401(k) Frequently Asked Questions


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  1. What is a 401(k) plan?
  2. Can you summarize the new 401(k) limits taking effect in 2002?
  3. How did 401(k) plans originate?
  4. What information is my employer required to give me regarding my 401(k)?
  5. How long can my employer hold funds before depositing them into my account?
  6. What happens to my 401(k) plan if I switch jobs?
  7. What is the maximum I can contribute to my 401(k)? Is the employer's match included in this maximum amount?
  8. Is there a minimum contribution amount?
  9. When can I begin to participate?
  10. If I contribute to a 401(k) can I still contribute to an IRA?
  11. What's the difference between a 401(k), a traditional IRA and a Roth IRA?
  12. Will I have to pay taxes on my 401(k) plan if I leave my company?
  13. What can you tell me about the Roth 401(k)?
  14. What happens to my 401(k) if I leave my company?
  15. What is the penalty if I take money out of my 401(k) before I'm 59?
  16. Can I roll over the 401(k) money from my old job into my new company's plan?
  17. The company I work for was acquired by a larger company. My 401(k) has been frozen. What does this mean and what can I do about it?
  18. What are my rights as a 401(k) plan participant?
  19. Can I have a 401(k) if I am self-employed?
  20. Can I roll my 403(b) or 457 account over into a 401(k) account with my new employer?
  21. Does the 100-percent-of-pay limit apply to gross income or net income?
  22. Is any part of my 401(k) plan, contributions or company match guaranteed by any federal agency?
  23. How can I set up a 401(k) plan on my own? My employer doesn't offer one.
  24. What is the most I can contribute pre-tax to my 401(k) for 2002?

1. What is a 401(k) plan?

A 401(k) plan is a retirement plan set up by your employer. It is a simple and convenient way for you to build up your retirement savings and get significant tax benefits while you are working. It is named after the part of the IRS Internal Revenue Code that spells out the rules for this type of plan: Section 401, paragraph (k).

When you join a 401(k), you agree to contribute part of your salary to the 401(k) account. The money you contribute is deducted from your paycheck before income taxes are taken out, so you end up paying less income tax up front. Additionally, you don't pay taxes on what you contribute (and any interest it earns) until you withdraw money from your account at retirement. This way, you enjoy the benefit of tax-deferred compounding, which helps your savings add up quickly!

Of course, there is a catch. (There always is, when it comes to tax advantages.) You cannot withdraw money from the account before you turn 59 except in rare cases -- without paying a 10 percent early withdrawal penalty. One of these exceptions is the early retirement rule. According to this rule, if you separate from service with your employer (whether taking retirement, changing jobs or through layoff) in the year in which you turn 55, or later, withdrawals from that employer's 401(k) plan are penalty free. If you have money still in 401(k) plans with other former employers, you will have to wait to get that money until you reach age 59.

The 401(k) account is not an investment in itself; it is a protective shell for your money. It is up to you to decide how to invest the money using the choices your employer provides for you. Generally, these are stock, bond and money market mutual funds.

Some employers offer a match, meaning that for every dollar you contribute up to a certain amount, your employer will also make a contribution (10 cents, 50 cents, a dollar -- it depends on your employer). As free money, this is worth taking advantage of.

Each company's 401(k) plan has different rules. The best source of information about your particular plan is the "Summary Plan Description," which you can get from your company's human resources or benefits representative.

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2. Can you summarize the new 401(k) limits taking effect in 2002?

In the summer of 2001, Congress passed a new tax bill containing significant changes to the rules governing tax-advantaged retirement savings programs. These rules take effect in 2002. While we could write a book on this topic, we won't. Instead, here are some of the highlights of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

Be aware, while these rules become effective in 2002, your ability to take advantage of some of them depends on when your plan adopts them. Check with your benefits department for details specific to your plan.

New 401(k) Contribution Limits for 2002
2001 2002
Individual annual contribution limit $10,500, subject to percent-of-pay limit (see below) $11,000, subject to percent-of-pay limit (see below)
Percent-of-pay limit 25 percent of compensation or $35,000, whichever is less. 100 percent of salary or $40,000, whichever is less. The $40,000 limit will be indexed to inflation and will adjust in $1,000 increments.
Maximum includable compensation limit $170,000 $200,000. This limit will be indexed to inflation and will adjust in $5,000 increments.
Catch-up contributions Nonexistent $1,000 in 2002. Allowed for all 401(k) savers age 50 and older. This limit is added to all other limits, and these contributions will not be subject to discrimination tests.
Low-income savers credit Nonexistent Low- and moderate-income savers can claim a non-refundable tax credit on the first $2,000 in contributions. This credit is claimed on your tax return and the amount is based on your adjusted gross income (AGI). This credit can be taken in addition to the standard tax deduction allowed for 401(k) contributions. 1) Individuals with an AGI of $0 to $15,000 and those filing married-jointly with an AGI of $0 to $30,000 may claim a 50 percent tax credit on their contributions. 2) Individuals with an AGI of $15,001 to $16,250 and married filing jointly with AGI of $30,001 to $32,500 may claim a credit of 20 percent. 3) Individuals with an AGI of $16,251 to $25,000 and married filing jointly with AGI of $32,501 to $50,000 may claim a credit of 10 percent.
Highly compensated employee limit $85,000 $90,000

New Portability Rules for 2002
2001 2002
Portability Limited -- rollovers from 401(k) plans to an IRA could only be rolled back to a new 401(k) plan (not 403(b) or 457). Money rolled over from an employer plan could not be mixed with contributory IRA funds and earnings. (See item below) Greatly expanded -- 401(k) rollovers to an IRA may be subsequently rolled to a new employer's 401(k), 403(b) or 457 plan.
Portability of IRA contributions to employer plan Not allowed. Original after- or pre-tax contributions to an IRA could not be rolled to an employer's plan. Allowed. Savers may roll original pre- and after-tax IRA contributions into an employer's retirement plan, such as a 401(k), 403(b) or 457.
Portability of after-tax contributions to employer-retirement savings plan Rollovers of after-tax contributions to a 403(b) or 401(k) plan to an IRA were not allowed. Allowed
Automatic rollover to IRAs from employer plans Nonexistent For workers with 401(k) balances of more than $1,000 and less than $5,000, employers may choose to automatically roll this balance into an IRA account on the employee's behalf.

New Vesting Rules Starting in 2002
2001 2002
Vesting of employer contributions -- maximum time allowed before contributions are fully vested Cliff vesting -- five years; Graded vesting -- seven years Cliff vesting -- three years; Graded vesting -- six years

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3. How did 401(k) plans originate?

The plans originated not exactly by design of Congress, but as a result of a sharp-eyed benefits consultant seeing an opportunity to create a new retirement savings plan based on the tax law passed by Congress in 1978.

The 1978 act contained a technical correction to the Internal Revenue Code that allowed employees to take profit-sharing bonuses in cash or deferred compensation.

The language was drafted in a way that could be interpreted as allowing not only profit-sharing bonuses to be voluntarily deferred before taxes, but W-2 wages as well. Ted Benna, a benefits consultant working for the Johnson Companies in suburban Philadelphia, noticed this opening and drafted a retirement plan designed to take advantage of it. His new plan was based on the post-tax thrift savings plans many employers offered at that time.

Here is a timeline of how those laws were eventually translated into today's 401(k) plans.

1978 -- The Tax Reform Act of 1978 is enacted and section 401, paragraph (k), of the Internal Revenue Code is created.

Jan. 1, 1980 -- Section 401(k) of the Internal Revenue Code becomes effective.

Jan. 1, 1981 -- The first 401(k) savings plan, created by Benna, begins operating at the Johnson Companies. This plan offers many of the features present in today's plans, including pre-tax salary reduction and employer matching contributions.

Spring 1981 -- The IRS grants provisional approval to Benna's 401(k) plan.

Nov. 10, 1981 -- The IRS issues the first proposed 401(k) regulations, in effect giving Benna's plan official sanction.

February 1982 -- The IRS announces that taxpayers can rely on the proposed regulations until final regulations are published. This stamp of approval opens the doors for 401(k) plans nationally.

Aug. 15, 1991 -- The IRS publishes final 401(k) regulations.

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4. What information is my employer required to give me regarding my 401(k)?

Legally, all your employer has to give you is a Summary Plan Description, a summary annual report, and an annual statement. You might not receive a prospectus for every fund offered in the plan, but if your company's stock is offered in the plan you are required to receive a prospectus (or prospectus substitute) for that.

Luckily for participants, most plan sponsors provide a lot more information than they're required to. Often, if you need more information all you have to do is ask.

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5. How long can my employer hold funds before depositing them into my account?

According to the Department of Labor (DOL), employers are supposed to deposit employee contributions into the plan as soon as they are able to determine the amount that should be deposited into the plan. This vague definition gives employers some latitude.

A few years ago, the DOL updated its regulations to specify that employers are definitely in trouble if the money isn't deposited prior to the 15th business day of the month after the contributions are deducted. But, employers could still run afoul of auditors with this method.

To be safe, employers should deposit employee contributions within a day or two after contributions are deducted.

DOL regulations apply to when your contributions must be deposited into the plan account. There aren't any regulations governing how soon the money must be invested in the specific funds you have selected.

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6. What happens to my 401(k) plan if I switch jobs?

If you switch jobs, you have three options for what to do with the vested portion of your 401(k) account. The following outlines your options and the tax implications for each.

  1. Leave the money: If your vested account balance is $5,000 or more and you're under the plan's normal retirement age, which is commonly age 65, you can leave your money where it is -- and taxes won't be due until you withdraw money from the account. However, if your balance is less than $5,000 and more than $1,000, your employer may decide to automatically roll it into an IRA account on your behalf. If this occurs, there are no tax consequences because the money is moving from one tax-deferred account to another.
  2. Roll the money into a new plan or IRA: You can roll over your 401(k) into a rollover IRA account or into your new employer's 401(k) plan. If you do a direct rollover -- have the money transferred directly into the new account -- you won't owe taxes until you withdraw money from the account.
  3. Cash out: If you elect to take your money out of the 401(k) and not roll it over into a rollover IRA or another employer-sponsored retirement plan you will owe all applicable taxes. You will also owe a 10 percent early withdrawal penalty unless you leave your company during the year you turn 55 or later.

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7. What is the maximum I can contribute to my 401(k)? Is the employer's match included in this maximum amount?

In the tax bill passed in the summer of 2001, several key 401(k)-plan contribution limits were changed.

For 2002, the maximum pre-tax contribution a participant can make is $11,000 -- subject to the 100-percent-of-pay limitation and special non-discrimination tests described below. The limit will rise by $1,000 a year until 2006, when it will hit $15,000. The limit for 2001 was $10,500. The IRS imposes this limit because Uncle Sam loses tax revenue for every dollar you contribute to your 401(k). If your plan allows you to make after-tax contributions, they are not included in this limit.

The percentage-of-pay limit stipulates that the maximum amount that can be accumulated in any of your tax-qualified defined contribution plans -- 401(k), thrift, profit-sharing, ESOP, and money purchase -- is limited to 100 percent of your gross pay or $40,000, whichever is less, in 2002. Every dollar contributed (both employee and employer) counts toward this limit, including after-tax contributions. (In 2001, this limit was $35,000 or 25 percent of pay.)

Finally, there are special non-discrimination rules to prevent highly compensated employees (HCE) from being able to save substantially more than lower paid employees. If you earned $85,000 or more in 2001, or owned more than 5 percent of the company, additional contribution caps may apply for you in 2002, because the HCE designation is based on your previous year's salary. For 2002, the income limit for highly compensated employees is $90,000. What does this mean? If you earn $90,000 or more in 2002, your contributions to a 401(k) plan could be limited in 2003.

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8. Is there a minimum contribution amount?

This depends on the rules of your particular plan. There is no federally imposed minimum contribution to a 401(k), but many plans require participants to contribute at least 1 to 2 percent of their salary. This helps offset administration costs.

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9. When can I begin to participate?

That depends on the rules of your specific plan. Many companies require new employees to complete six months or even one year of service before they're eligible to participate. Some companies also require employees to be at least 21 years old to participate.

Ask your company's human resources or benefits representative for information about your plan.

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10. If I contribute to a 401(k) can I still contribute to an IRA?

Yes, but your ability to make a tax-deductible IRA contribution depends on three factors:

  • Your filing status
  • Your adjusted gross income (AGI), and modified adjusted gross income (MAGI)
  • Whether it is a Roth IRA or a traditional IRA.

In the chart below are the year 2002 income break-points for full, partial and nondeductible contributions to a traditional IRA. (These are each $1,000 higher than the 2001 limits.)

Traditional IRA income break points for 2002
IRA contribution is fully deductible if MAGI is: IRA contribution is partially deductible if MAGI is: IRA contribution is not deductible if MAGI is:
Single, covered by employer-sponsored retirement plan Less than $34,000 $34,000 - $43,999 $44,000 or more
Single, not covered by employer-sponsored retirement plan OR married filing separately*, neither spouse covered by employer-sponsored retirement plan Contributions fully deductible at all income levels Contributions fully deductible at all income levels Contributions fully deductible at all income levels
Married filing jointly, both covered by employer-sponsored plan Less than $54,000 $54,000 - $63,999 $64,000 or more
Married filing jointly, one covered by an employer-sponsored retirement plan, one not: Contribution of covered spouse Less than $54,000 $54,000 - $63,999 $64,000 or more
Married filing jointly, one covered by an employer-sponsored retirement plan, one not: contribution of non-covered spouse Less than $150,000 $150,000-$159,999 $160,000 or more
Married filing separately**, if either spouse is covered by an employer-sponsored retirement plan $0 Between $0 and $10,000 $10,000 or more

Notes:

*You are entitled to the full deduction if you did not live with your spouse at any time during the year.

**If you did not live with your spouse at any time during the year, your filing status is considered, for this purpose, as single (therefore your IRA deduction is determined by the "single" criteria).

To illustrate how to interpret the chart, let's assume that you are single and covered by an employer-sponsored retirement plan. If your MAGI is less than $34,000 your contribution is fully deductible ($3,000 maximum). If your MAGI is $34,000 or more, up to $43,999, the amount you may deduct is reduced incrementally. If your MAGI is $44,000, or more, you may not make a deductible contribution for 2002, but you may make a nondeductible contribution of up to $3,000 in 2002.

For your 2001 tax return, the MAGI limits are $1,000 less for single, covered by an employer-sponsored retirement plan ($33,000 to $42,999); married filing jointly, both covered by an employer-sponsored plan ($53,000 to $62,999); and married filing jointly, one spouse covered by an employer-sponsored retirement plan ($53,000 to $62,999).

If your contribution is nondeductible because of MAGI limitations, you may consider contributing to a Roth IRA. Roth IRA contributions are always nondeductible. However, there are separate MAGI limitations for making a Roth contribution.

If you are a single filer in 2002 and earn less than $95,000 or are married filing jointly and earn less than $150,000, you can make a full Roth IRA contribution of $3,000. If you are a single filer in 2002 and earn more than $110,000 or are married filing jointly and earn more than $160,000, you will not be eligible to contribute to a Roth IRA at all. If you earn between $95,000 and $109,999 for single filers; $150,000 to $159,999 for Married Filing Joint and Head of Household; and between $0 to $10,000 for Married Filing Separate, your maximum allowable contribution will be less than $3,000 and will decline as your salary increases. These income limits are the same for your 2001 tax return. The maximum annual IRA contribution limit was $2,000 in 2001.

For purposes of our chart, AGI is your gross income less any traditional IRA or other deductions. MAGI is your adjusted gross income without taking into consideration the tax deduction for a traditional IRA. In other words, it is your gross income less all non-IRA deductions.

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11. What's the difference between a 401(k), a traditional IRA and a Roth IRA?

All three are protective shells that allow your money to grow tax-free. But there are substantial differences among them.

  • Before-tax contributions: With a 401(k) plan, you may contribute up to $11,000 before taxes in 2002, which reduces your income for tax purposes. (The 2001 limit was $10,500.) Keep in mind that your plan may limit your contributions further depending on circumstances. You can only contribute a maximum of $3,000 in 2002 to a traditional IRA, and your contribution may not be tax deductible if you also participate in an employer-sponsored retirement plan (depending on your income level). You are also limited to a maximum $3,000 contribution to a Roth IRA in 2002, and that is not deductible at all. You may have more than one IRA (traditional and/or Roth), but your total contributions to all of them may not be more than $3,000 for 2002.
  • Tax-deferred growth: In all three cases, the interest you earn is not taxed while in the account, so your investment keeps growing tax-free. In the case of a Roth IRA, you do not pay any taxes when you withdraw the money, either, providing you fulfill the withdrawal requirements. With a traditional IRA and a 401(k), federal, state and local taxes are due on the money you withdraw.
  • Employer match: Your employer may match part or all of your contribution to a 401(k). This is not the case with a traditional IRA or Roth IRA.
  • Early withdrawal: Under certain circumstances, and depending on the rules of your plan, you may be able to withdraw money from your 401(k) account before age 59. However, in addition to paying local, state and federal taxes on the money you withdraw, you will most likely also have to pay a penalty of 10 percent of the money you withdraw. If in the year you turn age 55 or later, you quit your job, take retirement or are fired, this early withdrawal penalty will be waived. Some plans also offer the possibility of taking out a loan and avoiding the 10 percent withdrawal penalty. But, you must repay this loan or the government will consider it an early withdrawal and charge you the penalty and appropriate taxes.
  • Traditional IRA: In most cases, a penalty of 10 percent will apply to withdrawals before age 59, in addition to local, state and federal taxes. However, you can make early withdrawals without the 10 percent penalty to pay for college or graduate school education, or to make a down payment (up to $10,000) on a first-time home purchase for yourself, your children, your parents or grandparents.
  • Roth IRA: Once you have had the account for five years, you may be able to make a withdrawal without paying an early withdrawal penalty. However, if you are younger than 59 and your withdrawal includes interest earned on the account (and not just your contributions) you may be charged a 10 percent early withdrawal penalty.
  • Investment choices: With a 401(k), the choices you have for investing your money are limited to the options offered by your plan. With IRAs, your choices will likely be greater.
  • Protection from creditors: If you declare bankruptcy, federal law protects your savings in an employer-sponsored qualified plan such as a 401(k). Your creditors cannot touch it. (Only the IRS or, in the case of divorce, your ex-spouse or children, can.) IRAs, which are not qualified retirement plans, are subject to state law. While most states protect IRA balances from creditors, not all do and the level of protection varies from state to state.

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12. Will I have to pay taxes on my 401(k) plan if I leave my company?

That depends on what you decide to do with your 401(k) money. You have several options:

  1. Leave the money: If your vested account balance is $5,000 or more and you're under the plan's normal retirement age, which is commonly age 65, you can leave your money where it is -- and taxes won't be due until you withdraw money from the account. However, if your balance is less than $5,000 and more than $1,000, your employer may decide to automatically roll it into an IRA account on your behalf. If this occurs, there are no tax consequences because the money is moving from one tax-deferred account to another.
  2. Roll the money into a new plan or IRA: You can roll over your 401(k) into a rollover IRA account or into your new employer's 401(k) plan. If you do a direct rollover -- have the money transferred directly into the new account -- you won't owe taxes until you withdraw money from the account.
  3. Cash out: If you elect to take your money out of the 401(k) and not roll it over into a rollover IRA or another employer-sponsored retirement plan you will owe all applicable taxes. You will also owe a 10 percent early withdrawal penalty unless you leave your company during the year you turn 55 or later.

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13. What can you tell me about the Roth 401(k)?

The Roth 401(k) is an optional feature that employers will be able to offer beginning in 2006. It was created by the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA), but regulations have not been drafted yet. It is expected they will be modeled after Roth IRAs, allowing workers to save after-tax dollars in a tax-deferred account and never pay tax on the interest earned. It is likely that, as with IRAs, if you have more than one 401(k) (regular and Roth), your total contributions to all your 401(k) plans will have to fall within the 401(k) contribution limit, which is planned to be $15,000 in 2006.

Catch-up contributions will likely be permitted in a Roth 401(k), subject to IRS limits. And employers may be able to match employee contributions to a Roth 401(k). However, it's uncertain whether the matching contribution would be made to the Roth 401(k) or to a regular 401(k) account. It is expected that Roth 401(k) savings may also be eligible to be rolled to a Roth IRA or Roth 403(b) if you change jobs.

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14. What happens to my 401(k) if I leave my company?

If you switch jobs, you have three options for what to do with the vested portion of your 401(k) account. The following outlines your options and the tax implications for each.

  1. Leave the money: If your vested account balance is $5,000 or more and you're under the plan's normal retirement age, which is commonly age 65, you can leave your money where it is -- and taxes won't be due until you withdraw money from the account. However, if your balance is less than $5,000 and more than $1,000, your employer may decide to automatically roll it into an IRA account on your behalf. If this occurs, there are no tax consequences because the money is moving from one tax-deferred account to another.
  2. Roll the money into a new plan or IRA: You can roll over your 401(k) into a rollover IRA account or into your new employer's 401(k) plan. If you do a direct rollover -- have the money transferred directly into the new account -- you won't owe taxes until you withdraw money from the account.
  3. Cash out: If you elect to take your money out of the 401(k) and not roll it over into a rollover IRA or another employer-sponsored retirement plan you will owe all applicable taxes. You will also owe a 10 percent early withdrawal penalty unless you leave your company during the year you turn 55 or later.

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15. What is the penalty if I take money out of my 401(k) before I'm 59?

The penalty is 10 percent of the untaxed money you withdraw, plus applicable federal, state and local taxes on that amount. So if you were to withdraw $5,000 from your 401(k) before age 59, you would owe a penalty of $500 (plus applicable federal, state and local taxes on the entire $5,000).

Providing your plan allows pre-retirement withdrawals, under the following circumstances the IRS says you may withdraw money before age 59 and not have to pay the 10 percent penalty:

  1. If you become totally disabled.
  2. If you die, and your beneficiary collects the money.
  3. If you are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
  4. If you are required by court order to give the money to your divorced spouse, a child, or a dependent.
  5. If you are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
  6. If you are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59, whichever is longer.)
  7. If the money is a dividend distribution from an Employee Stock Ownership Plan.

Any money withdrawn for the above reasons would still be subject to applicable federal, state and local income taxes.

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16. Can I roll over the 401(k) money from my old job into my new company's plan?

Yes, if your new company's plan allows rollovers. If you roll over your 401(k) money into your new employer's 401(k), 403(b) or 457 plan, you maintain the account's tax-deferred status and will not have to pay taxes on the account until you withdraw money from the plan.

If your new company does not allow rollovers, you have two other options that would allow you to maintain the account's tax-deferred status.

  1. If your vested account balance is $5,000 or more and you're under the plan's normal retirement age, which is commonly age 65, you can leave your money in your old employer's 401(k) plan -- and taxes won't be due until you withdraw money from the plan. If your balance, however, is less than $5,000 and more than $1,000, your employer may decide to automatically roll it into an IRA account on your behalf. In this case, it will retain its tax-deferred status.
  2. You can roll over your 401(k) into a rollover IRA account. If you do a direct rollover -- have the money transferred directly into the new account -- you won't owe taxes until you withdraw money from the account.

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17. The company I work for was acquired by a larger company. My 401(k) has been frozen. What does this mean and what can I do about it?

When one company is acquired by another, there are three possible scenarios regarding the acquired company's 401(k) plan.

  1. The acquired company may choose to terminate its 401(k) plan entirely. In this case, all employee contributions, vested employer matches and profits are returned. If the new company's 401(k) plan allows rollovers, employees of the acquired company can roll their money into the new plan. If it does not, they can roll their money into an IRA, or take a distribution. Rolling the money into an IRA or a new 401(k) will enable participants to preserve their retirement savings and avoid early withdrawal penalties.
  2. If the features of the two companies' plans cannot be easily combined, the acquired company may opt to continue its plan. New employees would most likely be directed to the new company's plan, however.
  3. The two plans may be merged. In this case, 401(k) assets of the acquired company's employees would be automatically rolled into the new plan. Combining two plans can be very complex, and can take anywhere from a week to several months. The plan is frozen during that time -- the money continues to earn interest, but participants can't make contributions or withdrawals.

In this type of situation, it is common for the new employer to take some time to determine what to do with retirement plans such as a 401(k). The fact that the existing plan is frozen is not unusual -- and it may be left this way indefinitely (since there isn't any legal requirement to do otherwise).

In the interim, you should retain all the rights you had before the plan was frozen, except the right to make new investments. As long as the plan continues to be properly administered -- you continue to receive statements and are able to make investment transfers -- there isn't much you can do except wait for the company to decide what to do with your plan.

If your plan ceases to be properly administered (you stop receiving statements, or are no longer able to make transfers, for example) and your plan sponsor cannot explain the lapse to your satisfaction, you might want to contact an attorney or the Department of Labor [(202) 219-8776 or www.dol.gov].

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18. What are my rights as a 401(k) plan participant?

Under the Employee Retirement Income Security Act of 1974 (ERISA) all 401(k) plan participants are entitled to:

  • Examine without charge all plan documents including collective-bargaining agreements, copies of all documents filed by the plan with the U.S. Department of Labor, and detailed annual reports.
  • Obtain copies of all plan documents and other information upon written request to the plan administrator. The administrator may make a reasonable charge for these copies.
  • Receive a summary of the plan's annual financial report. The administrator is required by law to furnish each participant with a copy of this summary annual report.
  • Obtain once a year, without charge, a statement of benefits accrued to the participant.
  • Examine without charge at the administrator's office, or obtain upon written request from the administrator, a complete list of the employer and employee organizations sponsoring the plan.
  • Upon written request, receive information from the administrator as to whether a particular employer or employee organization is a sponsor of the plan and, if so, receive the sponsor's address.

Additionally, your employer may not fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit or exercising your rights under ERISA. If your claim for a benefit is denied, you must receive a written explanation of the reason for the denial. You have the right to have the plan administrator review and reconsider your claim.

If you have additional questions about your rights under ERISA, you should contact the Pension and Welfare Benefits Administration division of the U.S. Department of Labor at (202) 219-8776, or on the Web at www.dol.gov.

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19. Can I have a 401(k) if I am self-employed?

401(k) plans are normally established by for-profit companies that have "more than a few" employees. While there is no set minimum for the number of employees required, a 401(k) is probably not the best choice for a self-employed person due to plan set-up expenses and the time commitment surrounding plan administration.

For self-employed people, there are several tax-deferred retirement savings options available beyond the traditional IRA. These plans allow larger contributions, but also require a bit more paperwork. They include:

  • Simplified Employee Pension IRA (SEP-IRA) Plans -- SEP plans are essentially individual retirement accounts (IRAs). Like an IRA account, the money you contribute to a SEP-IRA is tax-deductible and your investment earnings grow tax-free until you withdraw funds at retirement. For 2002, if you are the only participant in the plan, you can deduct contributions up to 25 percent of your compensation or $40,000, whichever is less. (The 2001 limit was 15 percent of salary or $35,000.) If you have employees, in 2002, they may contribute up to 100 percent of compensation or $40,000, whichever is less.
  • Keogh Plans -- If your business is not incorporated, you may be eligible to establish a Keogh plan. Keogh plans are generally more flexible than SEPs and may allow you to save even more toward your retirement than you can in a SEP plan. For 2002, you can save up to $40,000 in combined employer and employee contributions in a Keogh. (The 2001 limit was $35,000) A Keogh plan must be set up as either a defined-contribution plan [like a 401(k) or SEP] or as a defined-benefit plan (like a traditional pension). In other words, you will need to have a plan document. For that reason if you're considering a Keogh plan, you may want to seek the advice of a pension professional.
  • SIMPLE IRA -- A SIMPLE IRA works a lot like a traditional IRA except you can contribute more (up to $7,000 starting in 2002) and employer matching contributions are allowed. (In 2001, the limit was $6,500.) There is no percentage-of-salary limit on contributions. In the case of a self-employed person, you can contribute $7,000 as an individual and your company can match your contributions dollar-for-dollar, for a total annual contribution of $14,000 ($13,000 in 2001). Another plus is that the SIMPLE plan you set up now can grow with your company (up to 100 employees).
  • SIMPLE 401(k) -- A SIMPLE 401(k), which is a variant of the SIMPLE IRA, can be set up for companies with up to 100 employees. The maximum salary deferral allowed per employee in 2002 is $7,000 or a percentage of salary specified by the employer, whichever is less. (In 2001, the limit was $6,500.) The employer must make either dollar-for-dollar matching contributions up to 3 percent of compensation for each employee (for a total employer and employee contribution of up to $14,000 [$13,000 in 2001]), or non-elective contributions of 2 percent of compensation on behalf of each eligible employee who receives $5,000 or more in compensation from the employer.

Setting up any of these plans can be as easy as visiting your local bank, broker, insurance agent, financial planner or mutual fund company.

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20. Can I roll my 403(b) or 457 account over into a 401(k) account with my new employer?

Yes. Under new laws taking effect Jan. 1, 2002, you are permitted to roll money saved in a 403(b) or 457 plan into a 401(k) plan sponsored by your new employer. The issue is whether your new employer's plan accepts rollovers in the first place. The law allows employers to refuse to accept rollovers to their defined-contribution retirement plans.

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21. Does the 100-percent-of-pay limit apply to gross income or net income?

The 100-percent-of-pay limitation on contributions to all tax-qualified defined contribution plans applies to gross income, not net income. Prior to 2002, this limit was 25 percent of pay.

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22. Is any part of my 401(k) plan, contributions or company match guaranteed by any federal agency?

There is no federal agency that guarantees 401(k) plan assets. It is not considered necessary because the value of your balance at retirement is determined by the amount of your contributions and employer matching contributions, and the performance of the investments you choose. (This contrasts with defined-benefit plans, which are guaranteed by the Pension Benefit Guaranty Corporation. Because of the way defined benefit plans operate, it could be possible for accumulated assets to be insufficient to pay the promised benefits when a participant retires.)

It is true that 401(k) participants could lose money if their investments perform badly. That is why it is important to invest wisely. Independent advice providers like mPower exist to give participants tools to make the best possible decisions about their investments.

Also, it is important to note that the Department of Labor's Pension and Welfare Benefits Administration (PWBA) acts as a 401(k) plan watchdog to ensure that employers and trustees follow the rules. There are a number of checks and balances built in to the 401(k) system to safeguard participants' funds. For instance, because your money is held in a custodial account, the account custodian is responsible for protecting your assets on your behalf. Any complaints about the administration of a 401(k) plan that are not adequately answered by the plan administrator can be addressed to the PWBA at (202) 219-8776 or www.dol.gov.

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23. How can I set up a 401(k) plan on my own? My employer doesn't offer one.

A 401(k) plan is set up by an employer for its employees. You may not set one up on your own, unless you are self-employed (in which case there are other tax-deferred retirement savings options that might be more advantageous to you).

If you are currently employed by a company that does not offer a 401(k) plan or other deferred compensation plan, such as a 403(b) plan for nonprofits, and you wish to invest privately in a tax-deferred retirement account, you could consider opening a traditional IRA or Roth IRA. You can open these types of accounts at your local bank, broker, or mutual fund company.

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24. What is the most I can contribute pre-tax to my 401(k) for 2002?

The maximum pre-tax contribution limit for 401(k) plans for the 2002 tax year is $11,000. The limit for 2001 was $10,500.

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