Frequently asked Questions
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| Frequently asked Questions
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Q: What is a 401(k) plan?
A: There is nothing mysterious about a 401(k) plan. The name comes from section 401, paragraph k of the Internal Revenue Code. This section says that an employer can setup a plan that permits employees to save some of their money on a tax-deferred basis into an account for their retirement. As an incentive to get employees to take advantage of the plan, any salary they opt to put in the plan isn't taxed until it is later withdrawn. This means your contributions go in dollar for dollar without being reduced by taxes. |
Q: When can I join the plan?
A: 401(k) plans can require that you complete a minimum amount of work service or attain a certain age. Common requirements are that you must work one year full-time and reach age 21 to join although other plans let you join right away. Check your Summary Plan Description (See Question 10 below) or contact your employer to find out what the plan requires. |
Q: What forms do I have to fill out when I join the plan?
A: When you are eligible, your employer will ask you to complete an enrollment form and a beneficiary designation form. The enrollment form is where you indicate how much of your pay you want to save into the plan and which investment options you want to use (if your plan permits participants to select their investments). The beneficiary designation form is where you identify who should become the owner of your account in the event of your death. |
Q: How much can I contribute?
A: Your contributions are called salary deferrals because they are compensation you could have received as take-home pay, but instead decided to wait, or defer, receiving the money until later, hopefully when you retire. An employee can contribute up to $14,000 in salary deferrals for the calendar year 2005. If you will reach age 50 at anytime during 2005, you can contribute an additional $4,000 in catch-up contributions. These limits are indexed which means they can change each year. For instance, for 2006, the salary deferral limit is $15,000 and the catch-up limit is $5,000. Check our website for updated limits. |
Q: Can I rollover my account balance from my previous employer's plan?
A: Usually yes. It depends on the plan document, but most plans permit you to rollover your account balance from your previous employer's plan into your new employer's plan without incurring any income tax liabilities. Check the Summary Plan Description or ask your employer. |
Q: Does my employer have to contribute to the plan?
A: Usually no. Employers can make contributions to the plan such as profit sharing or matching contributions, but typically the plan is written in such a way as to give them leeway in whether they actually do. A profit sharing contribution is what the name implies. The employer decides to share some of the profit for the year in the form of making a contribution to the plan. A matching contribution is tied to the salary deferrals you make. If you make contributions, then with a matching contribution, the employer will contribute or match a certain portion of the contributions. A typical matching contribution might be 50% up to 4%. This means the employer will contribute (either with each paycheck or at the end of the year) 50 cents on the dollar for everyone of your contributions up to 4% of your total pay. |
Q: Who is eligible to receive an employer contribution?
A: Plans can require participants (employees who have met the eligibility requirements and entered the plan) to meet additional requirements before they are eligible to receive a portion of any profit sharing and/or matching contribution. These usually take the form of requiring the participant to be employed on the last day of the plan year and/or to have worked 1,000 hours during the year. |
Q: If I terminate employment, can I take all my money?
A: It depends on what the plan document says. Plans can be written to permit distributions as soon as possible after you terminate employment or to say that you must wait until after the end of the plan year in which you terminated in order to receive a payment. Check your Summary Plan Description or contact your employer. Don't wait until you've terminated to think about this. |
Q: When can I receive a distribution from the plan?
A: In general, you can't receive a distribution from the plan unless you quit, die, retire, become disabled, or have a financial hardship. Some plans permit loans, others don't allow for hardships. Check your Summary Plan Description or contact your employer. Don't assume that all plans are alike. Your current plan may be, probably is, different from the plan maintained by your prior employer. Remember too that the plan is set-up for retirement. |
Q: How am I taxed when I receive a distribution?
A: Since the plan is meant to be for retirement, Uncle Sam says no fair saving the money on a tax-deferred basis and then pulling it out early for something else. If you take a distribution before age 59 ½, you will be, in general, subject to an early distribution penalty equal to 10% of the distribution amount. You will pay this when you file your tax return for the year in which you took the distribution. If you take a lump-sum distribution, you will prepay a minimum 20% in federal income tax withholding and 4% in NC withholding (if you are an NC resident). Your ultimate income tax liability will be determined when you file your tax return for the year in which you received the distribution. If you rollover the distribution into another employer plan or into an IRA you won't pay any income tax. |
Q: How can I get more information about the plan?
A: When you became a plan participant your employer gave you a Summary Plan Description (SPD). The SPD includes more questions and goes into more detail than we can here so it is a good first place to start if you have any questions about the plan and how it works. If you need a copy of the SPD or have further questions, please contact your employer. |
