Question:

My employer told me that the plan is required to withhold 20% of my distribution for Federal taxes. Does this mean I will not have to pay additional taxes when I file my personal tax return?

Answer:

Not necessarily. The IRS requires 20% withholding on all qualified plan distributions eligible for rollover to an IRA or another qualified plan. You will report the distribution as ordinary income on your personal tax return. Depending on your personal tax bracket, you may be required to pay additional taxes on the distribution or you may be entitled to a refund. If the additional amount of tax due is substantial, you may be required to make estimated tax payments. You should consult your personal tax advisor before making decisions regarding your distribution.

Question:

What are the current year's contribution and compensation limits?

Answer:

See the attached Adobe® Acrobat® document.

Question:

I will be attaining age 70 this year. When am I required to begin withdrawing funds from my employer's 401(k) plan?

Answer:

In general, Required Minimum Distributions (RMDs) from your retirement accounts (including IRAs) need to begin by April 1 following the year in which you attain age 70½. Thereafter, the plan must issue RMDs annually on or before December 31. Note that two required distributions will be issued your first year (April 1 and December 31) if you wait until April 1 to begin your distributions. You may avoid two taxable distributions in the first year by taking your first withdrawal by December 31 of the year in which you attain age 70½.

However, if you are still working, you are not required to begin RMDs from your employer sponsored plan until April 1 of the year following the year in which you terminate employment. This exception does not apply if you own more than 5% of the employer, nor does it apply to IRA's.

Question:

What is the maximum percent of my compensation that I can defer as 401(k)?

Answer:

The maximum total contributions from all sources (i.e., 401(k), match, safe harbor, profit sharing, forfeiture allocations and money purchase contributions) for a plan year ending in 2011 is 100% of compensation not to exceed $49,000.  For 2012 this limit increases to $50,000.

The IRS dollar limit on elective deferrals is $16,500 for 2011 and $17,000 for 2012. In addition, if you attain age 50 or older by December 31,  you may defer an additional $5,500 catch up contribution.

If you are a highly compensated employee, you may be restricted to a lesser amount by various nondiscrimination rules.

Question:

What is the maximum amount a participant may defer in a 401(k) plan each year?

The annual deferral may not exceed the lesser of:
a. $16,500 for 2011; $17,000 for 2012
b. the maximum deferral amount allowed under the terms of the plan; or
c. the amount that allows the plan to meet the required nondiscrimination tests.

In addition, if you attain age 50 or older by December 31, you may defer an additional $5,500 catch up contribution.

When must an employer deposit 401(k) elective contributions withheld from employees' payroll checks?

The contributions (401(k) AND plan loan repayments) should be deposited as soon as they can reasonably be segregated from the employer's general assets, but not later than the 15th business day of the month following the month in which the contributions are withheld by the employer. The Department of Labor has been focusing on this issue in recent years. A guideline frequently used by the DOL is to expect 401(k) deferrals and plan loan payments to be deposited as early as the due date of the payroll taxes. The DOL has issued a safe harbor deadline to provide clarity for employers. Amounts will be considered timely if they are deposited with the plan no later than the 7th business day following the date of withholding or the date a payment is otherwise received by the employer. For more information, see our Winter 2003/2004 Newsletter and Fall 2008 Newsletter on this issue.

Can an employee rollover benefits into a plan before meeting the plan's eligibility requirements?

If a plan accepts rollover distributions from other qualified plans, it may also allow for employees to make a rollover contribution before they meet the plan's minimum age and service eligibility requirements. These employees would be considered "limited participants" in the plan.

Can 401(k) deferrals be made from severance pay?

No. 401(k) deferrals may only be made from pay while the participant is an employee of the plan sponsor. Severance pay that is received after termination of employment is not eligible for deferral.

Does the additional 10% distribution tax apply to hardship distributions if the recipient is less than age 59-1/2?

Yes, the additional 10% tax applies, with limited exceptions. Exceptions include distributions that are made to a participant after termination of employment after attainment of age 55, distributions that are attributable to an employee being disabled, and distributions that are made to cover deductible medical expenses.

Do taxes need to be withheld from a hardship distribution prior to paying a participant?

Maybe. Since a hardship distribution is not eligible to be rolled over to an IRA or other qualified plan, participants may elect to have no withholding on their hardship withdrawal. The withdrawal is reported on a Form 1099-R as taxable income. If no withholding is elected, the participant may be required to make estimated tax payments and should consult a tax professional before making this decision. Absent the written election not to withhold taxes, 10% withholding is required.

Who is the "plan administrator?"

The plan administrator is the individual or entity designated in the plan document as such, and is responsible for interpreting the plan and adhering to its terms. The plan administrator is often the employer sponsoring the plan or the trustees of the plan. HPL&S is not the plan administrator. Rather, we are an administrative service provider engaged to assist the plan administrator in fulfilling its responsibilities. We are sometimes called a third party administrator ("TPA").

What is a Summary Plan Description?

A Summary Plan Description ("SPD") is a booklet for plan participants that describes the plan provisions in a manner that can be understood by the average individual.

When must the Summary Plan Description be distributed?

It must be distributed within 90 days of the date an individual becomes a plan participant.

What is a Summary Annual Report?

A Summary Annual Report ("SAR") is a narrative which contains basic plan and financial data for the plan as a whole. A participant must receive a SAR for each plan year.