Ted's Table

TB: Labor laws generally prohibit employers from offering the same retirement benefits to union employees as to other employees. Your employer is required to provide the benefits agreed to through the collective bargaining process. To do otherwise would violate labor laws.

So, each plan must be considered separately when HCE tests are conducted.

The fact that you are able to contribute only 2% of your pay is due to IRS law, which has placed you into the HCE category. Employees who earned more than $80,000 during 1999 are HCEs. The amount these employees can contribute is tied to the average percentage that the other eligible employees contribute.

Your problem stems from the fact that many of your fellow union employees aren't contributing to the plan. You and other participants need to encourage them to do so.

TB: Legally, your contributions to the plan must come from your paycheck before taxes are deducted. You can't make up the lost contributions by giving your employer a check to put into the plan. Your employer goofed and the options for correcting this error are limited.

I recommend increasing your future contributions to make up the difference, assuming you are contributing less than the maximum permitted. This should enable you to catch up over time. Of course, the investment results will be somewhat different than if the money went in when you intended.

If you aren't able to put this money into the 401(k) due to the various contribution limits, then I would request the employer to make up the loss outside the plan. For example, you can put the money into an IRA. You won't be able to get a tax deduction if your adjusted gross income exceeds the applicable threshold for deductible IRA contributions. The money will enjoy tax-deferred growth in any event. If you aren't able to deduct the IRA contribution, you can ask your employer to make up the tax loss.

Regarding your final questions, this is an administrative error, which isn't specifically covered by law. You can contact the Department of Labor at 800.998.7542, but I don't think they will have much interest in this matter. You can't file a claim with the IRS for a tax refund on money you intended to contribute to the plan. Tax breaks are given only for money that is actually contributed. You received the money, which made it taxable, and this fact can't be reversed.

Your employer goofed and any resolution must be made going forward rather than attempting to go back. You won't like my final comment, which is that you also have some responsibility to review your paycheck to see that the correct amount is being deducted. Each paycheck should show your current and year-to-date 401(k) contributions.

TB: I'm sorry to hear that you decided to give up a 25% match for the past three years. These contributions would already be 75% vested and in another year they would be 100% vested. Unfortunately, you can't make up what has already been lost but you should get into the plan ASAP to avoid additional losses.

The employer contributes the 25% match regardless of the plan's vesting schedule. When you leave the employer, the plan administrator must determine whether you are eligible to receive the matching contributions that have been contributed to your account. You will receive 75% of this contribution, adjusted for investment gains or losses, if you have completed three years of service when you leave. You will get 100% of all employer contributions if you leave after completing four years. I'm unable to tell from the information you provided when you will complete four years of service, but 75% of the match is better than nothing, so you can't lose.

If you start contributing now, you should be able to contribute the maximum percentage that your plan allows, counting your pay for the entire year. You need to check with the person who oversees your plan to see whether this is how your employer administers the plan.

TB: The fees that you pay within your 401(k) ultimately impact the amount you accumulate. Distributions are fully taxable when you receive benefits from the plan. Your tax liability is reduced when you receive the money from your plan account, due to the deduction of these fees. This is the only "tax break" you get for these fees.

TB: The normal vesting schedule is overridden when a plan is terminated. The law requires full vesting of all benefits when a plan is terminated. Cessation of all contributions is considered a plan termination even though the assets may remain in the plan for some period thereafter. The IRS also has the latitude to require full vesting at an earlier point. This enables them, in situations like yours, to protect employees when a business gradually declines, reduces the number of employees, and ultimately ceases to exist. It's quite possible that you were fully vested if you left this company when it was in its final days.

The plan assets must be used to provide benefits to participants and to pay administrative expenses. Those who have money in the plan are still participants even though they are no longer employees. All funds remaining after paying reasonable administrative fees must be allocated to participants in a manner that is acceptable to the IRS. Generally, the IRS is asked to approve the final benefit distributions when a plan is closed, to protect the tax benefits of participants. Such approval isn't required, but the fiduciaries involved are still required to follow the law.

TB: Your tip employees are correct. That's because it can be difficult for them to make contributions. My experience with this type of situation is limited. I remember one client had to create a deduction priority list to follow for employees who receive tips. This covered deductions such as taxes, medical benefits, 401(k) contributions, and a couple of other items. It was the employee's responsibility to see that there was enough income to cover the deductions. When there wasn't, the items with the lower priorities didn't get funded.

You should check with other similar employers in your area to see what they do. We will also ask our readers who have experience with tip employees to send any suggestions they have.

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: Labor laws generally prohibit employers from offering the same retirement benefits to union employees as to other employees. Your employer is required to provide the benefits agreed to through the collective bargaining process. To do otherwise would violate labor laws.

So, each plan must be considered separately when HCE tests are conducted.

The fact that you are able to contribute only 2% of your pay is due to IRS law, which has placed you into the HCE category. Employees who earned more than $80,000 during 1999 are HCEs. The amount these employees can contribute is tied to the average percentage that the other eligible employees contribute.

Your problem stems from the fact that many of your fellow union employees aren't contributing to the plan. You and other participants need to encourage them to do so.

TB: Legally, your contributions to the plan must come from your paycheck before taxes are deducted. You can't make up the lost contributions by giving your employer a check to put into the plan. Your employer goofed and the options for correcting this error are limited.

I recommend increasing your future contributions to make up the difference, assuming you are contributing less than the maximum permitted. This should enable you to catch up over time. Of course, the investment results will be somewhat different than if the money went in when you intended.

If you aren't able to put this money into the 401(k) due to the various contribution limits, then I would request the employer to make up the loss outside the plan. For example, you can put the money into an IRA. You won't be able to get a tax deduction if your adjusted gross income exceeds the applicable threshold for deductible IRA contributions. The money will enjoy tax-deferred growth in any event. If you aren't able to deduct the IRA contribution, you can ask your employer to make up the tax loss.

Regarding your final questions, this is an administrative error, which isn't specifically covered by law. You can contact the Department of Labor at 800.998.7542, but I don't think they will have much interest in this matter. You can't file a claim with the IRS for a tax refund on money you intended to contribute to the plan. Tax breaks are given only for money that is actually contributed. You received the money, which made it taxable, and this fact can't be reversed.

Your employer goofed and any resolution must be made going forward rather than attempting to go back. You won't like my final comment, which is that you also have some responsibility to review your paycheck to see that the correct amount is being deducted. Each paycheck should show your current and year-to-date 401(k) contributions.

TB: I'm sorry to hear that you decided to give up a 25% match for the past three years. These contributions would already be 75% vested and in another year they would be 100% vested. Unfortunately, you can't make up what has already been lost but you should get into the plan ASAP to avoid additional losses.

The employer contributes the 25% match regardless of the plan's vesting schedule. When you leave the employer, the plan administrator must determine whether you are eligible to receive the matching contributions that have been contributed to your account. You will receive 75% of this contribution, adjusted for investment gains or losses, if you have completed three years of service when you leave. You will get 100% of all employer contributions if you leave after completing four years. I'm unable to tell from the information you provided when you will complete four years of service, but 75% of the match is better than nothing, so you can't lose.

If you start contributing now, you should be able to contribute the maximum percentage that your plan allows, counting your pay for the entire year. You need to check with the person who oversees your plan to see whether this is how your employer administers the plan.

TB: The fees that you pay within your 401(k) ultimately impact the amount you accumulate. Distributions are fully taxable when you receive benefits from the plan. Your tax liability is reduced when you receive the money from your plan account, due to the deduction of these fees. This is the only "tax break" you get for these fees.

TB: The normal vesting schedule is overridden when a plan is terminated. The law requires full vesting of all benefits when a plan is terminated. Cessation of all contributions is considered a plan termination even though the assets may remain in the plan for some period thereafter. The IRS also has the latitude to require full vesting at an earlier point. This enables them, in situations like yours, to protect employees when a business gradually declines, reduces the number of employees, and ultimately ceases to exist. It's quite possible that you were fully vested if you left this company when it was in its final days.

The plan assets must be used to provide benefits to participants and to pay administrative expenses. Those who have money in the plan are still participants even though they are no longer employees. All funds remaining after paying reasonable administrative fees must be allocated to participants in a manner that is acceptable to the IRS. Generally, the IRS is asked to approve the final benefit distributions when a plan is closed, to protect the tax benefits of participants. Such approval isn't required, but the fiduciaries involved are still required to follow the law.

TB: Your tip employees are correct. That's because it can be difficult for them to make contributions. My experience with this type of situation is limited. I remember one client had to create a deduction priority list to follow for employees who receive tips. This covered deductions such as taxes, medical benefits, 401(k) contributions, and a couple of other items. It was the employee's responsibility to see that there was enough income to cover the deductions. When there wasn't, the items with the lower priorities didn't get funded.

You should check with other similar employers in your area to see what they do. We will also ask our readers who have experience with tip employees to send any suggestions they have.

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.