Frequently Asked Questions

Question: We’ve just signed an employment agreement with a new executive. His agreement allows him to participate in our 401k plan now, even though our normal waiting period is 6 months after hire. Can we let him begin participating now?
Answer: No. ERISA overrides your employment contract. The executive must wait 6 months to enter the plan just like every other employee.
Question: Do we need any documentation for employees who chose not to enroll in our 401k plan?
Answer: Yes. You should retain a signed enrollment form or other documentation showing that the employee declined to participate. Employers who don’t have signed waivers can be forced to make contributions for the employee later.
Question: What happens if we don’t get the paperwork done to enroll a participant by the entry date?
Answer: Generally, a participant can still be enrolled within 30 days of the entry date. However, if an employer has forgotten to give enrollment paperwork to an eligible participant, then they may be enrolled whenever the error is discovered.
Question: When must 401k contributions withheld from wages be remitted to the investment company?
Answer: Generaly within 7 business days, or as soon administratively feasible.
Question: We have received a copy of a divorce decree for one of our employees giving half of the retirement plan benefits to the spouse. Can we go ahead and distribute half the account to the spouse?
Answer: No. A plan must be in receipt of a document known as a QDRO (Qualified Domestic Relations Order) that must contain very specific information before a distribution can be made. Please send any such paperwork to us and we will review it for you.
Question: One of our employees wants to take all of her money out of her 401k account. Can she?
Answer: Probably not. A participant can only withdraw their funds if they meet certain criteria such as retirement, termination of employment, and age 59 ½. They may not withdraw the funds just because “it’s their money”. However, the participant may be eligible to take a loan from the plan or to take a hardship distribution.
Question: What are the reasons that qualify for hardship distributions?
Answer: Purchase of a primary residence, prevent eviction, or college, medical, and funeral expenses.
Question: We’ve been told that our executives put too much money into the plan compared to the other participants. What happens now?
Answer: A refund (which we will calculate) must come out of the plan by March 15th (for calendar yearend plans). And the refund plus earnings will be taxable to the participant on their personal tax return in the year the refund is received.
Question: We’d like to close the retirement accounts for some employees who have been gone for a long time. Can we just write them checks?
Answer: No. If the participant’s account is over $5,000, you may not force them out of the plan. However, if their account is under $5,000, and your plan allows it, you may force the participant to either take a distribution, or you can roll the funds to an IRA account.
Question: Can we stop our matching contribution in the middle of a plan year?
Answer: Yes, but it may require a plan amendment.
Question: We forgot to send in our Form 5500 before the deadline. What do we do now?
Answer: Your best bet may be to file under the Delinquent Filer Program. The Dept of Labor fee is $750 but it allows the plan to avoid penalties of up to $1,100 per day for late filing.
Question: How much can I borrow from my retirement account?
Answer: The lessor of $50,000 or 50% of your vested account balance.
Question: How fast must I pay back a loan from my 401k plan?
Answer: The loan period cannot exceed 5 years unless it is to purchase a primary residence.
Question: What interest rate will I be charged if I borrow from my 401k account?
Answer: Each plan may set its own interest rate within the federal guidelines. The most common interest rate is prime plus 1%.
Question: What happens if I stop making payments on my loan?
Answer: Loan payments must be withheld from payroll. You may not stop making payments until you terminate employment. At that time, if you do not pay off the balance of the loan, it will become taxable to you.
Question: How much taxes will I pay when I take a distribution from my retirement account?
Answer: The investment custodian is required to withhold 20% of the distribution for taxes. However, this may or may not be enough to cover your tax liability. You will pay tax at your regular state and federal tax rate, plus a 10% IRS penalty if you are under age 55.
Question: Can I buy real estate with my retirement account.
Answer: Only if the plan document allows it. However, investments in things other than financial instruments may result in tax on your retirement account. Please consult with us before you proceed with any such transaction.
Question: Can the owner of our practice invest his 401k funds in something different than the employees?
Answer: Yes, but only if the investment is offered to all participants. No participant (including the owner) may invest in something that is not available to all participants.
Question: What does Top Heavy mean?
Answer: Top Heavy is an IRS term meaning that 60% of the plan’s investments are in the accounts of the key employees. If this happens, your plan must either 1) Make a 3% contribution to all eligible employees, or 2) The key employees may not contribute the following year.
Question: What is the ADP (antidiscrimination) test:
Answer: The ADP test is a test which limits the amount the “highly paid” employees may contribute compared to all of the remaining employees. If the plan fails the test, then the highly paid employees will receive refunds of a portion of their contributions.
Question: What is a Safe Harbor plan?
Answer: A Safe Harbor plan is a plan which attempts to avoid the problems of ADP test and Top Heavy tests by making a guaranteed contribution to employees. That contribution is either a matching contribution that caps at 4% of wages for employees who are contributing their own funds, or a contribution of 3% of wages for all eligible employees.
Question: Can we change our plan to be a Safe Harbor plan this year?
Answer: No. A Safe Harbor Notification must be given to employees 30 days before the start of a plan year. You will need to wait and start the Safe Harbor provisions next year. Note: Companies who do not currently have a 401k plan may start a Safe Harbor plan midyear.
Question: Can we exclude part time employees from the plan?
Answer: Generally, any employee who works more than 1,000 hours per year (20 hours per week) must be included in the plan.
Question: What is the deadline for funding our matching contribution?
Answer: You must fund the matching (and/or profit sharing) contributions by the due date of your business tax return, including extensions.
Question: May I put my whole paycheck into the 401(k) plan?
Answer: Almost. As long as your plan allows, you may defer your entire paycheck less the amount withheld for Social Security and Medicare taxes.
Question: How much Roth 401(k) may I defer?
Answer: The limits for Roth deferrals are the same as for regular deferrals. Which is $16,500 for 2010.
Question: What is the 401(k) deferral limit this year?
Answer: The deferral limit for 2010 is $16,500 plus an extra catch up contribution limit of $5,500 for any participant who is 50 years old or older.
Question: I’m past retirement age and have started taking distributions from my retirement account even though I’m still working. Can I still make 401(k) deferrals.
Answer: Yes.
Question: If we hire a trustee outside of our company can we avoid having liability for the plan?
Answer: No. The plan sponsor will still be liable for the proper operation of the plan.
Question: What is an ERISA bond, and how much does it need to be?
Answer: Retirement plans are required to carry coverage to protect the plan participants from misappropriation of funds. The bond needs to be in the amount of 10% of plan assets and can generally be obtained as a rider on your regular liability insurance policy.
Question: Our company is an LLC. Can the “partners” still make 401(k) contributions?
Answer: Yes. “Partners or owners” in an LLC, a partnership, or in a sole proprietorship may still make 401(k) contributions.
Question: Do we really have to pass out a copy of the Summary Plan Description to all of our plan participants?
Answer: Yes. In fact, you must provide a copy to all eligible employees.
Question: Why do you need a census with all of our employees each year?
Answer: There are reporting requirements, coverage tests, and other factors which require that we look at a complete employee census. If you have concerns about your census information, please call us.
Question: What is our biggest risk in sponsoring a 401(k) plan?
Answer: The number one area in which plan sponsors get into trouble is for withholding 401(k) contributions from employees' wages, but failing to remit those contributions to the investment custodian in a timely manner. We will help you manage the other compliance areas of your plan.

"I manage a Multiple Employer 401(k)plan. Accurate and timely testing, administration and 5500 filings are essential. Thankfully my PPS team delivers on all fronts."

—Shanda Molinsky
Contract and Compliance Managery
XeniumHR

The talent you need. The attention you deserve.