An eligible employee can elect to defer part of their wages on a pre-tax basis into a qualified 401(k) plan. This deferral comes out of your paycheck prior to Federal and State income taxes being calculated and thus saves you taxes. The amount you choose to defer can generally be either a fixed dollar amount per pay period or a percentage of your pay. The plan sponsor has to deposit your deferrals into a retirement plan account in a timely manner. You generally cannot access these funds until your employment has been terminated, subject to the plan’s distribution rules.

Each plan participant should designate a beneficiary for their account in the event of their death. You should review/update your beneficiary designation on a regular basis, or upon any life-changing events (marriage, divorce, birth of child, formation of living trust, etc.).

This is a type of retirement plan that allows employers to make large contributions for the benefit of the eligible employees. Traditionally this plan design is used when a client would like to contribute more than a 401(k) Profit Sharing Plan will allow. Depending on the type of business that the plan sponsor has, it may be subject to coverage by the Pension Benefit Guaranty Corporation.

When and how you can take a distribution from your retirement plan depends on the provisions in the plan document. In order to take a distribution you must have a “triggering event”. The most common triggering events are:

• Termination of employment (voluntary or involuntary)
• Attainment of age 59 ½
• Attainment of Normal Retirement Age

Some plan designs may require a return of excess salary deferrals to certain “highly compensated employees” in order to pass the required non-discrimination testing that the IRS imposes. Excess Returns can be prevented by using a Safe Harbor 401(k) plan design.

These are the non-vested dollars that are left in your account after you are paid out. The forfeitures can be used to pay administration fees, reallocated to the remaining participants, or used to reduce a future employer contribution.

Most retirement plans are required to file a tax return each year. There are several different variations of this filing (Form 5500, Form 5500-SF, Form 5500-EZ) depending on the number of participants and type of plan investments. This form is due seven months after the close of the plan year, but can be extended an additional 2 ½ months by timely filing an Application for Extension of Time.

Some 401(k) plans allow a participant to withdraw some of their salary deferral contributions (not earnings). If a participant receives a hardship withdrawal they will need to cease their salary deferrals for a 6 month period. Below are situations that typically qualify for an IRS approved hardship:

• For medical care that would be deductible under IRC 213(d) for the employee, the employee’s spouse or the employee’s dependents
• Costs directly related to the purchase of a principal residence (not including mortgage payments) for the employee
• Payments for tuition, related educational fees, and room and board expenses, for the next 12 months of post-secondary education for the employee, the employee’s spouse, the employee’s children or the employee’s dependents
• Payments necessary to prevent eviction from the employee’s principal residence, or to prevent foreclosure on the mortgage on that residence
• Payments for burial or funeral expenses for the employee’s deceased parent, spouse, children, or dependents
• Expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under IRC 165 (determined without regard to whether the loss exceeds 10% of the adjusted gross income).

Upon attainment of the plan’s normal retirement age you automatically become 100% vested and are generally allowed to take a distribution while still employed. The most common normal retirement age is attainment of age 65 plus five years of participation in the plan.

Few plans offer a participant loan program as the dollars in the plan are meant for retirement and should not be viewed as a “savings account” that is easily accessible.

Also referred to as a QDRO (quadro), this is a legal document that assigns a portion (or all) of a plan participant’s benefit to an alternate payee (typically an ex-spouse). These must be signed by all parties and filed with the court before any distribution paperwork can be drafted.

These notices are required by the Department of Labor for certain plan designs and are meant to give plan participants a better understanding of their particular plan and the fees associated with their investments or plan administration.

Some 401(k) plans offer a Roth deferral option. Instead of receiving a tax deduction at the time of deferral, a Roth contribution comes out of your paycheck after income taxes have been calculated. The Roth contributions’ growth is tax deferred and can be distributed tax-free upon attainment of age 59 ½ (and certain other criteria). A Roth deferral does not have the same income limitations like a Roth-IRA does.

Some 401(k) plans are referred to as “Safe Harbor” plans. Under this plan design the employer is relieved from certain non-discrimination tests if they notify the eligible employees in advance of a plan year telling them that they will be making a specific contribution, typically one of the following (although there are other variations):

The employer will match your salary deferrals under the following formula: 100% on the first 3% deferred plus 50% on the next 2% deferred. The maximum match is 4% of your eligible compensation assuming you are deferring at least 5% of your compensation. This contribution is always 100% vested.

An eligible employee needs to complete a salary reduction agreement if they wish to defer some of their wages into a 401(k) plan. This form needs to be completed by the employee and given to the person or company responsible for processing payroll. Changes to a salary reduction agreement can be made at certain times throughout the year, according to the plan document or the plan sponsor’s administrative policies.

An annual statement required by the Department of Labor that must be provided to plan participants giving them general information about the plan’s activity for the preceding year. This gives participants the total asset value of the plan, number of participants, and information about how to contact the plan sponsor.

If the plan is amended and a new Summary Plan Description (SPD) is not provided, the plan sponsor must hand out a Summary of Material Modifications detailing what was changed in the SPD.

Often referred to as an SPD, this is a document that the Department of Labor requires plan sponsors to distribute to all eligible employees. It is meant to summarize the full plan document and provide an easy to understand description of the employer’s retirement plan.

Commonly referred to as a TPA, this is someone that the plan sponsor contracts with to provide administrative services to the plan. They typically assist the plan sponsor with plan design, preparation of the plan’s tax return, participant statements, and general administration. The TPA is not a plan trustee and does not have any discretionary authority over the plan.

This is the person or persons that the plan sponsor assigns discretionary authority to in order to run the plan. This is never the third party administrator.

How much of your retirement account you get to take when you leave depends on the plan’s vesting schedule. By definition, any 401(k) salary deferrals, Roth deferrals or Safe Harbor contributions are always 100% vested. Any Profit Sharing or Matching contributions may be subject to a vesting schedule. There are many different vesting schedules for a plan to choose from, but the most common is called a 6-year graded vesting schedule. Under this schedule you are:

• 0% vested in year one
• 20% vested in year two
• 40% vested in year three
• 60% vested in year four
• 80% vested in year five
• 100% vested in year six

This type of vesting schedule typically requires you to work over 1,000 hours each plan year to move up on the vesting schedule. Some plans also exclude your years of service prior to the effective date of the plan or prior to attaining age 18.