FAQ: Frequently asked questions by participants to plan sponsors
Below, we hope to answer some of the most commonly asked questions in regards to retirement plans. While these answers are very broad, you can always find more plan specific answers in the Summary Plan Description which can be located upon logging into the portal. You can always contact us as well to answer any questions you may have.
Q: What is the benefit of participating in a 401(k) plan?
A: A 401(k) plan allows you to make pre-tax contributions via salary deductions in order to invest and save for retirement. The tax is deferred until you choose to take a cash distribution from the plan. If your plan allows it, you may also be able to designate a portion of your salary deductions as ROTH contributions. These are deducted on an after tax basis and therefore may be withdrawn tax free given certain requirements have been met. Some plans also offer an employer funded match on an individual’s 401(k) contribution to encourage participation. The match would typically be determined by a percentage based formula written into the plan document.
Q: What is the maximum amount a participant may contribute to a 401(k) plan?
A: The maximum 401(k) Deferral limits change on an annual basis and are set by the IRS. For 2017, the maximum 401(k) limit is $18,000. This is a limit that is comprehensive of all salary reductions in a tax year regardless of if the individual is a participant in more than one plan throughout the year. The limit is also a combination of pre-tax and ROTH contributions. If you are 50 years of age or older, you may contribute an additional $6,000 for 2017 (also subject to change on an annual basis).
Q: What does the term “vesting” refer to?
A: Vesting essentially refers to an employee’s ownership in certain assets in the plan. Typically, Employer Contributions (i.e. Matching contributions or Profit Sharing Contributions) are subject to “vesting schedules” based on years of service with the Employer. You are always 100% vested in any money you contribute to the plan. Your vesting will either increase gradually per year of service (maximum 6 years of service for full vesting) or you will be 0% vested until a service requirement is met (maximum 3 years for full vesting). Your quarterly statement will have your vesting percentage listed. Please refer to the Summary Plan Description for specific information regarding vesting for your plan.
Q: Can I withdraw the money from my retirement account at any time?
A: No, you may not withdraw money from the plan at any time. In order to take a full distribution of your account, a distributable event must have occurred. Distributable events are listed in your document and typically are as follows: termination of employment, retirement, disability, or death. Only if one of these has occurred may you take a full distribution of your account.
Q: If I have terminated employment, how do I go about requesting a distribution from the plan?
A: First and foremost, you must decide if you would like to take a cash distribution or rollover your account balance to a new plan or IRA. If you request a full cash distribution and are under the age of 59 1/2, you will be charged a 10% penalty tax for early withdrawal. You will also have to pay federal income tax on your cash distribution regardless of your age. To avoid taxes and penalties, you may also request a rollover of your assets to a plan with a new employer or an IRA. You will need to make sure you obtain account information for the rollover prior to requesting a distribution. You may also choose to combine the options taking a partial cash distribution and rolling the remaining balance into an IRA or another qualified plan. Once you have decided what to do with your account balance, you will need to complete a distribution request form for the financial institution where your retirement assets are invested. You can locate these forms by going to commonly used forms. Once the form has been completed, you will need to send it to your former employer to sign. Your employer will then send the form to us for processing. Once we receive the form, it can take 5-10 business days for you to receive the money.
Q: May I withdraw money from the plan if I have not incurred a distributable event?
A: If the plan allows, there are several options available for partially withdrawing money prior to a distributable event. Individuals age 59 ½ and over may request an in-service distribution of their funds. Some plans might only allow in-service distributions of employee deferrals until retirement age while others may allow distributions from all sources. It is best to check with your Employer. If you do request an in-service distribution, your account will not be closed; it will remain open for future Employer contributions until a distributable event occurs. In order to request an in-service distribution, you will need to complete a distribution form (go to commonly used forms to access) and send to your employer for approval and signature. Your employer will then send the form to us for processing. Please note that upon our receipt, it can take 5-10 business days for you to receive your money.
Q: How do I withdraw from the plan if I am not age 59 ½ or older?
A: If the plan permits, you may take a loan from the plan. The minimum allowable loan is $1,000 and the maximum is $50,000. You also may only borrow 50% of your vested account balance at any time. Therefore, if your plan allows multiple loans, you may never have more than 50% of your vested account balance outstanding in loans. If you would like help calculating your available loan, please feel free to contact us. Loan applicants should complete a loan request form and the promissory note and irrevocable pledge prior to requesting a loan. These can be found in commonly used forms. You will provide these to your employer for signature. Once signed, the paperwork will be sent to us for processing. Once we process, we will create an amortization (payment) schedule and send it to your employer. You should receive the money 5-10 business days after we receive the request.
Q: What are the terms of the loan and how is it repaid?
A: Loans are repaid via after-tax salary deductions. Therefore, the frequency of the payments is typically aligned with your payroll (weekly, bi-weekly, twice a month, or monthly). Loans must be repaid within 5 years unless you are purchasing a primary place of residence. In that case, repayment may be extended to a maximum of 25 years. Interest on the loan is typically defined in the plan’s loan provision and is determined by the “prime” rate of interest. (i.e. Prime +1, or Prime +2) The “prime” interest rate, as defined by the Wall Street Journal, is “ the base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks”. If you would like to try and model a loan and see how much the payment would be, please use our loan calculator.
Q: What happens if I terminate employment prior to paying off my loan?
A: The balance of the outstanding loan basically becomes due upon termination of employment. You can either pay the balance upon termination or you can have the balance deemed a taxable distribution for the tax year in which you terminate employment. If the balance is deemed a distribution, income and penalty taxes will apply if you are under the age of 59 ½. This is because the IRS will see the outstanding loan amount as a cash distribution from the plan regardless of if you rollover your account balance.
Q: What can I do if I need to withdraw from the plan due to financial hardship and my plan does not allow loans or I have already taken out the maximum allowable amount?
A: If the plan allows, you may request to take a hardship distribution. However, there are strict rules in place regarding hardships. You must have exhausted all other options for obtaining the money to meet your financial hardship. Some reasons for needing a hardship distribution are as follows: your own, your spouse’s or your dependent’s medical expenses, expenses in purchasing a principal residence (excluding mortgage payments), the cost of tuition and related educational fees for the next 12 months of post-secondary education for yourself or your spouse or dependents, or to prevent your eviction or the foreclosure on the mortgage of your principal residence, home repairs that qualify for casualty deduction on your principal residence, and funeral expenses for you, your spouse or dependents. You may not take more than needed to cover your financial hardship and you may only withdraw money that you have contributed to the plan (salary deferrals)—no investment earnings. In order to help you pull out of financial hardship, you may not defer to the plan for the six months following taking a hardship distribution. Appropriate evidence of hardship is recommended and should be provided along with the hardship distribution form. We have a hardship application that we recommend participants complete prior to requesting a hardship. This can be found by going to commonly used forms. All paperwork should be submitted to your employer for approval. Your employer will then forward to us for processing. Once again standard processing time is 5-10 business days though hardships do get priority and will be moved along faster.