behalf of a participant who is over age 70 1/2 before the RMDs due date.

If the participant is rolling over his entire 401(k) account into an IRA and the participant has other IRAs, the participant may choose to have the RMDs taken out of the other IRAs. There may be reasons why the participant would prefer to do this.

Your plan document probably doesn't permit you to deduct the RMDs before making the rollover since such action does not comply with the requirements of Sections 401(a)(9) and 401(a)(31) of the Internal Revenue Code. This practice would appear to be a disqualifying defect, which should cease. You may also need to consider corrective action for your past actions. I recommend consulting an ERISA attorney.

TB: Your employer has good reason to be concerned. There have been instances where participants who made very bad investments have sued either the third-party trustee or the employer, claiming that they should have been prevented from making such investments.

Permitting participants to pick individual stocks also significantly complicates the administration of the plan, which is another reason most employers don't permit this type of investment.

TB: Your 401(k) plan contributions are subject to Social Security taxes. Apparently Social Security taxes have been deducted incorrectly from your net income after making your 401(k) contributions. During the early years of 401(k), the pre-tax contributions weren't subject to Social Security tax but the law was changed during the 1980s.

To answer your specific question, contact your employer and tell them about the error. Make sure that they correct your withholdings from this point forward. That takes care of the future.

As to the past, your options are limited. If your employer tries to fix this with the Social Security Administration the company will likely be subject to an IRS audit that leads to penalty fees and taxes. What many employers choose to do is let the past go and correct going forward. The employer figures it will take a chance the IRS won't run an audit. And if the IRS does, the employer just pays the back taxes at that time.

TB: Working for another employer, part-time or full-time, won't impact how the distribution you receive from your current employer is taxed. The key is to leave your current employer after attaining age 55. The distribution won't be subject to the early distribution penalty tax. The situation is somewhat different if you continue to work for your current employer. You must leave your employer after attaining age 55 in order to avoid the early distribution tax. Continuing to work for your current employer, even part-time, could negate your eligibility for this tax break. I recommend not working for your current employer until after you receive the distribution and the tax reporting form showing that the distribution was for early retirement, not as an early distribution.

TB: If you won't be in a lower tax bracket after retirement, you should probably avoid the extra 1.5% annual fee and put the money into the S&P 500 fund outside the 403(b) plan. You will also have greater flexibility on withdrawing the money both pre- and post- retirement with this type of investment outside the plan.

TB: One doesn't have to be an employee to be a trustee; therefore, a trustee who is an employee isn't required to resign trusteeship if he terminates employment. A trustee may resign by submitting his written resignation to the employer. The board of directors also may remove a trustee. The board is responsible for selecting a new trustee. It's common practice for the board to remove a trustee when he ceases to be an employee. Until this occurs, the trustee continues to have the full power of a trustee.

Regarding the distribution of the trustee's benefit, he may direct the financial organization that holds his money to distribute it to him if this agrees with the administrative provisions of the plan document and the authorization requirements that have been established with the financial organization. More specifically, if the plan document and the authorization procedures require the signature of only one trustee, then this individual may direct the financial organization to distribute his benefit. It may be desirable to change the procedures to require two signatures for distributions in the future but this will make it more difficult if the trustees are frequently unavailable.

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.