OVERVIEW OF 401k PLANS

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=90 BGCOLOR="#006699" TEXT="#080000" bgproperties="fixed" background="07a285a1erlcgo.gif"> <div> <FONT SIZE="5" COLOR="#FFCC66" FACE="Arial" ><B>401 (k) PLANS</B></FONT><B>     |     </B><A HREF="index.htm" TARGET="_top" TITLE="401 (k) PLANS"><U><B>home</B></U></A></div> <div> <B>OVERVIEW OF 401k PLANS</B>   |   <A HREF="id20.htm" TARGET="_top" TITLE="401k CONTRIBUTIONS"><U>401k CONTRIBUTIONS</U></A>   |   <A HREF="id58.htm" TARGET="_top" TITLE="VESTING"><U>VESTING</U></A>   |   <A HREF="id21.htm" TARGET="_top" TITLE="NONDISCRIMINATION RULES"><U>NON-DISCRIMINATION RULES</U></A>   |   <A HREF="id22.htm" TARGET="_top" TITLE="401k DISTRIBUTIONS"><U>401k DISTRIBUTIONS</U></A>   |   <A HREF="id23.htm" TARGET="_top" TITLE="SIMPLE 401k PLANS"><U>SIMPLE 401k PLANS</U></A>   |   <A HREF="id54.htm" TARGET="_top" TITLE="SOLO 401ks"><U>SOLO 401ks</U></A> 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HREF="id24_m.htm#qualified__plan_requirements" TARGET="TRLX_Middle" TITLE="OVERVIEW OF 401k PLANS"><U><B>Qualified Plan Requirements</B></U></A></div> <div> <A HREF="id24_m.htm#contributions_limits__" TARGET="TRLX_Middle" TITLE="OVERVIEW OF 401k PLANS"><U><B>Contributions</B></U></A></div> <div> <A HREF="id24_m.htm#vesting_requirements____" TARGET="TRLX_Middle" TITLE="OVERVIEW OF 401k PLANS"><U><B>Vesting Requirements</B></U></A></div> <div> <A HREF="id24_m.htm#nondiscrimination_rules" TARGET="TRLX_Middle" TITLE="OVERVIEW OF 401k PLANS"><U><B>Non-Discrimination Rules</B></U></A></div> <div> <A HREF="id24_m.htm#benefits_contingent_on_elective" TARGET="TRLX_Middle" TITLE="OVERVIEW OF 401k PLANS"><U><B>Contingent Benefits</B></U></A></div> <div> <A HREF="id24_m.htm#distributions_from_401k_plans" TARGET="TRLX_Middle" TITLE="OVERVIEW OF 401k PLANS"><U><B>Distribution Rules</B></U></A></div> <div> <A HREF="id24_m.htm#joint_and_survivor_annuities" TARGET="TRLX_Middle" TITLE="OVERVIEW OF 401k PLANS"><U><B>Joint & Survivor Annuities</B></U></A></div> <bR> <bR> <bR> </td> <td valign="top" height=390 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <I><B>OVERVIEW OF 401k PLANS</B></I></div> <bR> <div> This page summarizes the important characteristics of 401k plans.  The following pages will provide more detailed discussion of these points.   Links to these detailed pages are provided throughout this page -- or can be accessed by the links listed above.  Links to major topics on this page are shown at the left. </div> <bR> <div>    </div> <div> In general, 401k plans -- also called Cash Or Deferred Arrangements (CODAs) -- allow employees to choose to have part of their current compensation contributed to a qualified profit-sharing or stock bonus plan.  Today, most private sector employers may establish 401k plans for their employees.  State and local governments may not maintain cash or deferred arrangements -- although, tax-exempt organizations may establish 401k plans for their employees.</div> <bR> <div> Because a 401k plan must be part of an underlying profit-sharing or stock bonus plan, 401ks must meet the <A HREF="#qualified__plan_requirements" TITLE="OVERVIEW OF 401k PLANS"><U>general qualification rules</U></A> that apply to all such tax-advantaged plans.  </div> <bR> <div> As with other qualified plans, contributions to a 401k plan receive favorable tax treatment.  Most contributions are tax deductible and earnings in the plan grow tax-deferred until withdrawn.  </div> <bR> <div> Like all qualified plans,  401ks may not discriminate in favor of highly compensated employees in terms of coverage, contributions or benefits.  To satisfy this nondiscrimination requirement, a 401k plan must satisfy several tests. In addition, contributions made by employees and the employer must also satisfy two other tests: an actual contribution percentage (ACP) test and an actual deferral percentage (ADP) test.</div> <div>     </div> <div> <A HREF="id22.htm" TARGET="_top" TITLE="401k DISTRIBUTIONS"><U>Distributions</U></A> from 401ks are generally treated much like distributions from other qualified plans. However,  the rules governing withdrawals from a 401k plan allow for distributions for financial hardship, which most other qualified plans do not allow. Another important feature of 401k plans is the availability of loans to plan participants. The hardship and loan provisions offer plan participants liquidity, adding to the popularity of 401k plans and encouraging employee participation.</div> <bR> <bR> <bR> <div> <B> <A NAME="types_of_401_k__plans"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>Types of 401k plans</B></div> <bR> <div>      </div> <div> 401k plans are cash or deferred arrangements that allow private-sector employees to elect to receive either current compensation or contribute a portion of their compensation to a qualified profit-sharing or stock bonus plan. 401k plans are generally structured as <I><B>profit-sharing</B></I> (sometimes called "bonus plans") or <I><B>thrift plans</B></I>. At one time, profit-sharing plans were called cash or deferred arrangements (CODAs) and thrift-type plans were called salary deduction plans. Because the distinction between these types of plans can become blurred in operation, especially as the complexity of the plan increases, both types of plans have become better known simply as 401k plans. Beginning in 1997,  a third type of plan, the SIMPLE 401k was made available to smaller employers.  So-called Solo 401k plans for "owner-only" businesses became available in 2002 and Roth 401ks were added in 2006.</div> <bR> <div> <I> </I></div> <div> <I><B>Bonus-type plans</B></I></div> <bR> <div> Under a bonus-type plan, contributions are not usually made until the end of the year when a traditional bonus is declared for all employees. After the bonus is declared, each employee may then elect to receive the bonus distribution in cash or defer the amount by having them contributed to the plan.  Some plans have an all-or-nothing approach, requiring that an employee take the entire amount as either a cash bonus or as a plan contribution. In other plans, however, an employee is allowed to split the bonus and take part of the distribution in cash and part as a plan contribution.</div> <bR> <div> <I><B>Thrift-type plans</B></I></div> <bR> <div> Under a thrift-type plan, an employee has the option of receiving a reduced salary, or possibly foregoing a salary increase, and having the difference contributed to the plan on the employee's behalf. Under such a plan, the 401k contribution -- a fixed percentage of salary -- is deducted from each paycheck and contributed to the plan. Typically, most employers allow employees to change their contribution levels once or twice a year, but there are no legal restrictions on how often the amount of the contributions may be changed.</div> <bR> <bR> <div> <I><B>SIMPLE 401k Plans</B></I></div> <div>     </div> <div> Employers that do not maintain any other qualified plan and who employ 100 or fewer employees may adopt a Savings Incentive Match Plan for Employees (SIMPLE plan) as part of a 401k arrangement. The advantage of a SIMPLE 401k plan is that the complex nondiscrimination tests applicable to other 401k plans are satisfied if the plan meets relatively uncomplicated contribution and vesting requirements that apply to SIMPLE plans. However, SIMPLE 401k plans must satisfy the all of the other rules governing qualified plans, as well as all other requirements applicable to 401k plans.   <A HREF="id23.htm" TARGET="_top" TITLE="SIMPLE 401k PLANS"><U> ........more on SIMPLE plans</U></A></div> <bR> <bR> <div> <I><B>Solo 401k Plans</B></I></div> <bR> <div> A Solo 401k or  Individual(k) plan is a type of 401k plan designed specifically for owner-only businesses. An owner-only business, for this specific purpose, is defined as either a business that employs only the owner and his or her immediate family members, or a business that employs the owner and other employees who may be excluded from plan participation under federal laws governing plan coverage requirements, such as part-time or seasonal employees.   Like SIMPLE plans, Solo 401k plans eliminate much of the adminstrative headache that accompanies regular 401ks.  However, unlike SIMPLE plans, Solo 401k plans allow for the higher funding levels available under regular 401k rules.  <A HREF="id54.htm" TARGET="_top" TITLE="SOLO 401ks"><U> .......more on Solo 401k plans</U></A></div> <bR> <bR> <div> <I><B>Roth 401k Plans</B></I></div> <bR> <div> Starting in 2006, the tax code permits Roth 401k plans.  These plans — like their cousins,  Roth IRAs — allow for nondeductible (after-tax) employee contributions into the plan, tax deferred growth, and tax-free withdrawal at retirement — under certain circumstances.   </div> <div> .  <A HREF="id55.htm" TARGET="_top" TITLE="ROTH 401k PLANS"><U>......more on Roth 401ks</U></A></div> <bR> <bR> <bR> <bR> <div> <B> <A NAME="qualified__plan_requirements"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>401k</B><B>  Plan Requirements</B></div> <bR> <div> Qualified retirement plans are those that "qualify" for favorable tax treatment. In order to qualify for these tax breaks, the plan must comply with a federal law: Employment Retirement Income Security Act of 1974, commonly referred to as ERISA.  If the plan does meet the requirements of this federal law, employer's contributions to the plan are tax-deductible as a business expense and employees do not have to include any monies contributed on their behalf as taxable income.  The monies contributed to the plan are invested and the investment income grows tax-deferred.  When funds are withdrawn from the plan, the withdrawal will be taxed as ordinary income -- and since the withdrawal is presumably taken at retirement, the recipient may be in a lower tax bracket than when he or she  was working.   </div> <bR> <div> Plans wishing to be treated under Section 401k of the tax code must meet several requirements.  To treated as a 401k plan, it:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">is part of a profit-sharing, stock bonus, pre-ERISA money purchase or rural cooperative plan,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">is a <A HREF="#general_erisa_requirements____" TITLE="OVERVIEW OF 401k PLANS"><U><B>qualified plan</B></U></A> under ERISA,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">requires no more than <A HREF="#one_year_eligibility_requirement__" TITLE="OVERVIEW OF 401k PLANS"><U><B>one year of service</B></U></A> to participate,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">offers employees the option of receiving <A HREF="#option_of_cash_or_deferral__" TITLE="OVERVIEW OF 401k PLANS"><U><B>cash or deferrals</B></U></A>,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">imposes annual <A HREF="#contributions_limits__" TITLE="OVERVIEW OF 401k PLANS"><U><B>contribution limits</B></U></A>,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">meets special requirements relating to <A HREF="#nondiscrimination_rules" TITLE="OVERVIEW OF 401k PLANS"><U><B>nondiscrimination</B></U></A><B>, elective deferrals, and </B><A HREF="#distributions_from_401k_plans" TITLE="OVERVIEW OF 401k PLANS"><U><B>distributions</B></U></A>,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">provides for a <A HREF="#separate_accounting_requirement___" TITLE="OVERVIEW OF 401k PLANS"><U><B>"separate accounting"</B></U></A> of the different types of employer and employee contributions, and </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">may not require participation as a condition for <A HREF="#benefits_contingent_on_elective" TITLE="OVERVIEW OF 401k PLANS"><U><B>other benefits</B></U></A>.</div> <bR> <bR> <div> <I><B> <A NAME="general_erisa_requirements____"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B></I><I><B>General ERISA requirements.   </B></I></div> <bR> <div> As with all qualified plans, 401k plans must meet the general rules imposed by ERISA (Employment Retirement Income Security Act of 1974). In brief, this means that the plan must:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">be a written plan that is communicated to employees,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">be for the exclusive benefit of employees or their beneficiaries,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">not discriminate in favor of highly compensated employees.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">meet the minimum<A HREF="#vesting_requirements____" TITLE="OVERVIEW OF 401k PLANS"><U> vesting</U></A> rules,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">provide that an employee's entire interest be paid out when the employee retires or reaches age 70<FONT SIZE="3" COLOR="#000000" FACE="Arial" >½</FONT>, whichever is later,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">provide a qualified joint and survivor annuity as a payout  alternative,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">allow for rollover of benefits to another qualified plan,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">contain a spendthrift provision, and</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">file various reports with the IRS and the Department of Labor.</div> <div>     </div> <bR> <div> <I><B> <A NAME="one_year_eligibility_requirement__"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B></I><I><B>One-year eligibility requirement.</B></I><FONT SIZE="3" COLOR="#000000" FACE="Arial" > </FONT></div> <bR> <div> Unlike other qualified plans that may require a longer period of service before employees are eligible for coverage, 401k plans must be open to any full-time, adult employee who has provided at least one year of service.  Employers may set shorter eligibility periods, but not longer than one year of service.</div> <bR> <div> A year of service is a 12-month period in which the employee has worked at least 1,000 hours. The employee must be permitted to participate in the plan within six months of satisfying the age and service requirements.  Special “break-in-service” rules apply to participating employees who work fewer than 500 hours in a 12-month period.</div> <bR> <bR> <div> <I><B> <A NAME="option_of_cash_or_deferral__"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B></I><I><B>Option of Cash or Deferral.</B></I><FONT SIZE="3" COLOR="#000000" FACE="Arial" > </FONT></div> <bR> <div> To qualify as a 401k plan, the amount an employee may defer as an elective contribution must be available to the employee as cash.  Plans that offer the employee a choice of a non-cash benefit (such as health insurance coverage) or deferral of an equal amount into a plan will not qualify as a  401k plan.</div> <bR> <bR> <div> <I><B> <A NAME="separate_accounting_requirement___"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B></I><I><B>Separate Accounting Requirement.  </B></I></div> <bR> <div> 401k plans are subject to a "separate accounting" rule. Under this rule, the plan must provide a separate account of  employer and employee contributions for each participant.  The plan must allocate gains, losses, and other credits or charges on a reasonable and consistent basis to each participant's account — that is, not discriminate in favor of highly compensated employees.  This rule applies to plans that impose vesting requirements (see below) or restrictions on withdrawals of employer contributions.  Employers who wish to simplify accounting by maintaining only one account for each employee must consider all contributions 100% vested.</div> <bR> <bR> <div> <I><B> <A NAME="contributions_limits__"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B></I><I><B>Contributions Limits.</B></I><FONT SIZE="3" COLOR="#000000" FACE="Arial" > </FONT></div> <bR> <div> There are four different types of contributions that may be made to the plan:</div> <bR> <div> <B>elective deferrals:</B> before-tax funds contributed to the plan at the employee's direction as part of the salary reduction or bonus deferral.    The IRS requires all 401k plans to include elective contributions as part of the plan (the other three types of contributions are optional).</div> <bR> <div> <B>voluntary after-tax contributions: </B> after-tax funds set aside by the employee.  These funds come from the employee's after-tax income -- but any earnings in the plan from these contributions grow tax-deferred.</div> <bR> <div> <B>employer matching contributions: </B> funds added to an employee's 401k account by the employer -- typically as an incentive, to encourage employees to make elective contributions.   </div> <bR> <div> <B>nonelective contributions: </B>funds contributed by an employer that are not based on the employees' elective contribution.  Most employers compute these contributions on the basis of the employer's profits and are allocated among employees in proportion to their salaries. </div> <bR> <div> Of the four types of possible 401k contributions, only elective contributions are required by the tax code in order to constitute a 401k plan. The other options may be added by employers to make the plans more attractive to employees and to increase the amounts that can be sheltered from current taxation, but these are not required. </div> <bR> <div> Employees who participate in a 401k plan are subject to three types of limitations on contributions — one by the employer and two by the tax code.  </div> <div>  </div> <bR> <div> <B>Plan limits</B></div> <bR> <div> Each employer’s plan will outline the maximum amount that employees may contribute to its 401k plan. This limit is expressed as a percentage of the employee's compensation.   The plan will spell out what amounts the employee may contribute and what contributions, if any, the employer will make.  Many employers will match an employee’s deferrals, but this is not a requirement</div> <div> .</div> <div> <B>Dollar limit on annual additions</B></div> <bR> <div> The tax code limits the amount that an employer can contribute to defined contribution plans on behalf of an employee. 401k plans are considered to be defined contribution plans.  The annual amount an employer may add on behalf of an employee is limited to the lesser of 100% of the employee's compensation (net of deferral) or $40,000 (adjusted annually for inflation).  This is the “100% / $40,000 rule”.</div> <bR> <div> <B>Dollar limit on all elective contributions</B></div> <bR> <div> A completely separate limit applies to the aggregate amount that an employee may elect to defer under all 401k plans or other plans allowing elective deferrals (such as tax sheltered annuities and SEP-IRAs).  The limit is $7,000, adjusted annually for inflation.     </div> <div>      </div> <bR> <div> These limits are <A HREF="id20.htm" TARGET="_top" TITLE="401k CONTRIBUTIONS"><U>discussed in greater detail</U></A> later in this course. </div> <bR> <bR> <div> <I><B> <A NAME="vesting_requirements____"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B></I><I><B>Vesting Requirements.   </B></I></div> <bR> <div> Vesting refers to the employees ownership of the retirement savings in a qualified plan. To become tax-qualified, the 401k  plan must satisfy the minimum vesting standards provided in the Internal Revenue Code.</div> <bR> <div> Accumulated savings in a 401k  plan are generally the result of:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">employer contributions,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">earnings on employer contributions,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">employee contributions,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">earnings on employee contributions, and</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">amounts allocated from plan forfeitures.</div> <bR> <div> Qualified plans must contain a vesting schedule that will provide the employee with increasing ownership in the employer's contributions and all earnings in the plan.  The schedule is based on the employee's length of service.  Eventually, the employee owns all of the retirement savings in his or her account. At that point, the employee is "100% vested" and the employee's right to retirement benefits become "nonforfeitable".  Vesting may be <I><B>immediate</B></I> or <I><B>deferred</B></I>.  In the case of deferred vesting, the employee must wait a specified period of time before having access to the benefits in plan.  If a benefit is immediately vested, the employee is entitled to the benefit once the funds have been contributed to the retirement plan (Please note: just because the benefit is vested mean that the benefit can be distributed without restriction -- it simply means that the employer cannot withhold the benefit from the employee.   For example, the tax code may penalize a withdrawal prior to age 59<FONT SIZE="3" COLOR="#000000" FACE="Arial" >½)</FONT>.</div> <bR> <div> Deferred vesting provides a powerful incentive to continue working for the same employer in order to enjoy full retirement benefits.  From an employee's point of view, the plan's vesting schedule determines the amount the employee can expect to receive upon retirement, and it generally limits the amount an employee may borrow from the plan.</div> <bR> <div> Generally speaking, the tax code requires "full and immediate vesting" for <I><B>employee</B></I> contributions to a 401k plan (and all income earned from any of these contributions), as well as any amounts transferred or rolled over into the 401k.  All other contributions (and resulting income) may be vested under a deferred vesting schedule.   </div> <div> For example, if a plan provides that 60% of an employee's account is vested in a given year, it is only the matching and nonelective contributions that are 60% vested, employee-provided elective contributions are fully vested.  </div> <bR> <div> Special vesting rules apply to top heavy plans and employer's matching contributions.  </div> <bR> <div> <A HREF="id58.htm" TARGET="_top" TITLE="VESTING"><U>....................more details on vesting</U></A></div> <bR> <bR> <div> <I><B> <A NAME="nondiscrimination_rules"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B></I><I><B>Nondiscrimination Rules</B></I></div> <bR> <div> Perhaps the most onerous requirements of a 401k plan (especially for smaller employers) are the nondiscrimination rules.  As with any qualified plan, 401k plans may not favor highly compensated employees as to the plan’s coverage, contributions or benefits.  For purposes of these rules, highly compensated employees  includes:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">any employee who owned 5% or more of the employer (during the current year or previous year), and</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">any employee who received compensation of $80,000 or more (adjusted for inflation, $100,000 in 2007) from the employer during the previous year. Alternatively, employers may choose to include as “highly compensated employees” only those employees earning more than this amount and who are in highest paid 20% of all employees.</div> <bR> <div> To satisfy the nondiscrimination requirement, a 401k plan must be established for the benefit of the general workforce.  The plans must satisfy meet one of two tests that apply to all qualified plans:</div> <bR> <div> <B>Percentage test:</B> at least 70% of all nonhighly compensated employees must be covered by the plan.</div> <bR> <div> <B>Ratio test</B>: the percentage of nonhighly compensated employees covered by the plan must be at least 70% of the percentage of highly compensated employees covered.</div> <bR> <div> A plan may appear nondiscriminatory on paper but prove to be discriminatory in operation. In many 401k plans lower-paid employees elect to take compensation in cash rather than defer it. The law is concerned not only with the wording of a plan but also with its operation. So employers must comply with two other tests to measure actual funding of the plan: the “actual deferral percentage” (ADP) test and the “annual contributions percentage” (ACP) test. <A HREF="id21.htm" TARGET="_top" TITLE="NONDISCRIMINATION RULES"><U> for more on Non-Discrimination tests.......</U></A></div> <div>                       </div> <bR> <div> <I><B> <A NAME="benefits_contingent_on_elective"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B></I><I><B>Benefits Contingent on Elective Contributions</B></I></div> <bR> <div> For an arrangement to be treated as a 401k plan, an employer may not impose any conditions, either directly or indirectly, regarding other employer-provided benefits (other than matching contributions) based upon an employee’s choice to defer into the plan.  If any of the following are offered to an employee only if he or she makes (or does not make) elective deferrals under a cash or deferred arrangement, that arrangement does not qualify as a 401k plan:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">the availability or amount of health benefits,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">the level of employer contributions towards health benefits,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">the cost of health benefits,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">vacations or vacation pay,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">life insurance,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">dental plans,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">legal services plans,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">loans (including plan loans),</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">financial planning services,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">subsidized retirement benefits,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">stock options,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">dependent care assistance,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">benefits under a defined benefit plan, or</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">non-elective employer contributions under a defined contribution plan.</div> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="5" CELLPADDING="20" CELLSPACING="4" WIDTH="602" BORDERCOLORLIGHT="#FFCC66" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#006699 > <tR> <tD VALIGN=TOP HEIGHT= 215 WIDTH="542"><div> <B>Example: </B></div> <bR> <div> <B>ABC Corporation maintains a cash or deferred arrangement for all of its employees. ABC also maintains a nonqualified deferred compensation plan for two highly paid executives, Bob and Ray. Under the terms of the nonqualified deferred compensation plan, Bob and Ray are eligible to participate only if they do not make elective contributions under the cash or deferred arrangement. Participation in the nonqualified plan is a contingent benefit because the participation of Bob and Ray is conditioned on their decision to not make elective contributions under the cash or deferred arrangement. Therefore this cash or deferred arrangement does not qualify as a 401k plan.</B></div> </tD> </tR> </TABLE></div> <bR> <bR> <bR> <div> <I><B> <A NAME="distributions_from_401k_plans"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B></I><I><B>Distributions from 401k plans</B></I></div> <bR> <div> In general, contributions are placed in a qualified retirement plan and invested, where they grow tax-deferred.  When funds are withdrawn from the account, the distribution is subject to tax.  If the initial contribution was made with before-tax dollars (i.e., the contribution was not included in the employee’s taxable income), the withdrawal of those contributions — and any income earned on those contributions — will be fully taxed in the year of the withdrawal.   This applies to an employee’s elective deferrals and the employer’s matching contributions or non-elective contributions.  In each of these cases, the employee was not taxed on the contribution placed into the account, so the IRS will fully tax the withdrawal of these funds from the account.  An employee’s voluntary contributions to a 401k plan are made from after-tax income, so the IRS will only tax the accrued earnings on voluntary contributions.  The initial contribution was already taxed.</div> <bR> <div> <B>Premature withdrawals</B></div> <bR> <div> Funds held in qualified retirement plans are meant to be used for retirement purposes.  Consequently, the tax code imposes a penalty for withdrawals from such a plan prior to “retirement”.  Premature withdrawals are subject to a 10% penalty — in addition to any other taxes owed on the distribution.  The general rule for qualified plans  is that monies may be withdrawn without the 10% penalty tax only:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">upon the employee’s retirement, death, disability, divorce, or separation from service,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">when the employee attains age 59½,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">if the employer terminates the plan and does not establish a successor plan to replace it, or</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">the employer disposes of its business (or subsidiary) to an unrelated entity and the employee continues his or her employment with the purchaser.</div> <bR> <div> One advantage of a 401k plan over other qualified retirement plans is that the restrictions on premature distributions are less strict.   401k plans can allow penalty-free distributions due to economic hardship provided other financial resources are not readily available. </div> <bR> <div> <B>Mandatory distributions</B></div> <bR> <div> Since funds held in a 401k plan are to be used for retirement purposes, the tax code requires older participants to begin to withdraw funds from the plan.  Generally, minimum mandatory distributions must begin when the participant reaches age 70½.  Participants who continue to work after age 70½  need not begin distributions until they retire.  Mandatory distributions are based on the participant’s life expectancy.  Failure to take the minimum annual required distribution results in a 50% penalty tax,  in addition to the ordinary income tax owed on the distribution.</div> <bR> <bR> <div> <B>Loans</B></div> <bR> <div> In addition to the more liberal list of exemptions for premature withdrawals, 401k plans may also offer participants the ability to borrow funds up to one-half of the vested account value, to a maximum of $50,000.   These loans are not treated as taxable distributions if:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">the plan document offers loans to all participants equally,   </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">it is a secured loan that carries a reasonable rate of interest, and</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">the loan must be repaid within five years.</div> <bR> <div> If the loan does not meet these requirements, the amount “borrowed” is taxed as a distribution — and possibly subject to the 10% penalty tax on premature distributions.  In addition, if the value of the participant’s 401k account falls due to a loan default, this reduction is considered a distribution, subject to taxation and possible penalty.</div> <bR> <div> <A HREF="id22.htm" TARGET="_top" TITLE="401k DISTRIBUTIONS"><U>for more on Distributions.............</U></A></div> <bR> <div> <I><B> <A NAME="joint_and_survivor_annuities"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B></I><I><B>Joint And Survivor Annuities</B></I></div> <bR> <div> Most qualified plans, including 401ks are required to provide a qualified joint and survivor annuity (QJSA) payout to married participants, unless they elect otherwise.  This rule prevents a participant for dying after electing a "life-only" annuity and leaving his or her spouse with no retirement benefits.</div> <bR> <div> <A HREF="id22_joint_and_survivor_annuities.htm" TARGET="_top" TITLE="401k DISTRIBUTIONS"><U>for more on QJSAs .............</U></A></div> <bR> <bR> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="2" CELLSPACING="4" WIDTH="84" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#FFCC66 > <tR> <tD VALIGN=TOP HEIGHT= 20 WIDTH="66"><div> <A HREF="id20.htm" TARGET="_top" TITLE="401k CONTRIBUTIONS"><U><B>NEXT</B></U></A></div> </tD> </tR> </TABLE></div> <bR> <div> <B>OVERVIEW OF 401k PLANS</B></div> <div> <A HREF="id20.htm" TARGET="_top" TITLE="401k CONTRIBUTIONS"><U><B>401k CONTRIBUTIONS</B></U></A></div> <div> <A HREF="id58.htm" TARGET="_top" TITLE="VESTING"><U><B>VESTING</B></U></A></div> <div> <A HREF="id21.htm" TARGET="_top" TITLE="NONDISCRIMINATION RULES"><U><B>NON-DISCRIMINATION RULES</B></U></A></div> <div> <A HREF="id22.htm" TARGET="_top" TITLE="401k DISTRIBUTIONS"><U><B>401k DISTRIBUTIONS</B></U></A></div> <div> <A HREF="id23.htm" TARGET="_top" TITLE="SIMPLE 401k PLANS"><U><B>SIMPLE 401k PLANS</B></U></A></div> <div> <A HREF="id54.htm" TARGET="_top" TITLE="SOLO 401ks"><U><B>SOLO 401ks</B></U></A></div> <div> <A HREF="id55.htm" TARGET="_top" TITLE="ROTH 401k PLANS"><U><B>ROTH 401k PLANS</B></U></A></div> <div> <A HREF="id30.htm" TARGET="_top" TITLE="REVIEW QUESTIONS "><U><B>REVIEW QUESTIONS </B></U></A></div> <div> <A HREF="id46.htm" TARGET="_top" TITLE="FINAL EXAM"><U><B>FINAL EXAM</B></U></A></div> <div> <A HREF="id52.htm" TARGET="_top" TITLE="Printable Versions"><U><B>Printable Versions</B></U></A></div> </td> </tr></table></body>