Have questions about retirement plan terms and concepts you’ve seen? We’ve compiled questions and answers from the experts. For specific question related to your account, please call the Participant Service Center at 1-866-401-5272 or send a secure message.
A defined contribution plan is an “account-based plan”. Each participant will have an account balance, which may be updated daily or on some other frequency. Various types of contributions can be made to DC plans, depending on the plan's design. This might include employee pre-tax contributions, Roth contributions, rollover contributions and various types of employer contributions (matching, profit sharing, core contributions, ESOP contributions, prevailing wage contributions, etc.). Depending on the plan design, investments may be directed by participants (usually the case in 401(k), 403(b) and 457 plans), or may be trustee-directed, in a uniform mix for all participants/ In a defined contribution plan, the employer sets up an arrangement through which various types contributions can be made, and defines the rules for these contributions (whether they are fixed or discretionary, the percentage or dollar amounts supported, etc.). The final account balance for a participant accumulates in a DC plan is driven by actual circumstances -- how much the participant and the employer contribute each year, how the participant invest their assets, the length of the accumulation period and independent factors, like how investment markets perform. In today's workplace, DC plans have become extremely popular due to their flexibility, portability and visibility, and the way they put participants in a position of control. Many participants also find that when they reach a personal milestone or "high water mark" in their DC plan, it can be a rewarding and motivating experience that brings the entire journey into perspective. In a defined benefits plan, also known as a pension plan, the employer is essentially "defining a benefit" that will be a payable to the participant at some future date. There are many types of DB plan designs. A traditional design might outline a lifetime benefit that will begin at a ge 67 of "2% of final average pay for each year you worked for the company". Under this formula, if an employee worked for the company for 20 years and had the final average pay of $50,000, he or she would receive a benefit of $20,000 per year (40 percent of $50,000) for life when they retire (on or after the plan's normal retirement age). In recent years, a new type of defined benefit plan has emerged called a Cash balance Plan. This provides a certain "dollar amount" benefit to the participant that is guaranteed, (expressed as a dollar amount, with annual service and interest credits and a minimum and derived through a formula) for the employee at retirement age. Defined benefit plans are essentially "promises to pay" a certain benefit. As such, they involve liability for the employer, required annual funding and a valuation performed by an actuary.
While each employer will make decisions as to which combination of retirement programs are best suited to their workforce, DC and DB plans both play a vital role in the American workplace.
When we refer to "contributory DC plans", we are speaking of 401(k), 403(b) and 457 plans, which allow employees to make pre-tax contributions. THe three concepts are as follows. First, yolu contribute to the plan with pre-tax dollars, which helps you get more money invested sooner. Second, your account grows on a tax-deferred basis (without paying taxes each year). And third, when you retire and start withdrawing from the account, you may be in a lower tax bracket -- providing more assets to fund your retirement needs.
This is set by each plan in its plan document. Depending on the type of plan, it might include employee pre-tax contributions, employee Roth contributions (after tax), rollover contributions, employer matching contributions, employer core contributions (or profit sharing contributions) and other contribution types. Consult your Summary Plan Description or enrollment kit for the contribution types made within your plan.
A Roth feature allows participants to designate elective deferrals as Roth contributions. Without a Roth feature, salary deferral contributions to 401(k) and 403(b) plans are made on a pre-tax basis and are taxed when distributed, usually at ordinary income tax rates. A Roth deferral is made on an "after-tax" basis -- meaning that taxes are withheld at the time the deferrals are contributed to the plan. Then, if certain conditions are met, distribution of earnings will be tax-free, not merely tax deferred (the distribution of actual Roth deferrals is always tax-free). A plan that permits participants to make Roth deferrals as well as the traditional pre-tax deferrals will allow individual participants, based on their specific circumstances, to make current taxation choices. These choices may have substantially different tax outcomes at retirement when the accumulation phase is over and they begin to take distributions from their retirement accounts. If your plan includes a Roth source, our Roth contributions calculator can help you consider this question and determine what mix of pre-tax or Roth contributions may be best suited to your situation. For younger workers and those who believe that long-term US tax rates may rise, Roth contributions can be very attractive.
Section 402(g) of the Internal Revenue Code limits and employee's annual contributions into a 401(k) or 403(b) plan. This annual limit is set each year and indexed based on cost of living factors. The 402(g) limit is $18,000 for 2016, and will generally increase in $500 increments in future years (when it is raised). Because section 402(g) in the US Code is where these rules reside, the limit is simply called the 402g limit. For Puerto Rico plans that follow guidance through the Department of Treasury at Hacienda, this code is referred to as 1081.01(d) and is currently limited to $15,000 (again, subject to indexing). In terms of the maximum percentage of pay that each employee can contribute, this is set in the plan document. Several years ago, the tax laws on this point changed. If their plan document is adjusted to allow it, employees can now contribute as much of their compensation as desired up to the 402(g) and catch up limits, if applicable. Since Social Security and Medicare taxes still represent 7.65% of pay for most employees, this means that in the most extreme circumstances, some employees might be able to contribute as much as 92.35% of pay to their 401(k) or 403(b) plan (100% minus 7.65%). Obviously, for most employees, contributing 10 or 15% of pay range is a terrific goal to strive for. Yet in some cases -- such as where both spouses work and only one has a 401(k) plan -- certain employees may decide to contribute high percentages of pay to take full advantage of the 402(g) limit.
As explained in a previous question, the 402(g limit ($18,000 for 2016) applies jointly to pre-tax and Roth contributions. SO if an employee contributed $10,000 in pre-tax contributions, he or she could make an additional $8,000 in Roth contributions during that plan year to reach the full 402(g) limit. If the employee will be age 50 or greater during the plan year and the plan so allows, he or she could make additional "catch up" contributions to the plan for that year, with the aggregate limit again applying equally to pre-tax and Roth sources. Section 402(g) of the Internal Revenue Code limits an employee's elective deferrals into a 401k or 403b plan to $18,000 in 2016 as indexed. Because section 402(g) in the US Code is where these rules reside, the limit is simply called the 402g limit. For Puerto Rico plans that follow guidance through the Department of Treasury at Hacienda, this code is referred to as 1081.01(d) and is currently limited to $15,000. During annual non-discrimination testing, anyone who contributed more than this maximum limit within a calendar year is identified and corrected. The correction must occur by April 15th of the following year or violators will face paying a penalty to the Internal Revenue Service (or the Hacienda in Puerto Rico) for over-contributing.
A catch-up contribution is not really a separate contribution; it is an increase in a limitation that would otherwise apply for those who attain age 50 (or greater) during the current plan year. Catch up contributions are elective deferrals that: 1) Are treated by the plan as catch–up contributions,
2) Don’t exceed the annual catch–up limit in the Code ($6,000 in 2015), and
3) Exceed any of the following:
1-The §402(g) dollar limit,
2-An employer-provided (under the plan document) limit,
3-The ADP (test) limit, or
4-The 415 limit.
The concept behind catch up contributions is that, to the extent that older employees have fallen behind in building wealth for retirement, this feature allows them to contribute more than the 402(g) limit each year, to help get back on course.
Vesting refers to “ownership” of the participant’s account balance. A participant vests in his benefit through the use of a vesting schedule, which defines vesting in terms of percentages upon completion of a certain service requirement. Employees are normally 100% vested in their own contributions to DC plans at all times. However, they may need to satisfy a vesting schedule to “own” employer contributions made to the plan on their behalf. This essentially means that these contributions “become theirs” over time, supported by their years of service with the employer. For defined contribution plans, there are two minimum schedules from which a plan sponsor can choose: 1) three-year cliff vested or 2) 6 year graded schedule. Under the three-year cliff schedule, a participant would not earn any vesting credits or have any ownership in his account balance until the completion of his or her third year of service (as defined by the plan). At that time, he or she would be 100% vested, meaning that he would have ownership of his entire account and none of the money could be subject to forfeiture. Under the 6 year graded schedule, an employee must be 100% vested after the completion of six years of service. Since this schedule allows the plan sponsor to delay 100% vesting, the law requires a minimum vesting percentage to apply to earlier years. Upon completion of 2 years of service, the participants is entitled to 20% of his account balance and 20% additionally every year of service he or she completes going forward, reaching 100% upon completion of 6 years of service. As is true with the eligibility requirements, these are minimum vesting requirements; a plan can provide for faster and more liberal vesting of benefits at the discretion of the employer. Different plans use different vesting schedules, which can allow benefits to become "owned" by employees faster than the schedules listed here. Please see your Summary Plan Description or enrollment kit for information specific to your plan.
As mentioned above, employer contributions made to a DC plan may involve a vesting schedule. This means that employees will increase their ownership of those contributions over time based on how long they work for the organization. For example, a plan might have a six year graduated vesting schedule, which provides for 20% of additional vesting after year 2, then an additional 20% each year until 100% vesting is reached after six years of service. A “year of service” is defined in the plan document, but will often be based on working for 1,000 hours or more during that plan year. Let’s assume that Employee A is in a plan with a matching contribution and “six year graduated” vesting schedule. Employee A works just over four years for the company, then terminates employment. At this point, the employee is 60% vested in the employer match, per rules of the plan. This means that they “own” $6,000 of the accumulated match dollars and can take it with them. In terms of the remaining $4,000, this will normally be swept to the plan’s forfeitures account. The treatment from there depends on what the employer has written into the plan document. In many cases, forfeitures are used to offset future employer contributions. So if the employer would normally owe $300,000 for the next year’s matching contribution but the plan had $25,000 in forfeitures from several employees who terminated employment but were not fully vested, the employer would only need to contribute $275,000 to cover that year’s obligation ($300,000 minus $25,000). In other cases, forfeitures may be reallocated to the accounts of employees who stay with the company. For more on this issue and the way that forfeitures are handled within your plan, please see your plan’s Summary Plan Description.
The basic concept of retirement plans is this: The U.S. government recognizes that American workers need to save and invest for their own retirement. Social Security alone will not be enough for most workers, and there are many future question marks around the program based on changing national demographics, the balance of inflows and outflows, and other factors. Retirement plans are given a tax-preferred status to incentivize employees to save and invest for retirement. They are not here to help employees plan for short-term expenses like a kitchen renovation or new car; they are here to build a lasting, sustainable base of assets that an employee can live on when they reach retirement age, when they may no longer be able to work, or able to work at the same pace. It is true that some plans feature a loan provision or a hardship withdrawal provision which can allow funds to be accessed earlier in certain situations (these features are discussed elsewhere within this page). Aside from loan or hardship provisions, retirement plan assets generally can’t be withdrawn from a qualified plan as long as an employee is still employed; this is to keep funds invested towards their primary purpose of use in retirement. As a general rule, employees are better off leaving their assets in the plan (or an IRA) and not taking loan or hardship distributions over their working years. This approach will maximize the buildup of your account over time, so the money is there when you need it in retirement.
It is true that the 402(g) limit (the amount that an employee can contribute to a 401(k) or 403(b) plan each year) applies separately to each defined contribution plan one participates in. So it is possible that an employee could work for two employers (perhaps 20 – 25 hours per week each) and be able to capitalize on this limit twice if they were willing to make that level of financial sacrifice. For most employees, this is moot point because they only work for one employer, and reaching the 402(g) limit one time annually is a lofty undertaking.
The total compensation package offered by each employer typically includes a lot more than just pay and benefits. Employees need to understand this complete picture to understand the true value of their position with an organization. In terms of retirement plan contributions, some employers make matching contributions. This sends a message that saving for retirement is a shared undertaking – one in which the employer and employer each play a vital role. Other employers offer a profit sharing contribution or “core contribution” which may be based on compensation and other factors but is not predicated on how much the employee contributes. There are other specific plan types and contribution types seen in certain employers – ESOPs and kSOPs, prevailing wage contributions, money purchase contributions and more. For each type of employer contribution, the plan document and Summary Plan Description will outline who is eligible to receive it, what the rules are for vesting, what happens to forfeitures and more. For example, some employer contributions are only paid to employees who worked a certain number of hours during the year and are still employed on the last day of the plan year.
If your plan has a match, the first thing you’ll want to do is understand exactly what the matching formula is. Maybe it is 25% of the first 6% contributed by employees. Maybe it is 50% on the dollar or a tiered approach, or maybe it changes from year to year at the discretion of your employer and current business conditions. You’ll want to know what the matching rate is and the amount on which it is provided. The first challenge for every employee in a 401(k) or 403(b) plan is to contribute at least enough to fully capitalize on the employer match. It’s important to do so to avoid “leaving money on the table” that should go towards your retirement. For most plans with a match, matching contributions are made during the plan year and funded each payroll cycle, along with your contributions. In this case, they are normally calculated by the payroll system. Let’s assume that a company has a match equal to 50 cents on the dollar for the first 6% of pay contributed by employees. Assume that Employee A started the year by contributing 8% of pay, then in August, dropped down to 4% of pay. He is now wondering if he got the full “benefit” of the match since it is only calculated and paid on the first 6% of employee contributions. There is a feature that an employer can add to its plan called a “match true up” if desired. If a match true up is included in a plan, the recordkeeper will perform a calculation at the end of the year to look at the employee’s total contribution for the year, then tell the employer what additional match should be provided for that employee based on what the payroll system missed. Most payroll systems look each pay cycle in isolation when they calculate the match, so when the employee drops back down to 4% of pay, the payroll system won’t “remember” that the put in more than 6% of pay for the first part of the year and make up the difference. If a match true up is not present, Employee A will not receive the full amount of the match that he would have received if he had instead contributed 6% for the entire year. If your plan has a match, you’ll want to take full advantage of it. Ask your HR department whether the plan includes a match true up feature. If it does not, figure out how much you are willing to contribute for the year, then try to spread that amount evenly during the year so that it is contributed about the same each payroll for all 12 months. In the example above, the employee would be better off contributing 6% the entire year if his plan does not have a match true up, to avoid leaving matching money on the table. When employees “front-load” or “backload” their contributions during the year and the plan doesn’t have a match true up feature, this anomaly can occur.
Most 401(k), 403(b) and 457 plans offer a percent of pay election for employees, set at even increments of pay (1%, 3%, 10%, etc.). However, some employers may decide to support a “fixed dollar” option as well; for example, allowing the employee to contribute $167 per payroll if desired. This is a plan sponsor election, considering the capabilities of the payroll system, the administrative work involved and other factors. As of today, most employers simply support even percentages of pay but let employees adjust their contribution rate during the year if needed. This allows an employee to track their contributions during the year to get very close to a desired level of contribution by making adjustments at any time.
This is decided by each employer and set forth within its plan document. Some plans treat these payments as ordinary payroll – so if the employee is contributing 10% of pay to the plan, they withhold the same amount on these payments and forward to the DC plan as a contribution. Others may exclude bonus or incentive compensation from ordinary deferrals, or may use a special form (completed by the employee in advance) if an employee wishes to defer some of this compensation. The best bet is to check with your HR or payroll department for practices specific to your plan.
A plan must specify how an employee becomes a participant. What this means is that there are requirements an employee must meet in order to enter the plan. Eligibility requirements can be broken down into three categories – age, service and job category. A plan can impose all three requirements or any combination of the three. However, there are certain parameters to which the plan must adhere. ERISA establishes minimum standards related to the age and service requirements for entry into the plan. With regard to the age requirement, a plan may not require an age over 21 to become a participant. Additionally, a plan may not impose a maximum age requirement for participation in the plan. Basically, a plan may not state that employees who have reached normal retirement age can no longer participate. There is also a maximum service requirement for plan participation. A plan cannot require an employee to complete more than one year of service as a condition of becoming a participant. Keep in mind the plan may be more liberal by imposing a younger age or service requirement or none at all. In addition, a plan can impose a job category or employment classification requirement for participation in the plan. Keep in mind that eligibility requirements drive who is able to participate in the plan. Vesting is a separate issue and defines when employer contributions become “owned” by employees.
Having employees keep retirement plan assets in a tax qualified setting until retirement is an important goal of the U.S. government. For this reason, Congress expanded the rules regarding the portability of account balances among various types of qualified plans and IRAs. For a summary of the rollover rules, please see this link:
In order to demonstrate the plan is not primarily benefiting higher paid workers, called Highly Compensated Employees (HCEs), the IRS subjects 401(k) plans to non-discrimination testing known as ADP (for salary deferral contributions) and ACP (for employer matching and after-tax contributions). To pass either the ADP or ACP test one of two tests must be met:
Basic Test: the average deferral/contribution percentage of the highly compensated employee (HCE) group must not exceed 125% of the average deferral/contribution percentage of the non-highly compensated employee (NHCE) group
Alternative Test: the average deferral/contribution percentage of the HCE group must not exceed the average deferral/contribution percentage of the NHCE group by the lessor of 2 plus or 2 times the ADP or ACP of the NHCEs
An additional compliance test looks at the aggregate amount that is contributed to the plan on behalf of an employee, from all sources. This is called the “Section 415” test. There are limits on what the IRS will allow to be contributed to a retirement plan each year, since the money is tax deferred. Another test performed by the recordkeeper is called the “top heavy test”. This looks at the total balance participants in the plan. If the total balance excessively favors key employees (a term defined by the IRS), the company may need to make a contribution to the accounts of all other employees. But the most common compliance test that impacts employees is the ADP and ACP test.
If this happens, the employer has various ways it can correct the situation. One of the most common approaches is for the plan to pay refunds for certain highly compensated employees – enough to reduce the contribution for these employees to allow the test to pass. There are other correction approaches which can also involve additional contributions being made to the accounts of other employees to allow the test to pass. The good news from a recent IRS change is, if an employee receives a refund from a failed ADP or ACP test, that refund is now handled in the tax year when the refund is received, not the previous year when the contributions were made. This minimizes the problem from employees who had already filed their tax return by the time the compliance testing result is known and corrective distributions are made.
Form 5500 is the annual information return required of most qualified plans that is sent jointly to the IRS and Department of Labor. The filing generally provides a balance sheet and income statement for the plan for the year, along with other information that is helpful to regulators. Form 5500 is longer and more detailed for “large plans” – generally, those with 100 or more eligible employees at the beginning of the plan year. These same plans are also subject to an annual audit by an outside accounting firm who reviews the plan from a variety of perspectives. For small plans, the Form 5500 is still prepared and filed, but the information included is more basic. The U.S. Department of Labor maintains a searchable database of Form 5500 filings, since these are a matter of public record. To search for a Form 5500, please visit www.efast.dol.gov and select the Form 5500 search option. In addition, a Summary Annual Report (SAR) is provided to participants annually in most qualified plans. This is usually a one or two page summary of the information contained in the Form 5500, in a concise, easy-to-read format.
ERISA generally requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan to be bonded. The purpose is, of course, to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who “handle” plan funds or other property.The fidelity bond must be at no less than 10% of plan assets with a minimum of $1,000 and a maximum of $500,000. And like all aspects of ERISA, there are important exceptions. A fidelity bond is generally required for every fiduciary and every other person who handles funds or other property of an employee benefit plan. There are some exceptions to theThe fidelity bond must be at no less than 10% of plan assets with a minimum of $1,000 and a maximum of $500,000. And like all aspects of ERISA, there are important exceptions. A fidelity bond is generally required for every fiduciary and every other person who handles funds or other property of an employee benefit plan. There are some exceptions to the fidelity bond requirement:
Un-funded plans where the benefits are paid from the general assets of the employer or employee organization are not required to secure fidelity bond coverage.
Financial institutions with trust powers such as banks or insurance companies subject to state and federal examination with at minimum 1 million on assets are not required to secure fidelity bond.
Insured pension and/or welfare plans where the plan benefits are provided through the insurance company or similar organization not from a trust is not required to secure fidelity bond coverage.
Plans that are not subject to ERISA’s reporting requirements (ex: one participant plans) are not required to secure fidelity bond coverage.
The Summary Plan Description (SPD) is a plain language explanation of the plan and must be comprehensive enough to apprise participants of their rights and responsibilities under the plan. It also informs participants about the plan features and what to expect of the plan. Among other things, the SPD must include information about:
When and how employees become eligible to participate;
The source of contributions and contribution levels;
The vesting period, i.e., the length of time an employee must belong to a plan to receive benefits from it;
How to file a claim for those benefits; and
A participant’s basic rights and responsibilities under ERISA.
This document is given to employees after they join the plan and to beneficiaries after they first receive benefits. SPDs must also be redistributed periodically and provided on request.
If the plan document has a mandatory cash-out provision, a distribution is generally made without the participant’s consent and before the participant attains the later of age 62 or normal retirement age. These automatic rollover provisions apply only to terminated participants who have vested plan balances of $5,000 or less. Typically, mandatory cash-outs apply to terminated participants who have not selected a distribution or rollover option for their plan balance. Generally, the amount of the mandatory cash-out is not greater than $5,000 unless the plan provides that rollovers from non-related plans are excluded in determining the $5,000 threshold.
A qualified plan may, but is not required to provide for loans. If a plan provides for loans, the plan may limit the amount that can be taken as a loan. The maximum amount that the plan can permit as a loan is (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less. A participant may have more than one outstanding loan from the plan at a time. However, any new loan, when added to the outstanding balance of all of the participant’s loans from the plan, cannot be more than the plan maximum amount. In determining the plan maximum amount in that case, the $50,000 is reduced by the difference between the highest outstanding balance of all of the participant’s loans during the 12-month period ending on the day before the new loan and the outstanding balance of the participant’s loans from the plan on the date of the new loan. A plan may require the spouse of a married participant to consent to a plan loan. A plan that provides for loans must specify the procedures for applying for a loan and the repayment terms for the loan. Repayment of the loan must occur within 5 years, and payments must be made in substantially equal payments that include principal and interest and that are paid at least quarterly. Loan repayments are not plan contributions. A loan that is taken for the purpose of purchasing the employee’s principal residence may be able to be paid back over a period of more than 5 years.
The virtues and evils of retirement plan loans have been discussed heavily in financial news shows, the financial press and news articles over the years. While it is true that most participants will be better off if they never take a DC plan loan (or any loans aside from their mortgage, for that matter), the truth on retirement plan loans is more complicated. In late 2014, BPAS addressed this topic in a blog entry which can be found here: http://blog.bpas.com/?p=507 The upsides of retirement plan loans are that you are borrowing from yourself, they usually involve a lower rate of interest than many other short term loans, you pay yourself back the interest, and there is no credit check or verification process involved. The downsides include the considerable tax burden if you terminate employment with a loan outstanding and can’t pay off the loan, the chance that you might have to reduce your ordinary contributions to make the loan payments (possibly even missing out on matching contributions), and the long-term financial impact if the yield on your loan is lower than the rest of your account while the loan is outstanding. As a general rule, it is advisable to investigate other loan sources (bank, mortgage company, tuition loans from schools or government) before dipping into your retirement plan account. When your loan payments are deposited directly into the account they don’t necessarily go back into the funds they were taken out of, so you have to be sure to rebalance your portfolio to keep your investment strategy on track. If you have no choice but to take a loan on your retirement plan account, keep the following points in mind to safeguard your nest egg:
Don’t take out any more than you absolutely need to.
Pay the loan back as soon as possible – including making additional loan payments when possible.
Try to keep making contributions to the account even while you are paying back the loan.
Don’t default on the loan.
For more on this topic, please see other educational tools in our Participant Education Center.
Many plans that allow employees to contribute elective deferrals (401k;s 403b’s 457b’s) allow hardship distributions. If a 401(k) or 403(b) plan allows hardship distributions, it must provide the specific criteria used to make the determination of hardship. Below is a description of the hardship rules for 401(k) Plans; the rules for hardship distributions from 403(b) Plans are very similar:
For a distribution from a 401(k) plan to be on account of hardship, it must be made based on an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. The need of the employee includes the need of the employee’s spouse or dependent.
Whether a need can be deemed immediate and heavy depends on the facts and circumstances of the situation. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee’s principal residence. Purchase of things like jewelry or a new dining room table, etc. will generally not qualify for a hardship distribution.
Keep in mind that a distribution is not “considered necessary to satisfy an immediate and heavy financial need” of an employee if the employee has other resources available to meet the need. Whether other resources are available is determined based on facts and circumstances.
A distribution is deemed “necessary to satisfy an immediate and heavy financial need” of an employee if: (1) the employee has obtained all other currently available distributions and loans under the plan, or monies from other resources (as long as those resources are not counterproductive and would not cause a heavier financial burden) and (2) the employee is prohibited, from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution. Keep in mind that a hardship distribution may not exceed the amount of the employee’s need. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that may result from the distribution.
Generally speaking, if a 401(k) plan provides for hardship distributions, the plan will specify what information must be provided to the employer to demonstrate a hardship. The employer may request certain information from the employee to ensure that the need is heavy and immediate, and not obtainable from other sources.
It is important to remember that hardship distributions are includible in gross income unless they consist of designated Roth 401(k) contributions. In addition, they may be subject to an additional tax on early distributions. You should consult with your tax advisor prior to taking a hardship distribution from your Plan.
Every person’s situation is different, thus, it is impossible to make a judgement that would apply to all plan participants. Below are a few things to consider before taking a loan or hardship distribution from your Plan:
When you take your loan or hardship distribution, you are removing those monies from your account balance, thus you will miss out on potential investment earnings on those monies. In the case of a loan, you will be paying the monies back (with interest), however you could still miss out on earnings gains over time.
Hardship distributions are taxable, and if taken prior to age 59.5, could be subject to an additional tax on early distributions. This could increase your tax burden in the year of distribution.
When taking a hardship distribution, you are not permitted to make salary deferral contributions for six months. So, not only are you reducing your account balance (and missing out on any potential investment earnings), you are also losing the ability to contribute monies to the plan on a tax-deferred basis, and receive potential investment earnings on those missed contributions.
If you were to take a loan from your retirement account, any loan payments are made back with “after-tax” dollars. When you withdraw those monies in retirement, you are taxed at your ordinary income tax rate on those dollars. Thus, any loans you take from your retirement account are taxed twice.
Before taking a loan or hardship distribution from your retirement account, you should discuss with your tax advisor to ensure you make the proper decision based on your circumstances.
There are several steps involved with rolling over 401(k) dollars from a previous employer into your existing Plan with BPAS. The first step is to make sure your current Plan allows for the rollover contribution, and if so, you can proceed with the next set of steps:
Contact your prior Employer to initiate the distribution and rollover of your account balance.
Complete Section I and Section II of the Rollover Verification Request Form. If your prior administrator or custodian requires paperwork from you, please forward the Rollover Verification Request form to them for completion of Section II (the Rollover Verification Form can be found in the Resource Center of the Participant Website).
The rollover check should be made payable to the Plan you are rolling to, including an “f/b/o with [your name]”.
Rollover checks received by BPAS cannot be invested until we receive a completed Rollover Verification Request Form.
For questions or assistance relating to the rollover process, you may:
Call 1-866-401-5272, option 3, option 3 (between 8am and 8pm EST) to speak directly with a member of our Customer Service team.
Unlike individual Stocks and Bonds, Mutual Funds are priced only one time per day, and only trade once per day. Each day after the market closes (4pm EST), the closing price (also referred to as “Net Asset Value”) of a Mutual Fund is determined by the fund family after considering the closing price of all securities in the fund. Any trades that are placed prior to 4pm EST are executed at the fund’s closing price of that day. Trades entered after 4pm will be executed at the next day’s closing price. This of course assumes normal market operation and non-holidays.
So, for example:
Let’s say you enter a trade or realignment request at 11:30 am EST on Monday, January 25th . Your trade will be executed at the January 25th closing price (the Fund’s price that is determined after 4pm on January 25th ) for all funds involved in the transaction. This is made possible by the “late trading agreements” that exist with mutual fund families which support same day trading and next day settlement in funds on the BPAS platform.
On the other hand, if you enter a trade at 4:30pm EST on Monday, January 25th , your trade will be executed at the January 26th closing prices of all involved funds.
Please keep in mind that BPAS is not the party that determines fund prices; thus we rely on data provided to us from 3rd parties to effectuate trades. Should any third party fail to provide us with the required data needed to effectuate trades (including the Mutual Fund companies themselves), there could be a delay in trade execution. This very rarely happens, but in the spirit of full disclosure — is important to mention. The Policy Statement Regarding Account Transactions (found in the resource center of the participant website) explains this and other matters in detail.