Ted's Table

TB: The provision of the law that you have referred to provides an opportunity for those who are eligible to reduce the amount of tax they pay when they receive a lump-sum distribution when they don't roll over the money into an IRA or another plan. Before you make your decision, you should ask a professional advisor who is familiar with this area of the law to compute the applicable tax for all the alternatives that are available to you.

If you decide to take a lump-sum distribution, you will be required to pay tax on the entire distribution during the year you receive it. The special five- and 10-year income averaging rules give you an opportunity to reduce the tax bite somewhat. If you withdraw the money this year and you are already taxed at a 30% rate, the lump sum will be taxed at 30%-plus even if you use income averaging. Your best alternative may be to take the money out after you retire and don't have any earned income.

TB: I agree with her. Withdrawals of employee pre-tax contributions are tightly restricted during your active employment. You may withdraw your pre-tax contributions after attaining age 59½. You may also withdraw vested employer contributions at any time if your plan permits. Otherwise your pre-tax contributions may be withdrawn during active employment only for a financial hardship following the applicable IRS guidelines. I don't recommend withdrawing the money unless you fit into one of the permissible categories.

TB: This has always been somewhat difficult to explain and to understand. Let me try. Only the first 6% of your pay that you contribute is eligible to be matched. You get a tax break for any amount you contribute in excess of 6% of pay but you don't receive any matching contributions. If you make $76,000, 6% of your pay is $4,560. It's on that amount that your company should make its 25-cents-on-the-dollar match. So, 25% of $4,560 is $1,140. Your company match should be $1,140.

Plans that include a matching contribution typically match only the first 3% to 6% of pay that an employee contributes. What your employer is telling you is correct and it is very normal.

TB: First, I recommend changing your enrollment form so new employees who enter the plan in the future must indicate the amount they have already contributed during the year to another plan. This will help you avoid this problem in the future.

There are a couple of factors to consider with respect to this specific situation. The employee is required to decide from which plan the excess amount is to be withdrawn. He is required to inform the employer he selects in writing by March 1, 2000. He must inform the employer of the amount of the excess and request the withdrawal. The withdrawal must be made by April 15, 2000. The employer matching contributions should be considered. If he withdraws money that has been matched, he will lose the matching contribution.

There are a couple of reasons why it may benefit your plan to have him withdraw the money from the former employer's plan. Of course, if he has already withdrawn all his money from the prior plan, the only option is to withdraw it from your plan. Unless he is a 5% owner, leaving the amount he has contributed in your plan will help your company pass the ADP non-discrimination test. You may also have to pay an administrative fee if he withdraws the money from your plan.

TB: Frankly, this is the first time I've heard of an employer attempting to charge the participants such a fee. A $250 fee per participant will total $6,250 if there are 25 participants. The typical fee to set-up a plan is $1,000. According to the Department of Labor, the employer isn't permitted to have the cost of establishing the plan deducted from money that is contributed to the plan. Presumably the employer also is not permitted to make employees pay this expense by using their personal money.

You indicate the annual cost is $4,700 per participant. I assume you mean $47.00 per participant. In addition, you will have to pay investment fees. I would be concerned from the information you have provided about the quality and cost of the investments that will be applicable. I would be reluctant to join a plan with such an expense structure. If the employer goes ahead with the plan, I recommend asking for an irrevocable waiver, which will enable you to opt out of the plan in order to preserve your eligibility to make deductible IRA contributions.

TB: The first reason is not having a specific goal. Most participants probably fall into this category. They have some fuzzy general notions about retirement but they have failed to develop a specific plan. Next would be those who have a loosely defined plan but they have failed to utilize a retirement calculator to see whether what they're doing will enable them to reach their goal. So, the biggest reason for failure is the failure to plan.

Some other reasons are:

1. Unwillingness to reduce discretionary spending in order to increase retirement savings to an adequate level.

2. Using retirement funds for non-retirement purposes when you change jobs or by taking a hardship withdrawal.

3. Investing too conservatively.

4. A lack of adequate income to be able to save for retirement. Those who are at the lower end of the wage scale don't have the economic resources to save for retirement.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Monday. 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 provision of the law that you have referred to provides an opportunity for those who are eligible to reduce the amount of tax they pay when they receive a lump-sum distribution when they don't roll over the money into an IRA or another plan. Before you make your decision, you should ask a professional advisor who is familiar with this area of the law to compute the applicable tax for all the alternatives that are available to you.

If you decide to take a lump-sum distribution, you will be required to pay tax on the entire distribution during the year you receive it. The special five- and 10-year income averaging rules give you an opportunity to reduce the tax bite somewhat. If you withdraw the money this year and you are already taxed at a 30% rate, the lump sum will be taxed at 30%-plus even if you use income averaging. Your best alternative may be to take the money out after you retire and don't have any earned income.

TB: I agree with her. Withdrawals of employee pre-tax contributions are tightly restricted during your active employment. You may withdraw your pre-tax contributions after attaining age 59½. You may also withdraw vested employer contributions at any time if your plan permits. Otherwise your pre-tax contributions may be withdrawn during active employment only for a financial hardship following the applicable IRS guidelines. I don't recommend withdrawing the money unless you fit into one of the permissible categories.

TB: This has always been somewhat difficult to explain and to understand. Let me try. Only the first 6% of your pay that you contribute is eligible to be matched. You get a tax break for any amount you contribute in excess of 6% of pay but you don't receive any matching contributions. If you make $76,000, 6% of your pay is $4,560. It's on that amount that your company should make its 25-cents-on-the-dollar match. So, 25% of $4,560 is $1,140. Your company match should be $1,140.

Plans that include a matching contribution typically match only the first 3% to 6% of pay that an employee contributes. What your employer is telling you is correct and it is very normal.

TB: First, I recommend changing your enrollment form so new employees who enter the plan in the future must indicate the amount they have already contributed during the year to another plan. This will help you avoid this problem in the future.

There are a couple of factors to consider with respect to this specific situation. The employee is required to decide from which plan the excess amount is to be withdrawn. He is required to inform the employer he selects in writing by March 1, 2000. He must inform the employer of the amount of the excess and request the withdrawal. The withdrawal must be made by April 15, 2000. The employer matching contributions should be considered. If he withdraws money that has been matched, he will lose the matching contribution.

There are a couple of reasons why it may benefit your plan to have him withdraw the money from the former employer's plan. Of course, if he has already withdrawn all his money from the prior plan, the only option is to withdraw it from your plan. Unless he is a 5% owner, leaving the amount he has contributed in your plan will help your company pass the ADP non-discrimination test. You may also have to pay an administrative fee if he withdraws the money from your plan.

TB: Frankly, this is the first time I've heard of an employer attempting to charge the participants such a fee. A $250 fee per participant will total $6,250 if there are 25 participants. The typical fee to set-up a plan is $1,000. According to the Department of Labor, the employer isn't permitted to have the cost of establishing the plan deducted from money that is contributed to the plan. Presumably the employer also is not permitted to make employees pay this expense by using their personal money.

You indicate the annual cost is $4,700 per participant. I assume you mean $47.00 per participant. In addition, you will have to pay investment fees. I would be concerned from the information you have provided about the quality and cost of the investments that will be applicable. I would be reluctant to join a plan with such an expense structure. If the employer goes ahead with the plan, I recommend asking for an irrevocable waiver, which will enable you to opt out of the plan in order to preserve your eligibility to make deductible IRA contributions.

TB: The first reason is not having a specific goal. Most participants probably fall into this category. They have some fuzzy general notions about retirement but they have failed to develop a specific plan. Next would be those who have a loosely defined plan but they have failed to utilize a retirement calculator to see whether what they're doing will enable them to reach their goal. So, the biggest reason for failure is the failure to plan.

Some other reasons are:

1. Unwillingness to reduce discretionary spending in order to increase retirement savings to an adequate level.

2. Using retirement funds for non-retirement purposes when you change jobs or by taking a hardship withdrawal.

3. Investing too conservatively.

4. A lack of adequate income to be able to save for retirement. Those who are at the lower end of the wage scale don't have the economic resources to save for retirement.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Monday. 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.