FREQUENTLY ASKED QUESTIONS
• How does eligibility work?
• When can I join the plan?
• What if I terminate employment and then I am re-employed?
• Where can I get an enrollment form and Summary Plan Description (SPD)?
• What is a Salary Deferral Arrangement?
• What is the Difference Between Safe Harbor and Traditional 401k Plans?
• What is the difference between Employer Profit Sharing, Employer Matching and Employee Salary Deferral contributions?
• When am I eligible to receive a distribution of my account balance?
• Can I bring this money into my new employer’s 401(k) plan?
• Can I take a loan from my retirement plan account?
• Can I take a distribution from the plan?
Depending on the plan’s definition of eligibility requirements, you may be required to
satisfy a pre-defined number of hours of service over a set period of time and also
may be required to have reached a minimum age before becoming eligible for plan
participation. If the plan defines eligibility service as one year, you can not be asked
to complete more than 1,000 hours to be credited with one year of service. However,
you must generally be employed for 12 consecutive months during which you have
completed at least 1,000 hours if one year of eligibility service is required.
If the plan defines its eligibility service requirement as less than one year, no requisite
number of hours may be required to be credited with such service. For example, if the
plan defines eligibility service as 6 months of service and you have been employed by
the employer for 6 months, you may be eligible to join the plan as long as you have
satisfied any age requirement that may apply, regardless of the number of hours that
have been performed during the 6 month period.
You may join the plan once you have satisfied the plan’s eligibility requirements defined
in the plan document and your Summary Plan Description. Once satisfied, you must
complete a beneficiary form and an enrollment form if the plan is a 401(k) plan or if the
plan allows participants to direct the investment of their account balance. Whether or not
you decide to defer a percentage of your pay to the plan (if a 401(k) plan), an enrollment
form should be completed so that your investment selections are on file in the event
that the employer makes an employer contribution to the plan to which you are entitled
to a share. A beneficiary form should also be completed so that the beneficiary of your
account is established in the event it is needed.
The answer depends on whether you terminated employment prior to meeting the plan’s
eligibility requirements or after you had become a plan participant, and will also depend
on the employer’s adopted plan document.
Generally, if you terminated prior to satisfying the plan’s eligibility requirements and are
re-hired prior to the time the eligibility requirement’s initial computation period expires
(12 months beginning on the original date of hire, if a one year of service requirement
applies) your prior service will count towards satisfying the plan’s eligibility requirements.
If re-hired after the expiration of the plan’s initial eligibility computation period, but prior
to 12 months following your termination date, you will be required to satisfy the eligibility
requirements using the plan’s plan year as the eligibility computation period.
If re-hired after having met the plan’s eligibility requirements, but prior to actually
becoming a plan participant (you were not employed on the plan’s next entry date after
satisfying the eligibility requirements) you will become a plan participant immediately
upon your re-hire date.
If re-hired after having met the plan’s eligibility requirements and actually became a plan
participant (were still employed as of the plan’s next entry date) you will become a plan
participant immediately upon your rehire date.
This question is a very technical one and each employee’s situation will be different
depending on a number of factors. Contact your plan’s Plan Administrator for further
clarification if this situation applies.
Your plan’s Plan Administrator should have a master copy of each on file and can supply
you with a copy. However, you may also access and print a copy of each of these items
from the FORMS section of our website. You will need to obtain the Client Identification
number from your Plan Administrator in order to access these items and may also need
to download a free copy of Adobe Acrobat Reader software in order to view and print
these forms. A link to the Adobe website is available in the FORMS section for your
A Salary Deferral Arrangement is an arrangement whereby a plan participant can
choose to receive their pay in cash or to have a portion of their pay contributed to their
employer’s qualified 401(k) plan. In electing to defer a portion of your pay, Federal Taxes
and certain State’s taxes on the deferred amounts (and earnings on those amounts)
are deferred until such time as you actually receive a cash distribution of your account
balance. However, these taxes can be further deferred by rolling over the distributed
account balance to an IRA or to another qualified retirement plan in which you have
become a participant, rather than taking the distribution in cash.
There are many advantages to a Salary Deferral Arrangement under a 401(k) plan. First
is the deferral of taxes. Distributions from the most common qualified retirement plans
are taxed as ordinary income, so deferring taxes until you retire may mean you are in a
lower tax bracket than at the time you actually deferred the income. This means that the
percent of the total amount you pay as tax may be lower.
Second is the compounding effect of interest on the growth of your retirement plan
account. With Uncle Sam waiting to take their bite until you actually receive a cash
distribution from your account balance, more of your money is going to work for you
rather than to the tax coffers. This means, theoretically, a larger account balance at
Third is the dollar cost averaging effect of investing. With a steady and consistent
amount being invested over time, the amount of shares you buy will depend on the
price per share of your chosen investment. When the share price is low in a particular
investment, your salary deferral amount buys more shares. When the share price is
high, your salary deferral amount buys fewer shares. Theoretically, over time your
average share price will be lower than if you would have invested a large amount several
The difference between safe harbor and traditional 401 k is that a Safe Harbor 401(k) Plan
is a relatively new type of 401(k) Plan that automatically meets certain IRS
non-discrimination requirements, unlike a traditional 401(k) plan, if the employer commits
to making one of two types of employer contributions. The first is a 3% of pay
non-elective (profit sharing) contribution required to be made on behalf of
any participant who has met the eligibility requirements for salary deferral contributions,
whether or not the participant actually participates in the salary deferral arrangement.
The second type of contribution is an employer matching contribution whose formula,
in the aggregate, may not be less than 100% on the first 3% of a participant’s pay
deferred to the plan and 50%} on the next 2% of a participant’s pay deferred to the plan.
A participant must actually participate in the salary deferral arrangement to be eligible for
the employer matching contribution.
The employer’s chosen Safe Harbor contribution must be 100% vested when made for
each participant, but there are certain withdrawal restrictions that apply to these types of
contributions resembling those that apply to salary deferral contributions. For example, a
plan participant may not rollover these types of contributions if distributed from the plan
on account of hardship (see the FAQ related to hardship withdrawals), as well as certain
With this type of 401(k) plan, a plan participant may defer salary to the plan in an amount
not exceeding the lower of the following: the maximum salary deferral percent defined in
the plan document and listed in the plan’s SPD; the annual IRS limit on salary deferral
amounts ($10,500 for 2001); or the Internal Revenue Code Section 415 limit (the lesser
of 25% of pay or $35,000 in 2001). For example, suppose the plan defines the maximum
salary deferral percent to be 15% of pay while an eligible participant. Suppose further
that your annual pay is $40,000 and you are eligible to participate in the plan for the
entire plan year. Your salary deferral limit would be $6,000 for the year in question
because 15% is the lower of the three limits cited above. Refer to the notice posted by
your employer for further details or contact your plan’s Plan Administrator.
What is the difference between Employer Profit Sharing, Employer Matching and Employee Salary Deferral contributions?
An employee salary deferral is an amount that the plan participant elects to defer from
their compensation to an employer sponsored 401(k) plan. Such amounts are 100%
vested (owned by the participant) when contributed to the plan because essentially
it is your pay to begin with and you have elected to have the employer deduct it and
contribute it to the plan.
An employer matching contribution is a contribution made by the employer to an
employer sponsored 401(k) plan. This contribution is based on a formula related to a
participant’s employee salary deferral contribution, therefore, a participant must enter
into a salary deferral arrangement to receive such a contribution. However, there
may also be other requirements a participant must satisfy in order to receive such a
contribution such as having worked at least 1,000 hours during the plan year. This type
of contribution is typically subject to a vesting schedule.
An employer profit sharing contribution is a contribution made by the employer to
an employer sponsored qualified retirement plan. Eligible participants share in this
contribution based on a predetermined formula used to allocate this contribution amount.
The plan need not be a 401(k) plan, but if it is a plan participant need not enter into a
salary deferral arrangement to receive such a contribution. However, there may be other
requirements that an employee must satisfy such as being employed on the last day of
the plan year or having worked at least 1,000 hours during the plan year. This type of
contribution is typically subject to a vesting schedule.
Qualified retirement plan distributions are subject to strict IRS regulations. There are
four basic triggering events that give rise to a distributable event: retirement; death; total
and permanent disability or termination of employment. If you have experienced any
of these events you, or your beneficiaries, may be eligible to receive a distribution of
your account balance. Generally, most plans 100% vest a participant’s account balance
upon death, total and permanent disability or retirement. If your employment with the
employer is terminated, either voluntarily or involuntarily, your vested account balance
will be determined based on the plan’s vesting schedule which is based on the number
of vesting years of service for which you have received credit.
Tax implications apply if you receive a cash distribution of your vested account balance
and do not rollover this amount into another qualified retirement plan or an IRA. See
your tax advisor or CPA for further details and read the Special Tax Notice Regarding
Plan Payments available in the FORMS section of our website, which is part of the
Distribution forms, prior to making your distribution election.
Please check with your plan’s Plan Administrator or your Summary Plan Description
for further details. If you are eligible to receive a distribution of your account balance
you may access the necessary distribution and related forms from the FORMS section
of our website. You will need to obtain the Client Identification number from your Plan
Administrator in order to access these items and may also need to download a free copy
of Adobe Acrobat Reader software to view and print these forms. A link to the Adobe
website is available in the FORMS section for your convenience.
Generally, yes. Your employer’s plan document will dictate whether rollover contributions
are allowed into the plan and whether you must satisfy the plan’s general eligibility
requirements prior to being eligible to roll this money into the plan. Most plans allow
rollover contributions. In this way you can consolidate your retirement accounts into one
plan and receive one benefit statement reflecting this money. The rollover contribution
also avoids current taxation otherwise levied on plan distributions because you are
depositing this money into another tax-deferred vehicle.
Please check with your plan’s Plan Administrator or your Summary Plan Description
for further details. If rollovers are allowed and you have met the requirements proceed
as follows. First, complete distribution paperwork from your prior 401(k) plan. This
paperwork should have a section that must be completed for distributions that will be
rolled into another qualified retirement plan. Once you have received the rollover check
from the prior 401(k) plan you must complete a rollover form that indicates which funds
you would like the plan Trustee to deposit the rollover amount by completing a rollover
The answer depends on whether the employer has elected to incorporate a loan
provision into the plan. If they have, then you are eligible to apply for a loan. If they have
not elected to incorporate a loan provision, then loans are not allowed from the plan.
A participant loan is a plan feature that allows plan participants to borrow against their
vested account balance. Obviously, as its name implies, the amount borrowed must be
repaid to the plan, which is usually required through payroll deductions on an after-tax
basis. Typically the interest charged for the loan is repaid to your account, however, this
is not always the case. Check with your plan’s Plan Administrator for details.
Generally, although you may be eligible to apply for a loan, whether you are approved
is a Trustee decision. The Trustee will review each application on a nondiscriminatory
basis, but will be judged on the applicant’s credit worthiness, purpose of the loan and
its term. Generally, participant loans may not exceed a 5-year term and can not be in
amount greater than 50% of the participant’s vested account balance or $50,000.
Plan Trustee(s) may also restrict participant loans to certain reasons such as preventing
foreclosure of the participant’s principal residence or for the acquisition of a principal
residence, among others. There may also be a minimum loan amount imposed such as
$1,000 and a one loan outstanding limit.
Please check with your plan’s Plan Administrator or your Summary Plan Description to
see if your plan allows participant loans.
The answer depends on whether the employer has elected to incorporate a hardship
withdrawal provision into the plan. If they have, then you are eligible to apply for a
hardship withdrawal. If they have not elected to incorporate this provision, then hardship
withdrawals are not allowed from the plan.
If permitted by the employer, a participant may request a hardship withdrawal from their
vested account balance if they have an immediate and heavy financial need and lack the
resources from which to remedy such need. Hardship withdrawals can not be repaid to
the plan. Generally, only the following reasons are valid to obtain a hardship withdrawal:
unreimbursed medical expenses for the participant, the participant’s spouse, children
and other dependents; the purchase of the participant’s principal residence; payment
of tuition and related education expenses for the next 12 months of post-secondary
education for the participant, the participant’s spouse, children or other dependents;
or the need to prevent the foreclosure or eviction of the participant from their principal
Generally, the following conditions also apply prior to obtaining a hardship withdrawal;
the participant has obtained all distributions, other than hardship distributions, and all
nontaxable loans under all plans maintained by the employer; all plans maintained
by the employer provide that the participant’s salary deferral contributions will be
suspended for 12-months after the receipt of the hardship distribution; the distribution
is not in excess of the immediate and heavy financial need although the participant
is allowed to “gross up” the distribution for taxes; and all plans maintained by the
employer provide than the participant may only make salary deferral contributions for
the participant’s taxable year immediately following the taxable year of the hardship
distribution not to exceed the applicable IRS annual salary deferral limit in effect for such
year less any salary deferral contributions made by the participant in the year he/she
received such hardship distribution.
Although the hardship distribution is generally eligible to be rolled over to another tax
deferred vehicle, salary deferral amounts received as part of such hardship distribution,
together with any amounts which are employer Safe-Harbor contributions, may not be
rolled over to another tax deferred vehicle. The participant, if under age 59 ½, must also
pay a 10% premature withdrawal penalty when filing their annual tax return.