Ted's Table

TB: I answered last week's questions while I was on the first day of vacation. A reader pointed out that one of the answers was somewhat incorrect, which proves either that I needed the vacation or that you shouldn't try to incorporate work and play.

Excess employee pre-tax contributions must be refunded for a calendar-year plan by March 15th (not March 1st) in order for the employer to avoid the 10% penalty tax. The correct 1099 Form for reporting the contribution that is refunded is the 2000 1099-R if the refund was made after December 31, 1999. The reporting code on the 1099 will indicate the year of taxation. For example, if the refund was made on February 5, 2000, the participant receiving the refund should receive a 2000 1099-R indicating the refund was taxable for 1999. Thanks to Wes Stanley for bringing this to our attention.

TB: You are permitted to use the 60-day period after you receive the "distribution" from your account to make up the unpaid loan balance. You may do this by using other funds, which would be added to your IRA rollover account.

TB: If the trailer will be your primary residence, you should be able to finance this purchase via a plan loan. The ERISA attorney we use for technical support discussed this point with a Department of Labor official last week. He was told that there is a rule limiting the payment period to a maximum of 10 years when purchasing a trailer as a primary residence. Our attorney asked this official where this rule appears and he was then told that there isn't any rule.

We cannot find anything that says that a primary residence must be brick and mortar. Such a requirement would in fact be discriminatory. The cooperation of your employer is needed to establish a payment period that will extend beyond five years. Because 401(k) loans are a big administrative pain generally, many plans do not permit loan repayment periods beyond five years.

I personally would advise a plan sponsor that was willing to go beyond five years for the purchase of a trailer to limit the repayment period to the maximum period permitted by an independent, third-party lender.

TB: The company may legally distribute your money to you before they receive IRS approval of the plan termination; however, it doesn't make sense for them to do so because IRS approval includes the benefits that are to be distributed. In some instances, adjustments in the proposed distributions that are submitted to the IRS are required in order to obtain IRS approval. It obviously is difficult and perhaps impossible to make such adjustments after the benefits have been distributed. Seeking IRS approval of a plan termination protects both the employer and the participants. For example, tax-deferred rollovers are permitted only for distributions from a qualified plan. Delaying the distributions until IRS approval is received will enable the participants to roll the money over without fear of disqualification, which otherwise could occur if the employer is audited after the plan has been terminated.

TB: You are correct that full vesting is required whenever a "partial termination" occurs, regardless of service. Generally the IRS considers a work force reduction in excess of 20% to be a partial reduction. The 20% guideline applies to the total participant base of the plan. In your type of situation, the employees who are engaged with a specific contract frequently work for a business unit of a much larger employer. A major issue in your situation is whether the 75% reduction you refer to applies to just a business unit or the entire employment base covered by the plan. If indeed there was a 75% reduction of the entire work force covered by the plan, full vesting would be required.

Some employers select investment vehicles, which have back-end surrender charges, such as variable annuities. Some contracts waive the surrender fees for normal benefit distributions but impose them when there is a plan termination or when the employer moves all the money to a new provider. The specific terms vary by contract. It would appear in this instance that the provider considers this transaction to be a plan termination, which triggers the surrender penalty, but your former employer does not consider it to be a plan termination. If this is correct, there is an obvious contradiction. You and your fellow employees should seek full vesting if 75% of the plan's total participant base was involved in this transaction. You should also request a written explanation of the surrender fee from the provider's representative. If they are applying this charge because there has been a plan termination under their contract terms, you ask the former employer to reimburse you for this expense because you had no control over this situation. You should inform your former employer that you will contact the Department of Labor to request their help if you do not receive satisfactory results. Their number is 800-998-7542.

TB: You must either leave your employer after you attain age 55 or have your account distributed as an annuity income stream in order to avoid the 10% early distribution penalty tax. If you wait until age 55 to retire, the early distribution penalty tax will not apply if you take the money out of the plan.

TB: The law was changed effective January 1, 1999 so that the 25% maximum contribution limit applies to gross earnings prior to employee 401(k) and/or Section 125 pre-tax contributions. It should be noted that the 25% limit applies to the compensation definition that is contained in the plan document for making contributions. For example, some employers tie contributions to base pay, excluding overtime, bonus, etc. If your plan document limits contributions to base pay, then the 25% limit must be applied to this compensation amount before being reduced by employee pre-tax 401(k) and Section 125 contributions.

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: I answered last week's questions while I was on the first day of vacation. A reader pointed out that one of the answers was somewhat incorrect, which proves either that I needed the vacation or that you shouldn't try to incorporate work and play.

Excess employee pre-tax contributions must be refunded for a calendar-year plan by March 15th (not March 1st) in order for the employer to avoid the 10% penalty tax. The correct 1099 Form for reporting the contribution that is refunded is the 2000 1099-R if the refund was made after December 31, 1999. The reporting code on the 1099 will indicate the year of taxation. For example, if the refund was made on February 5, 2000, the participant receiving the refund should receive a 2000 1099-R indicating the refund was taxable for 1999. Thanks to Wes Stanley for bringing this to our attention.

TB: You are permitted to use the 60-day period after you receive the "distribution" from your account to make up the unpaid loan balance. You may do this by using other funds, which would be added to your IRA rollover account.

TB: If the trailer will be your primary residence, you should be able to finance this purchase via a plan loan. The ERISA attorney we use for technical support discussed this point with a Department of Labor official last week. He was told that there is a rule limiting the payment period to a maximum of 10 years when purchasing a trailer as a primary residence. Our attorney asked this official where this rule appears and he was then told that there isn't any rule.

We cannot find anything that says that a primary residence must be brick and mortar. Such a requirement would in fact be discriminatory. The cooperation of your employer is needed to establish a payment period that will extend beyond five years. Because 401(k) loans are a big administrative pain generally, many plans do not permit loan repayment periods beyond five years.

I personally would advise a plan sponsor that was willing to go beyond five years for the purchase of a trailer to limit the repayment period to the maximum period permitted by an independent, third-party lender.

TB: The company may legally distribute your money to you before they receive IRS approval of the plan termination; however, it doesn't make sense for them to do so because IRS approval includes the benefits that are to be distributed. In some instances, adjustments in the proposed distributions that are submitted to the IRS are required in order to obtain IRS approval. It obviously is difficult and perhaps impossible to make such adjustments after the benefits have been distributed. Seeking IRS approval of a plan termination protects both the employer and the participants. For example, tax-deferred rollovers are permitted only for distributions from a qualified plan. Delaying the distributions until IRS approval is received will enable the participants to roll the money over without fear of disqualification, which otherwise could occur if the employer is audited after the plan has been terminated.

TB: You are correct that full vesting is required whenever a "partial termination" occurs, regardless of service. Generally the IRS considers a work force reduction in excess of 20% to be a partial reduction. The 20% guideline applies to the total participant base of the plan. In your type of situation, the employees who are engaged with a specific contract frequently work for a business unit of a much larger employer. A major issue in your situation is whether the 75% reduction you refer to applies to just a business unit or the entire employment base covered by the plan. If indeed there was a 75% reduction of the entire work force covered by the plan, full vesting would be required.

Some employers select investment vehicles, which have back-end surrender charges, such as variable annuities. Some contracts waive the surrender fees for normal benefit distributions but impose them when there is a plan termination or when the employer moves all the money to a new provider. The specific terms vary by contract. It would appear in this instance that the provider considers this transaction to be a plan termination, which triggers the surrender penalty, but your former employer does not consider it to be a plan termination. If this is correct, there is an obvious contradiction. You and your fellow employees should seek full vesting if 75% of the plan's total participant base was involved in this transaction. You should also request a written explanation of the surrender fee from the provider's representative. If they are applying this charge because there has been a plan termination under their contract terms, you ask the former employer to reimburse you for this expense because you had no control over this situation. You should inform your former employer that you will contact the Department of Labor to request their help if you do not receive satisfactory results. Their number is 800-998-7542.

TB: You must either leave your employer after you attain age 55 or have your account distributed as an annuity income stream in order to avoid the 10% early distribution penalty tax. If you wait until age 55 to retire, the early distribution penalty tax will not apply if you take the money out of the plan.

TB: The law was changed effective January 1, 1999 so that the 25% maximum contribution limit applies to gross earnings prior to employee 401(k) and/or Section 125 pre-tax contributions. It should be noted that the 25% limit applies to the compensation definition that is contained in the plan document for making contributions. For example, some employers tie contributions to base pay, excluding overtime, bonus, etc. If your plan document limits contributions to base pay, then the 25% limit must be applied to this compensation amount before being reduced by employee pre-tax 401(k) and Section 125 contributions.

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.