Ted's Table

TB: The term "key employee" isn't connected to the special non-discrimination tests that are applicable solely to 401(k) plans. Rather this term applies to the "top-heavy" rules, which are applicable to all qualified retirement plans. A plan is top-heavy whenever more than 60% of all assets in the plan belong to the key employees. The rules for determining the key employees are rather complex but generally owners are included in this group, and certain officers. The determination of whether an officer is a key employee is based upon the facts and circumstances rather than the title of the individual. One of the key factors is the amount of decision-making authority the individual has. Typically the president is considered a key employee.

When a plan becomes top-heavy, the company is required to make a minimum contribution for each eligible non-key employee. The minimum required contribution is equal to the lesser of the highest percentage contributed by a key employee or 3% of pay. You may have been told that you couldn't contribute to the plan because the company wanted to avoid having to contribute the minimum required percentage for non-key employees. For example, if you had contributed 3% or more of your pay, then the company would have been required to contribute 3% of each eligible non-key employee's pay.

TB: I'm not familiar with the term 401(k) lite. Perhaps one of our readers can answer this for both of us.

TB: You're limited by the rules that are contained within the 401(k) plan document even if these rules are more restrictive than what the law allows. Many 401(k) plan documents require contributions to be set as a specific percentage of pay rather than a fixed dollar amount per pay. If this is what your plan requires, it's legally permitted to do so.

The real problem in your situation is the 15%-of-pay limit that apparently is in the plan document. You should ask to have the plan amended to increase this percentage to the 25% maximum limit. This change would enable you to contribute the maximum dollar amount. Technically, this change must be addressed through the collective bargaining process. So, you should ask your union representatives to seek this change when your labor contract is re-negotiated. (Keep in mind that the 25% of pay limit applies to your contributions and employer matching contributions combined.)

TB: You're referring to two different processes involved with 401(k) loans. The first is the actual process of investing the money that's deducted from your pay to repay the loan. The other process is tracking the unpaid loan balance.

With most 401(k) loans, the amount that's deducted from your pay to repay the loan is invested back into the funds you've selected. These monies are deposited to the plan and are invested at the same time as other contributions to the plan. Assume your contributions to the plan are being split equally, with 20% going into each of five different mutual funds. The entire $318.64 deducted to repay the loan is going directly into these five funds to be invested for your benefit. If you check your account statement, you should find the money flowing into these different funds in this manner.

The next issue is the tracking of your unpaid loan balance. The money taken from your pay is applied to repay the amount you borrowed and to pay the required interest. It's necessary to allocate the amount deducted from your pay between interest and principal payments in order to determine the updated loan balance. Only the portion that's allocated to principal payment will reduce your unpaid loan balance. That's similar to what happens when you pay a home mortgage. In this instance, $77.54 is the monthly interest payment and $241.10 is the principal payment. The unpaid loan balance can be reduced only by the $241.10 principal payment.

Your plan administrator updates the unpaid loan balance monthly because 401(k) loan administrative systems are based upon monthly repayment. The loan balance updating is strictly a bookkeeping function. The fact that the updating occurs monthly rather than each pay period is not significant.

Bottom line: you don't have any reason to be upset.

TB: Excess liability coverage is rather inexpensive. You should consider an umbrella policy of perhaps $1 million to give you added security during your retirement years.

TB: You should contact the Department of Labor at 800.998.7542. Good luck!

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: The term "key employee" isn't connected to the special non-discrimination tests that are applicable solely to 401(k) plans. Rather this term applies to the "top-heavy" rules, which are applicable to all qualified retirement plans. A plan is top-heavy whenever more than 60% of all assets in the plan belong to the key employees. The rules for determining the key employees are rather complex but generally owners are included in this group, and certain officers. The determination of whether an officer is a key employee is based upon the facts and circumstances rather than the title of the individual. One of the key factors is the amount of decision-making authority the individual has. Typically the president is considered a key employee.

When a plan becomes top-heavy, the company is required to make a minimum contribution for each eligible non-key employee. The minimum required contribution is equal to the lesser of the highest percentage contributed by a key employee or 3% of pay. You may have been told that you couldn't contribute to the plan because the company wanted to avoid having to contribute the minimum required percentage for non-key employees. For example, if you had contributed 3% or more of your pay, then the company would have been required to contribute 3% of each eligible non-key employee's pay.

TB: I'm not familiar with the term 401(k) lite. Perhaps one of our readers can answer this for both of us.

TB: You're limited by the rules that are contained within the 401(k) plan document even if these rules are more restrictive than what the law allows. Many 401(k) plan documents require contributions to be set as a specific percentage of pay rather than a fixed dollar amount per pay. If this is what your plan requires, it's legally permitted to do so.

The real problem in your situation is the 15%-of-pay limit that apparently is in the plan document. You should ask to have the plan amended to increase this percentage to the 25% maximum limit. This change would enable you to contribute the maximum dollar amount. Technically, this change must be addressed through the collective bargaining process. So, you should ask your union representatives to seek this change when your labor contract is re-negotiated. (Keep in mind that the 25% of pay limit applies to your contributions and employer matching contributions combined.)

TB: You're referring to two different processes involved with 401(k) loans. The first is the actual process of investing the money that's deducted from your pay to repay the loan. The other process is tracking the unpaid loan balance.

With most 401(k) loans, the amount that's deducted from your pay to repay the loan is invested back into the funds you've selected. These monies are deposited to the plan and are invested at the same time as other contributions to the plan. Assume your contributions to the plan are being split equally, with 20% going into each of five different mutual funds. The entire $318.64 deducted to repay the loan is going directly into these five funds to be invested for your benefit. If you check your account statement, you should find the money flowing into these different funds in this manner.

The next issue is the tracking of your unpaid loan balance. The money taken from your pay is applied to repay the amount you borrowed and to pay the required interest. It's necessary to allocate the amount deducted from your pay between interest and principal payments in order to determine the updated loan balance. Only the portion that's allocated to principal payment will reduce your unpaid loan balance. That's similar to what happens when you pay a home mortgage. In this instance, $77.54 is the monthly interest payment and $241.10 is the principal payment. The unpaid loan balance can be reduced only by the $241.10 principal payment.

Your plan administrator updates the unpaid loan balance monthly because 401(k) loan administrative systems are based upon monthly repayment. The loan balance updating is strictly a bookkeeping function. The fact that the updating occurs monthly rather than each pay period is not significant.

Bottom line: you don't have any reason to be upset.

TB: Excess liability coverage is rather inexpensive. You should consider an umbrella policy of perhaps $1 million to give you added security during your retirement years.

TB: You should contact the Department of Labor at 800.998.7542. Good luck!

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.