Ted's Table

TB: You're correct that the deadline for rollovers is 60 days from the date of receipt. The situation you described sounds questionable, but I guess it is possible. I normally recommend having the employee provide a letter or complete a form indicating the name of the prior plan, the date the check was received, and that the distribution doesn't include any after-tax contributions.

The after-tax contributions are a problem if your plan doesn't provide for such contributions. I would request a copy of the distribution statement, which the employee should have received. I recommend also getting a separate investment selection from the employee for the rollover because the employee may not want to invest this money in the same way new contributions to the plan are being invested.

You have the right to refuse to accept any rollovers that you think don't satisfy the applicable legal requirements, including the provisions of your plan document. You can also establish administrative procedures that are consistent with the law and your plan document. For example, for plan-to-plan rollovers, you can require the check be issued payable to your plan, rather than to the employee. The employee will be less likely to hold the check, deciding whether to deposit it into his personal checking account or to roll it over to your plan.

You can require the employee to use an IRA rollover account as a conduit if the check is made payable to the employee. The financial organization accepting the rollover will have to determine whether it is a qualifying rollover.

TB: When the employee requests a refund before the money has been deposited into the plan, you can return it by reversing the payroll deduction process. The company should retain the money that has been deducted rather than sending it to be invested. You should increase the employee's gross pay by this amount during the next payroll period. FICA taxes shouldn't be deducted when you return this money to the employee because these taxes were already deducted when you processed the 401(k) deduction.

Money that has already been deposited into the plan must stay there until an event occurs that qualifies for a distribution. These are limited to an IRS-approved financial hardship, attaining age 59½, or terminating employment. One of the disadvantages of negative elections is having employees stop contributing after only one or two pay periods. You are stuck with a small account until the employee either leaves or starts to contribute again.

TB: The fact that half of your eligible payroll is found in the top 10% shouldn't stop you from having a qualified plan. You simply need a plan design that will minimize your compliance problems. The following are some alternatives. The first is a SIMPLE-IRA. The highly paid employees may contribute $6,000, regardless of how much the other employees contribute. There is a required employer contribution, which can be as low as 1% of pay the first two years and 2% thereafter. There isn't any installation or annual administrative fee. This fee savings may be sufficient to fund the required employer contributions.

The second alternative is a Safe-Harbor 401(k). The highly paid employees may contribute up to $10,500, regardless of how much the other employees contribute. The minimum-employer contribution is 3% of pay for all the eligible employees, including those who don't contribute. The highly paid employees may receive this 3% contribution in addition to the $10,500 maximum-employee contribution.

The third alternative is the regular 401(k) plan, where the amount the highly paid employees may contribute is tied to the amount the other employees contribute. The employer is also required to make a 3% minimum-employer contribution if 60% or more of the money in the plan belongs to key employees, which is likely in your case. The compliance requirements for this plan can be difficult for small employers with your employee demographics.

Another alternative is to have a retirement planning consultant design a more sophisticated plan such as an age-weighted profit sharing plan. The fees are higher for the more complex plans but the results can be very beneficial. For example, in the right situation, the highly paid employees may get a $30,000 contribution and other employees a contribution equal to 3% of pay.

A non-qualified plan is not likely to be a good alternative because the business doesn't receive a current tax deduction for any money that goes into the plan. For example, if you put $10,500 into a qualified plan, you don't pay current tax, and the business is able to deduct this amount. With a non-qualified plan, you don't pay current tax but the business doesn't get a deduction so it must pay tax on the amount you put into the plan.

This additional tax burden is placed on the owners when the business is structured as a Sub-S corporation or a limited partnership. Non-qualified plans are widely used by publicly owned companies, which tend to be less concerned about the deferred tax deduction. They are less common among small, privately owned businesses.

TB: The information you are receiving satisfies the legal requirements. The lack of hardship withdrawals, investment options, and quarterly statements is quite unusual, but all these omissions are legally permissible. Your employer apparently wants a plan that is as simple and inexpensive as possible to operate. You may ask your employer for more information about the plan investments but the employer isn't required to provide any additional information.

Your primary alternative is to stop contributing, but that won't be a good decision, particularly if there is an employer-matching contribution that you would lose. The major issue should be the actual investment results rather than the amount of information you are receiving. I would stay in the plan if the annual investment return is comparable to what you could get if you were investing outside the plan.

TB: Your husband is permitted to leave the money in the current plan if he has more than $5,000 accumulated. If he hasn't been in the plan long enough to accumulate this amount, he may have the money transferred directly to an IRA with a financial organization of his choice, or to another plan if he is employed by a company that has a plan. A 401(k) may be established only by an employer, not by an individual. Your husband should contribute to an IRA if he is now employed by a business that doesn't offer any retirement benefits.

TB: The government gives tax breaks to help employees save for retirement because Social Security alone is not sufficient. Retirees who have no other source of income become an economic drag on any society. This is why all industrialized societies provide tax incentives to help employees accumulate additional retirement funds.

Access to money in retirement plans, like 401(k)s, for non-retirement purposes is limited because withdrawing the money is contrary to the purpose of these plans. The law provides that any money taken out of your 401(k) as an early distribution is fully taxed and a 10% penalty tax is added on top. The 10% penalty tax is imposed to discourage early withdrawals.

It generally is not desirable to put non-retirement money into a 401(k) due to the penalty tax. When you take money out early, you may pay more taxes than you saved when you put the money in the plan. You should use other methods of saving for short-term needs unless you have a good employer-matching contribution.

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: You're correct that the deadline for rollovers is 60 days from the date of receipt. The situation you described sounds questionable, but I guess it is possible. I normally recommend having the employee provide a letter or complete a form indicating the name of the prior plan, the date the check was received, and that the distribution doesn't include any after-tax contributions.

The after-tax contributions are a problem if your plan doesn't provide for such contributions. I would request a copy of the distribution statement, which the employee should have received. I recommend also getting a separate investment selection from the employee for the rollover because the employee may not want to invest this money in the same way new contributions to the plan are being invested.

You have the right to refuse to accept any rollovers that you think don't satisfy the applicable legal requirements, including the provisions of your plan document. You can also establish administrative procedures that are consistent with the law and your plan document. For example, for plan-to-plan rollovers, you can require the check be issued payable to your plan, rather than to the employee. The employee will be less likely to hold the check, deciding whether to deposit it into his personal checking account or to roll it over to your plan.

You can require the employee to use an IRA rollover account as a conduit if the check is made payable to the employee. The financial organization accepting the rollover will have to determine whether it is a qualifying rollover.

TB: When the employee requests a refund before the money has been deposited into the plan, you can return it by reversing the payroll deduction process. The company should retain the money that has been deducted rather than sending it to be invested. You should increase the employee's gross pay by this amount during the next payroll period. FICA taxes shouldn't be deducted when you return this money to the employee because these taxes were already deducted when you processed the 401(k) deduction.

Money that has already been deposited into the plan must stay there until an event occurs that qualifies for a distribution. These are limited to an IRS-approved financial hardship, attaining age 59½, or terminating employment. One of the disadvantages of negative elections is having employees stop contributing after only one or two pay periods. You are stuck with a small account until the employee either leaves or starts to contribute again.

TB: The fact that half of your eligible payroll is found in the top 10% shouldn't stop you from having a qualified plan. You simply need a plan design that will minimize your compliance problems. The following are some alternatives. The first is a SIMPLE-IRA. The highly paid employees may contribute $6,000, regardless of how much the other employees contribute. There is a required employer contribution, which can be as low as 1% of pay the first two years and 2% thereafter. There isn't any installation or annual administrative fee. This fee savings may be sufficient to fund the required employer contributions.

The second alternative is a Safe-Harbor 401(k). The highly paid employees may contribute up to $10,500, regardless of how much the other employees contribute. The minimum-employer contribution is 3% of pay for all the eligible employees, including those who don't contribute. The highly paid employees may receive this 3% contribution in addition to the $10,500 maximum-employee contribution.

The third alternative is the regular 401(k) plan, where the amount the highly paid employees may contribute is tied to the amount the other employees contribute. The employer is also required to make a 3% minimum-employer contribution if 60% or more of the money in the plan belongs to key employees, which is likely in your case. The compliance requirements for this plan can be difficult for small employers with your employee demographics.

Another alternative is to have a retirement planning consultant design a more sophisticated plan such as an age-weighted profit sharing plan. The fees are higher for the more complex plans but the results can be very beneficial. For example, in the right situation, the highly paid employees may get a $30,000 contribution and other employees a contribution equal to 3% of pay.

A non-qualified plan is not likely to be a good alternative because the business doesn't receive a current tax deduction for any money that goes into the plan. For example, if you put $10,500 into a qualified plan, you don't pay current tax, and the business is able to deduct this amount. With a non-qualified plan, you don't pay current tax but the business doesn't get a deduction so it must pay tax on the amount you put into the plan.

This additional tax burden is placed on the owners when the business is structured as a Sub-S corporation or a limited partnership. Non-qualified plans are widely used by publicly owned companies, which tend to be less concerned about the deferred tax deduction. They are less common among small, privately owned businesses.

TB: The information you are receiving satisfies the legal requirements. The lack of hardship withdrawals, investment options, and quarterly statements is quite unusual, but all these omissions are legally permissible. Your employer apparently wants a plan that is as simple and inexpensive as possible to operate. You may ask your employer for more information about the plan investments but the employer isn't required to provide any additional information.

Your primary alternative is to stop contributing, but that won't be a good decision, particularly if there is an employer-matching contribution that you would lose. The major issue should be the actual investment results rather than the amount of information you are receiving. I would stay in the plan if the annual investment return is comparable to what you could get if you were investing outside the plan.

TB: Your husband is permitted to leave the money in the current plan if he has more than $5,000 accumulated. If he hasn't been in the plan long enough to accumulate this amount, he may have the money transferred directly to an IRA with a financial organization of his choice, or to another plan if he is employed by a company that has a plan. A 401(k) may be established only by an employer, not by an individual. Your husband should contribute to an IRA if he is now employed by a business that doesn't offer any retirement benefits.

TB: The government gives tax breaks to help employees save for retirement because Social Security alone is not sufficient. Retirees who have no other source of income become an economic drag on any society. This is why all industrialized societies provide tax incentives to help employees accumulate additional retirement funds.

Access to money in retirement plans, like 401(k)s, for non-retirement purposes is limited because withdrawing the money is contrary to the purpose of these plans. The law provides that any money taken out of your 401(k) as an early distribution is fully taxed and a 10% penalty tax is added on top. The 10% penalty tax is imposed to discourage early withdrawals.

It generally is not desirable to put non-retirement money into a 401(k) due to the penalty tax. When you take money out early, you may pay more taxes than you saved when you put the money in the plan. You should use other methods of saving for short-term needs unless you have a good employer-matching contribution.

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.