Are you looking for a little more explanation that just a simple definition? Or maybe you have a question you really need answered. This page will help you gain an overall understanding of the most common procedures and rules that apply to retirement plans, and much more! Be sure to consult your plan document to see how (and if) each provision is included in your retirement program.

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PLAN ENROLLMENT
Choosing a Beneficiary
Automatic Enrollment

PLAN DESIGN
Basics of a 401(k) Plan
Basics of a Profit Sharing Plan
Basics of a Money Purchase Plan
Basics of an Employee Stock Ownership Plan
Basics of a Defined Benefit Plan
Basics of a Cafeteria Plan

CONTRIBUTING TO A RETIREMENT PLAN
Different Ways to Contribute to Your Retirement Plan
Employer Contributions
Benefits of Contributing to a Retirement Plan
Contribution Maximums
Contributing to a Retirement Plan and an IRA

INVESTMENT SELECTION AND ADVICE
Importance of Selecting Appropriate Investments
Understanding Risk and Return
Time and Compound Interest
Understanding the Stock Market

WITHDRAWALS FROM YOUR RETIREMENT PLAN
Financial Emergencies and Hardships
Account Withdrawals While Still Employed
Distributions After Leaving Your Employer
Death and Disability
Required Minimum Distributions
Other Withdrawals
Requesting a Withdrawal
Special Tax Notice

PLAN LOANS
How Loans Work
Making Loan Payments
Loan Maximums
Taxes and Penalties
Loan Processing and Estimated Times
Changing Jobs and Loan Defaults

TECHNICAL ISSUES
Employer Bankruptcy or Plan Termination
Plan Fees and Account Expenses
Reservists Called on Active Duty
Black Out Periods

RETIREMENT
Retirement Defined
Early Retirement
Distributions at Retirement

PLAN ENROLLMENT

Choosing a Beneficiary

One of the most important things you should do when signing up to participate in your employer’s retirement plan is to complete a beneficiary designation form. This form will tell your employer how your account should be distributed in the event of your death. In almost all cases, if you have a surviving spouse, he or she will be entitled to 100% of your plan account unless you elect otherwise.

Just because your spouse is typically the automatic beneficiary of your plan account doesn’t mean you shouldn’t complete a beneficiary designation form. This form also designates who is the contingent beneficiary (or beneficiaries), provided you outlive your spouse. It also requires you to provide information that would allow your employer to locate your spouse or contingent beneficiaries.

If you and your spouse would like to designate someone else to be the beneficiary of your plan account, your spouse must consent to the waiver of his/her benefit. You will need to have your spouse consent on the beneficiary designation form, and typically this consent must be notarized by a notary public or witnessed by a plan administrator. If you are in the Spokane area, Randall & Hurley, Inc. has a notary public on staff for your convenience. Notary publics can also be found at most banking institutions.

Of course, if you are not married, you must select a beneficiary in the event of your death. Be aware, however, that if you do marry, your spouse will automatically become the beneficiary of your account, regardless of who is listed on your beneficiary designation form. (That is, of course, unless your spouse has consented to waive his/her benefit, as described above.)

Automatic Enrollment

Automatic enrollment—also referred to as “negative” or “passive” election—requires participants to elect not to have their pay contributed to their employer’s 401(k) plan. (Automatic enrollment can also be used by certain 403(b) and 457 plans.) Using automatic enrollment as the plan’s default feature, participants who fail to make an election will have a certain percentage of pay automatically contributed to the plan.

The IRS has ruled that, if employees are sufficiently notified of the plan’s automatic enrollment procedures, automatic enrollment is treated the same as if the employee were given the choice to make pre-tax contributions to the plan. The notice to employees must describe the automatic enrollment feature of the plan; the employee’s right to elect not to contribute to the plan (or to contribute at a different rate than the automatic enrollment default deferral rate); and the procedures for requesting a deferral rate change. This notice must be distributed annually and can apply to existing and future participants, with proper notice.

Employees must also have a reasonable period of time to make a change prior to the default percentage taking effect, and the plan must allow employees the ability to make future changes to their deferral percentages, including the suspension of all deferrals under the plan.

Automatic enrollment provides an easy way for employers to help their employees save for retirement, and take advantage of any employer contributions and benefits.

PLAN DESIGN

The Basics of a 401(k) Plan

A 401(k) plan provides significant advantages to employees. Employees have a real opportunity to participate actively in saving for retirement on a tax-deductible basis. When employer contributions are made, funds are allocated to participants before federal and state income taxes are imposed on such funds.

Employees choose to contribute a certain dollar amount (or percentage) to their retirement account. These contributions are made directly from pay before federal and state income taxes are imposed. These contributions earn pre-tax investment income, and a discretionary matching or profit sharing employer contributions may be made. Forfeitures from terminated employees may be added to employee accounts or may be used by the employer to help defray the administration costs. A 401(k) Plan has a high degree of flexibility in its design, so you should consult your plan document.

The Basics of a Profit Sharing Plan

A profit sharing plan is a retirement arrangement in which the company may make a discretionary contribution each year. These contributions are invested in a tax-deferred, creditor-proof trust. Employees do not have the opportunity to contribute. Tax-free earnings accumulate until the eventual distribution to participants or their beneficiaries. This payout usually occurs at retirement or some other specialized event (disability, death or termination of employment). Contributions are normally keyed to yearly profits, although profits are not required for a contribution to be made. Retirement benefits paid to employees are based on the amount in the participant's account at retirement.

Profit sharing contributions may be allocated to each participant in proportion to pay, integrated with the Social Security Wage Base, or weighted on age and/or service with the employer.

The Basics of a Money Purchase Plan

A money purchase pension plan is a retirement arrangement in which employer contributions are mandatory and usually based on a percentage of each eligible employee's compensation. A contribution formula is determined by the employer at the inception of the plan. These employer contributions are tax-deductible and are contributed on each employee's behalf to be distributed at retirement, disability, death, or termination of employment. As with profit sharing plans, the employer contributions may be made subject to a vesting schedule.

The Basics of an Employee Stock Ownership Plan (ESOP)

An employee stock ownership plan is a special type of plan whose funds must be invested primarily in employer securities (stock). This type of arrangement benefits the employer in three ways: (a) providing a market for the company's stock, (b) giving the employer tax deductions without affecting cash flow, and (c) keeping company stock in friendly hands in the event of a hostile takeover of the company.

The Basics of a Defined Benefit Plan

A defined benefit plan essentially offers employees a "guaranteed paycheck for the remainder of their lifetime." Retirement benefits earned under this type of plan must be definitely determinable. For example, a plan entitles a participant to a monthly pension for his or her post-retirement lifetime equal to 30% of monthly compensation is a defined benefit plan. Employer contributions are actuarially determined, certain benefits may be insured by the Federal Pension Benefit Guaranty Corporation (PBGC) and special rules apply upon termination of this plan.

The Basics of a Section 125 Cafeteria Plan

Increases in the cost of individual medical expenses, group health and dental insurance premiums, and dependent care expenses have encouraged a number of employer to adopt a cafeteria plan. This benefit allows employees to use pre-tax dollars to pay health insurance premiums, medical expenses (even those not covered by insurance), dependent care costs for themselves and their families, and work-related transportation expenses. Since contributions are taken from pay before federal and state income taxes and before payroll and unemployment taxes, the employee can truly avoid (not simply defer) all taxes on these contributions. Tax advantages may vary from state to state.

CONTRIBUTING TO A PLAN

Different Ways to Contribute to Your Retirement Plan

Depending on the type of plan your employer maintains, you may have the ability to contribute to your retirement account. Following are some of the most common ways you can make contributions to your plan:

Pre-Tax Contributions. Pre-tax contributions are, as the name implies, made before income taxes are deducted from your paycheck. Thus, you defer the payment of taxes until retirement (or the withdrawal of your account). The amount must be deposited directly to your retirement account within 5 business days, and it accumulates interest over time. The amount you contribute on a pre-tax basis is limited to a particular dollar amount each year.

Catch Up Contributions. If you will be age 50 or older, you may contribute an additional amount on a pre-tax basis. This type of contribution is called a catch up contribution. (This provision became effective January 1, 2002 by way of the Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA). In 2006, the additional contribution amount reached $5,000 and will be indexed in $500 increments.

Roth Contributions. Roth contributions allow employees to contribute money that has already been taxed into an employer-sponsored retirement account where contributions and earnings will grow tax free. No taxes will be due at retirement, provided certain requirements are met. These requirements are that the distribution must be made after the 5 year period that starts with the first year a Roth contribution was made AND t distribution is: (1) made on or after the date you reach age 59½, (2) made because you are disabled, or (3) made to a beneficiary or to your estate after your death. Under current law, the Roth provision will expire in 2010. However, many analysts believe this provision will be adopted into permanent law.

After-Tax Contributions. Although not as common as pre-tax contributions, many plans allow employees to contribute to their plan accounts on an after-tax basis. These contributions have already been subject to federal income tax, but once deposited in your plan account, these funds accrue earnings and are treated as part of your plan balance. When withdrawn, income taxes are not deducted from the amount (since the taxes were paid before the money entered the plan). After tax contributions are also called voluntary contributions.

Employer Contributions

In addition to all of the ways you may contribute to your retirement plan, your employer has the option of contributing to your retirement plan account. The types of contributions made to your account varies greatly with the type of plan your employer sponsors. There are several common types of employer contributions that we’ll describe here.

Profit Sharing Contributions. Typically, a company will tie contributions of this type to company profits, but not always. The amount of the contribution is usually determined annually. It may be based on a total dollar amount the company wishes to pay, i.e., $50,000, and allocated proportionately, or it may be based on a percentage of each employee’s pay, i.e., 4% of eligible compensation. The profit sharing contributions can be paid by the employer in a lump sum contribution or paid throughout the plan year. The company almost always reserves the right to not make a profit sharing contribution in any given year.

It may seem like there is too much leeway about when and how much contribution a company can make, but these contributions are strictly monitored to ensure compliance with federal pension laws. A contribution can be allocated in many different ways, e.g., by age, by compensation, etc. If you are unsure of the allocation formula, you should consult your plan document or contact your plan administrator.

Matching Contributions. When matching contributions are made, they are always directly tied to the amount participants contribute. The specific formula an employer utilizes will be set forth in your plan document. Typically, these formulas follow a tiered percentage of pay. For example, the company will contribute 100% of your contributions, i.e., one dollar for every dollar you contribute, up to 2% of  your compensation; then, if you contribute more than 2% of eligible compensation, the company may contribute 50% of your contributions up to 5% of your pay.

Matching contributions are generally deposited into your account at the same time your contributions are deposited. This should be within 5-7 business days from the date the funds were withheld from your paycheck.

Mandatory Employer Contributions. Certain kinds of plans, such as money purchase pension plans, require an employer to contribute a certain fixed amount or a fixed percentage of pay to each employee’s account. These contributions are not optional and are usually contributed on an annual basis.

Safe Harbor Contributions. Some employers adopt safe harbor plans or make safe harbor contributions. These are special contributions made by the employer, which are not discretionary. Safe harbor contributions can be structured either as safe harbor matching contributions or safe harbor non-elective contributions.

For an employee, one of the biggest advantages of a safe harbor contribution (versus other employer contributions) is that it is not subject to a vesting schedule, nor is it subject to service or hour requirements. In other words, all eligible participants will receive a contribution, regardless of how many hours were worked in the plan year. (See below for more information on vesting.) Employers usually make safe harbor contributions in order to pass discrimination tests.

The IRS requires employers to give a safe harbor notice to each eligible participant 30 days prior to the beginning of the plan year in which safe harbor contributions will (or may) be given. In addition to the required safe harbor contributions, employers can make additional non-safe harbor contributions that are subject to vesting.

Vesting. Most plans require employees to meet certain requirements before you are entitled to any employer contributions—even if they have already been deposited into your account. These requirements normally involve working a specific number of hours each year for the company. This means that if you terminate your employment before you are fully vested, you are only entitled to a percentage of the value of your employer contributions.

A vesting schedule can only apply to employer contributions, and will never apply to any safe harbor contributions made by the employer or any contributions made by you.

Benefits of Contributing to a Retirement Plan

Compound interest. Tax advantages. Saver’s credit. What's the difference between saving money in my company's retirement plan and putting money into a mutual fund or bank account? 

Contribution Maximums

The amount you may contribute to your retirement plan is limited by federal legislation. These limits are typically adjusted annually. We have provided you with a chart that shows current and past contribution limits.

Contributing to a Retirement Plan and an IRA

A traditional individual retirement account (IRA) allows you to save for retirement on a tax-deferred basis, just like a 401(k) plan. A Roth IRA allows you to save for retirement, with tax-free investment growth, just like Roth contributions. Many people choose to contribute to some type of IRA when they don’t have access to an employer’s retirement program or when they wish to contribute more than the plan allows.

There are typically penalties and rules that restrict withdrawals from these accounts, just as there are in qualified retirement plans. However, these penalties may be waived under certain conditions. There are also special rules that limit the amount that may be contributed to an IRA if you or your spouse are covered by an employer’s retirement program. If you are considering utilizing an IRA, you should consult a tax advisor or trained professional associated with an institution that offers IRAs.

INVESTMENT SELECTION AND ADVICE

As a third-party administrator, Randall & Hurley, Inc. does not offer or provide investment advice. The information contained in this website should in no way be construed as legal or financial advice. The intent is to simply provide an overview of basic financial concepts and principles. Should you need specific financial or investment advice, please contact your financial advisor. By using this website, you agree to hold Randall & Hurley, Inc. free from any liability or consequences incurred from information obtained on this website.

The Importance of Selecting Appropriate Investments

Just as important as deciding to participate in a retirement plan is the decision of where to put the money going into that account. If you choose poorly, your retirement savings will suffer. In most cases, your plan’s fiduciaries will have predetermined a number of funds that you may choose from. These funds are chosen with care and often represent high quality funds in each asset category. This makes the job of selecting which funds to invest in much easier for you as the participant, since you only have to choose from a limited number of quality funds versus an entire market of fund options.

How you allocate your funds is called your investment elections or asset allocations. Asset allocation determines the investment returns you achieve because different fund options typically react differently to changes in the financial markets and to broader economic conditions. For example, a market that produces strong stock returns may cause bond returns to slump, and vice versa. When you spread your investments across several different fund options, you diversify your account holdings, and you may be able to limit, or offset, potential losses in one asset class with stable values, or even gains, in another.

There are two key factors that can help you make the right allocation choices for you as an individual investor: your risk tolerance and your investment horizon. When you consider which options to include in your retirement portfolio, you must decide how comfortable you are with financial risk. (See our section Understanding Risk and Return for more information on this topic.) Essentially, riskier fund options outperform more stable fund options, but there is a greater tendency for high risk fund options to move from periods of high investment returns to periods of great investment loss. If you are not comfortable experiencing such fluctuating performance, or if you are nearing retirement, your risk tolerance may be much smaller.

You’ll also need to consider how much time you have until retirement. This is called your investment horizon. Those with longer investment horizons should invest differently than those who will retire shortly; time allows an account to take advantage of compound interest. (See the section called Time and Compound Interest for more information.) Also, if your retirement account takes a dip, you have more time to allow your funds to return to higher levels. In a sense, time provides a cushion against market fluctuation. Those with shorter investment horizons should consider fund options that are more stable so that your account does not decrease dramatically just as you are planning to use the funds for retirement.

Remember that as your life situation changes, your tolerance for risk will probably also change, and you should consider adjusting your asset allocation.

We recommend that you work with your plan’s financial adviser to determine an initial allocation model and refine it as time goes by. Please note that Randall & Hurley, Inc. can not provide investment advice.

Understanding Risk and Return

When it comes to investing, one of the most important principles you should understand is the risk/return tradeoff. Risk and return are directly related. The greater the risk that an investment may lose money, the greater its potential for providing a substantial return. By the same token, the smaller the risk an investment poses, the smaller the potential return it will provide. In other words, the risk/return tradeoff says that invested money can render higher profits only if it is subject to the possibility of being lost.

Once you understand this, you can find the right balance of risk and reward to help meet your long-term goals. First, you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can't cut out all risk. The goal instead is to find an appropriate balance—one that generates some profit but still allows you to sleep at night.

Everyone handles risk differently. That’s because some people can live with, or can afford to take, more risk than others. Risk tolerance is based on a mix of subjective traits and objective circumstances. Your personal risk tolerance could be influenced by current world events, your own investment experiences, and your inherited views on saving and investing. The younger you are, the more investment risk you generally can afford to take. That’s because you have the time to wait for a rebound when there is a downturn in the market. But if you’ve retired or are nearing retirement, you may be counting on income from your investments. That increases the likelihood that you’ll want to avoid the risk of losing principal even if you make yourself more vulnerable to inflation risk.

Your life situation also plays a role in how much risk you are willing to take. Those with children going to college soon or those who care for aging parents or those who wish to start a business may all have a different risk tolerance due to the circumstances in their lives.

Your personality matters, too. There’s no way around the fact that most investments will drop in value at some point. That’s what risk is all about. But most experts agree that it’s counterproductive to make investments that either make you so nervous you can’t sleep or mean you’ll sell in panic at the first sign of a downturn. But if you’re uncomfortable with all risk, you should learn more about the long-term rewards of well-planned risk-taking.

You can balance risk and return in your overall portfolio by making investments along the entire spectrum of risk, from the most to the least. Diversifying your portfolio in this way means that some of your investments have the potential to provide strong returns while others ensure that part of your principal is secure.

We recommend that you work with your plan’s financial adviser to determine your risk/return tolerance and investments appropriate within that spectrum. Please note that Randall & Hurley, Inc. can not provide investment advice.

Time and Compound Interest

In a retirement plan, account balances can grow very rapidly. First, your retirement savings grow more rapidly than traditional savings accounts because you are essentially investing your federal income tax savings into your retirement account, too. And although the tax savings may not seem like a lot, it can really add up over time.

When you invest early, your account grows increasingly larger. This is called compound interest. (Albert Einstein once called compound interest “the greatest mathematical discovery of all time.”) In simple terms, when you invest money, you earn interest on the principal. The next time, you’ll earn interest on the principal and the interest from the first period. Then, you’ll earn interest on the principal and the first two period’s interest, and on and on. It may not seem like a lot, but over time, it’s quite significant.

For instance, if you contribute $50 per month in an investment that earns 5% interest (a modest return by retirement standards), you’ll have a total balance of $614 at the end of one year. After 10 years, you’ll have $7,764. But after 40 years, you’ll have $76,301! (You’ll have contributed $24,000 and earned from interest $52,301.)

So, making contributions well in advance of your retirement allows your account to accrue interest for a longer period of time.

Understanding the Stock Market

The stock market itself is a complicated vehicle that we can never fully describe in the amount of space provided here. It is affected by investors’ attitudes and world events, among a host of other things. However, we do think its important that you have a basic understanding of stock market trends. A bear market and bull market are two terms that describe how stock markets are doing in general.

Bull Market. A bull market refers to a market that is rising faster than the historical average. It is characterized by a sustained increase in market share prices. In such times, investors have faith that the uptrend will continue in the long term. Typically, the country's economy is strong and employment levels are high. (The bull market gets its name from the way a bull attacks its predators. The bull will drive its horns up into the air.)

In a bull market, we usually see strong demand for securities. In other words, many investors want to buy securities while few are willing to sell. As a result, share prices will rise as investors compete to obtain available shares. Investors usually feel good about where the market is headed, confident that they will make a profit. In a bull market, people have more money to spend and are willing to spend it, which strengthens the economy and drives stock prices upward.

Bear Market. A bear market refers to a market where prices are falling. Share prices are continuously dropping, resulting in a downward trend that investors believe will continue in the long run, which (ironically) perpetuates the spiral. During a bear market, the economy will typically slow down and unemployment will rise as companies begin laying off workers. (The bear market gets its name from the way a bear attacks its predators. The bear will swipe its paws downwards upon its prey.)

In a bear market, we usually see more people wishing to sell their stocks than to buy them. The demand is significantly lower than supply, and share prices drop as a result. Market sentiment is negative, and investors begin to move money out of equities and into fixed-income securities. A bear market is also associated with a weak economy as most businesses are unable to record huge profits because consumers are not spending nearly enough.

Long Term Stock Market Health. Even though market returns may rise and fall a number of times throughout your lifetime, it is important to note that long-term investing has produced positive returns. For instance, since March 31, 1900, the Dow Jones Industrial Average has had an annual average return of at least 8%! This figure includes returns during the stock market crash and depression of the late 20’s and early 30’s.

WITHDRAWALS FROM YOUR RETIREMENT PLAN

Financial Emergencies and Hardships

Some plans, but certainly not all, will allow participants to make a withdrawal from their retirement accounts in the case of financial emergency or hardship. However, to discourage the use of this provision, the IRS has imposed strict rules and hefty financial penalties. You cannot repay a hardship withdrawal, and you permanently diminish your retirement account. In addition, you may be suspended from contributing to your retirement plan for six months or more. Remember, your retirement plan is meant to provide retirement income. It should be a last-resort source of cash for expenses before then.

Financial hardship withdrawals are allowed for the following reasons: (1) to purchase your principal residence; (2) to prevent foreclosure or eviction from your home; (3) to pay college tuition for yourself or a dependent, provided the tuition is due within the next 12 months; or (4) unreimbursed medical expenses for you or your dependents. Plan sponsors may choose to allow hardship withdrawals for a limited number of the circumstances listed here.

If you are under age 59½ when you receive the withdrawal, it will be subject to a 10% early withdrawal penalty, that will be paid to the IRS. You may be able to qualify for a penalty-free withdrawal if you: (1) become totally disabled; (2) are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income; (3) are required by court order to give the money to your divorced spouse, a child, or a dependent; (4) are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later; or (5) are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. Special rules apply during these circumstances, and you should consult with your plan administrator and tax advisor.

No matter how old you are or what your circumstances are, your withdrawal will certainly be counted as taxable income during the year you receive the distribution, and you will be responsible for federal (and any state) income taxes on this amount.

Account Withdrawals While Still Employed

In almost all cases, you may not withdraw money from your retirement account while you are still employed. (See the exceptions listed under financial hardship and participant loans.) Remember, your retirement plan is meant to provide retirement income. It should be a last-resort source of cash for expenses before then.

However, some plans have a provision which allows employees over age 59½ to withdraw a certain amount from their accounts. Typically, the plan has a minimum withdrawal amount of $1,000, but you should check your plan document to be sure. If you take an in-service withdrawal, the amount will be considered taxable income during the year you receive the distribution, and you will be responsible for federal (and any state) income taxes on this amount.

Distributions After Leaving Your Employer

Once you terminate employment with your plan sponsor, you may receive a distribution of your entire plan balance. This is a complicated matter with serious tax consequences, and we recommend you speak with a tax advisor or financial professional to ensure you make the choices appropriate for your situation. The following information is provided as a general guideline;  you should consult your plan document or summary plan description for information specific to your retirement program.

Total Distribution Amount. You are typically able to withdraw 100% of your vested plan account balance. This would include all of the money you have contributed to the plan. Employer-contributed money held in your account is typically subject to some type of vesting schedule, based on the number of years you have worked with your employer. On your account statement, you should see two figures, “account balance” and “vested account balance.” Your vested account balance is how much you would be eligible to withdraw.

If you have an outstanding plan loan, the amount of money eligible for withdrawal would be calculated differently. Again, you would start with your vested account balance. However, you will need to subtract the total outstanding loan amount (since you already received this money). You will, however, be liable for income taxes on the outstanding loan amount. For more information, see our section on participant plan loans.

Qualifying Circumstances. In order to qualify for a termination distribution, you must have the intention of permanently severing your employment relationship. Examples include quitting, being fired, being laid off, and disability. Examples of severance options that do not qualify you for a termination distribution include short-term disability, maternity or paternity leave, division transfers, and temporary lay-offs.

Distribution Types and Consequences. There are four different options typically available to plan participants when receiving a distribution: (1) a qualified joint and survivor annuity; (2) a lump-sum distribution directly to the participant; (3) a rollover to either a new retirement plan or an IRA; or (4) a combination of these options. Depending on plan provisions, some of these options may not be available to you.

A joint and survivor annuity is probably the least common option available for most plan participants and, if offered, is typically restricted to those with over $5,000 in the account. An annuity is a periodic and fixed payment for the life of the participant, with a periodic and fixed payment (equal to anywhere from 50% to 100%) for the life of the participant’s spouse. Typically, taxes are paid only on the amount distributed each year, and a 10% early withdrawal penalty (paid to the IRS) may apply if the participant is less than 59½ years of age.

In the case of a lump-sum distribution directly to the participant, the participant will receive his/her account balance, less any fees and outstanding loans, in a cash distribution. The gross amount of your distribution (including any outstanding loans) will be considered taxable income in the year in which it is distributed. You will be liable for federal (and any state) income taxes. If your account balance is over $200, the IRS requires that 20% of your account balance be withheld (and remitted to the IRS) for federal income taxes. (When you file your income taxes, you may owe more or receive a refund of part of this amount.) Additionally, if you are under age 59½, the IRS will impose a 10% early withdrawal fee on your gross distribution. You will be responsible for this amount when you file your income taxes. (There are a few, very limited exceptions to the early withdrawal penalty, the most common of which is a distribution made to an “employee after separation from service after attainment of age 55.")

To avoid federal (and state) income tax liability, as well as the 10% early withdrawal penalty, participants can “rollover” their plan balance to another employer-sponsored plan or to an IRA. You will need to contact the plan administrator of the plan you wish to transfer the money to ensure they will accept the funds. The receiving plan must be of the same plan type (e.g., you cannot roll money from a defined benefit plan to a 401(k) plan). If you do not have an employer-sponsored retirement program that will accept your rollover, and you still wish to avoid income tax liability, you may rollover your plan account into an IRA. You should consult a tax advisor or trained professional associated with an institution that offers IRAs to be ensure the right type of IRA is set up to accept your funds.

In most cases, you are able to split your account among several of these options. For instance, you may choose to take a partial lump-sum distribution and a partial rollover, leaving you with a portion of the account balance (and taxes and penalties) and placing the rest in a rollover IRA.

Doing Nothing. If your account balance is under $1,000, many employers opt to “force out” participants so they are not responsible for the administrative fees that accompany the maintenance of these accounts. So, if you do not make a decision about what to do with your account, chances are you could receive a lump-sum payment made directly to you. You will be responsible for income taxes and the early withdrawal penalty.

If your account balance is between $1,000 and $5,000 and you do not make an election, the employer has several options which vary from plan to plan. Your employer may choose to “force out” the account balance, as described above; leave the account balance in the plan; or transfer the account to an IRA. The action taken on your account is stated in the plan’s administrative procedures. You should consult your plan administrator to find out which option will be taken if you do not make a decision.

If your account balance is over $5,000, the employer is required to leave your account in the plan, with few exceptions (such as a plan termination). However, you may be charged a reasonable administrative fee to help defray the costs of maintaining this account.

Death and Disability

Disability. If you become disabled, all distributions from your retirement plan are not subject to the early withdrawal penalty. (You will still be responsible for any income tax liability.) Disability is defined as the inability to "engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration." The key to this definition is in the permanence of the condition, not the severity. Disability claims have been denied for chemical dependence and chronic depression, even when the participant was hospitalized for those conditions. The disability must be deemed permanent at the time of the distribution.

Death. Any distributions made from your retirement account after your death are not subject to the early withdrawal penalty, even if made to a beneficiary under age 59½, so long as the account is still in your name when the distribution occurs. If your spouse is the beneficiary of your account, he/she can receive the death benefit in the form of a lump-sum distribution paid directly to him/her OR he/she can rollover the distribution to an IRA. Other beneficiaries can only receive the death benefit in the form of a lump-sum distribution paid directly to the beneficiary.

Required Minimum Distributions at 70½

RMDs are the minimum amounts that the IRS generally requires you to withdraw from your retirement account each year once you turn age 70½ or when you retire, whichever is later. The RMD rules ensure that you withdraw at least a minimum amount from your account each year.

To calculate the amount of your MRD, all you need is your current age, your ending account balance for the previous year and the life expectancy factors found in the IRS Uniform Lifetime Table. To determine your RMD, divide your account balance by the IRS life expectancy factor corresponding to your age in the table. However, if you’ve named your spouse as the only beneficiary on your account and he or she is more than 10 years younger than you, then you need to use the joint life expectancy factors in the IRS Joint Life and Last Survivor Expectancy Table to calculate your annual distributions. (This calculation can be complicated, and Randall & Hurley, Inc. will prepare this amount for you each year, if you are participating in a retirement program administered by us.) Of course, you may request to receive more than the minimum amount in any given year.

Once you receive the distribution, you are responsible for the income taxes on that account. You can also elect to have a particular amount deducted from your MRD and withheld for income taxes. You may not roll your MRD into another tax-deferred account, like an IRA.

Other Withdrawals (Child Support, Alimony, Etc.)

All or part of your retirement plan may be transferred to your spouse if the transfer is made under a qualified domestic relations order (QDRO). A QDRO is a court order, judgment, or decree that relates to child support, alimony, or property rights of a spouse or former spouse, child, or dependent of the participant made pursuant to an applicable state's domestic relations law.

To qualify as a QDRO, all of the following criteria must be met: (1) The instrument must be a judgment, decree, or order of a court (including an approval of a property settlement agreement) that (a) relates to the provision of child support, alimony payments, and marital property rights of your spouse, child, or other dependent and (b) is made pursuant to your state domestic relations law, including a community property law. (2) The domestic relations order must create or recognize the existence of an alternate payee's right to receive, or it must assign to an alternate payee the right to receive, all or a portion of the benefits payable to you or payable on your behalf; the term alternate payee means your former spouse, child, or other dependent who is recognized by the order as having a right to receive all or part of your benefits under the plan

The QDRO must not: (1) require the plan to provide any type of benefit or any option not otherwise provided for in the plan; (2) require the plan to provide more benefits (determined on the basis of actuarial value) to the alternate payee than you would be entitled to require the plan to pay one alternate payee benefits that are required to be paid to another alternate payee under another order previously determined to be a QDRO.

The QDRO must clearly specify all of the following information: (1) your name and last known address and the name and mailing address of each alternate payee covered by the order; (2) the amount or percentage of your benefits to be paid by the plan to each alternate payee or the manner in which such amount or percentage is to be determined; (3) the number of payments or the period to which the order applies; and (4) the name of each plan covered by the order.

A plan administrator is required to determine whether a domestic relations order is a QDRO within a reasonable time after the receipt of the order and is required to notify you and each alternate payee of the determination. Every plan is required to have written procedures for making these determinations, and these written procedures should be available to you.

In addition, Randall & Hurley, Inc. has an ERISA attorney on staff who can prepare a QDRO that meets all the requirements specified in your plan’s document.

Requesting a Withdrawal

If you would like to utilize one of the distribution options listed above, there are several ways to accomplish this. If you have online access to your account on Randall & Hurley, Inc.’s website, you may be able to request your distribution online. If not, you can contact your plan administrator or Randall & Hurley, Inc. directly. At that time, you will be informed of the procedures and anticipated timeframe for your distribution.

Special Tax Notice

If all or part of your distribution is eligible for a rollover to a traditional IRA or eligible employer plan, you must receive a copy of the Special Tax Notice. This notice explains how you can continue to defer federal income tax on your retirement savings or retirement plan benefits and contains important information you will need before you decide how to receive your plan benefits.

When you receive a distribution packet from our offices, this Notice will be included with your packet. You may also view a copy of this Notice by clicking here.

PLAN LOANS

How Loans Work

An option some plans provide is a participant loan provision. This provision allows participants to borrow against their account balances. Some plans only allow loans for specific reasons (typically the same reasons that apply to hardship withdrawals), although some plans place no specific restrictions on what the need or use will be. You must consult your plan document for specifics.

Once you borrow against your account, you will be required to make payments back to your account through payroll deduction. You must repay the loan within a five year period (although this can be extended for a home purchase). Although the money for the loan has been withdrawn from your account, it is still counted as part of your plan assets, as a sort of liability. However, if you were to terminate employment, your distribution would be decreased by the amount of an outstanding loan. (See our discussion on Loan Defaults below.)

Advantages. While plan loans, like other distributions prior to retirement, should be minimized, there are several advantages in applying for a plan loan versus a traditional bank loan. A plan loan is convenient. There is no credit check or long credit application form. Some plans only require you to make a phone call, while others require a short loan form. ( Plans may also require a spousal consent.) The interest rate is relatively low and set by the plan, typically one percentage point above the prime rate. (The current prime rate can be found in the business section of your local newspaper or the Wall Street Journal.) And the interest you do pay is paid to your retirement account, not to the bank or credit card company.

Disadvantages. There are also some serious drawbacks to receiving a participant loan, and these should be given much consideration. Since the interest rate paid on a plan loan is often less than the rate the plan funds would have otherwise earned, you miss out the added growth to your account. Often, because you now have a loan payment, you may reduce the amount you are contributing to the plan and further reduce your long-term retirement account balance. Interest paid on the loan is not tax deductible, even if you borrow to purchase your primary residence, and you have no flexibility in changing the payment terms of your loan. There are also one-time set up fees and annual maintenance fees required to administer your loan. Also, you are “double taxed” on your loan amount; you are taxed on the amount of your loan when you eventually withdraw the funds (at retirement or termination of employment) and, since your loan repayments are made on an after-tax basis, you are taxed as you repay the loan balance. Finally, you should consider the possibility of defaulting on your loan, which causes serious financial consequences. If an employee quits or is terminated, the loan must be repaid in full, normally within sixty days. Should the plan participant fail to meet the deadline, a default would be declared and penalties and taxes assessed. (For a full discussion on loan defaults, please see the Loan Defaults section below.)

It is generally accepted that you probably shouldn’t take a plan loan if situations where you are planning to leave your job within the next couple of years; there is a chance you will lose your job due to a company restructuring; you are nearing retirement; you can obtain the funds from other sources; you can't continue to make regular contributions to your plan and pay your loan; you can't pay off the loan right away if you are laid off or change jobs; you need the loan to meet everyday living expenses; or if you want the money to purchase some luxury item or pay for a vacation.

Credit Reporting. Loans from your retirement plan, even in the case of a loan default, are not reported to credit-reporting agencies, and will not negatively impact your credit rating. But if you are applying for a mortgage, lenders will ask you if you have such loans and they will count the loan as debt.

Plans are not require to let former employee take plan loans and few allow them to do so.

Making Loan Payments

Loan repayments must be deducted directly from payroll, albeit on an after-tax basis. The payment amount is determined when the loan is set up, and is documented in the amortization schedule. Once the loan has been made, you generally can't stop this process.

In most cases, you are able to make additional payments to the loan principal. There are special procedures for this, so please contact us or your plan administrator for more information.

Military Service. In the case of military leave, a plan may permit loan repayments to be suspended for the entire period of the leave with no maximum time limit. (Typically, the maximum suspension length is only one year.) The length of the loan may be extended to the maximum permissible term for the loan (usually five years) plus the period of military leave.

When the participant returns, loan payments must resume. The plan may permit the participant to resume paying the same dollar amount with a “balloon” payment of the balance due at the end of the loan term, or increase the payment amount by reamortizing the balance due over the remaining loan term.

Loan Maximums

If you have had no other plan loan in the 12 month period ending on the day before you apply for a loan, you can usually borrow up to 50% of your vested account balance, up to a maximum of $50,000. Most plans also have a minimum loan amount, typically $1,000, to help defray the administrative costs of a loan.

If the participant had another plan loan in the last 12 month period, they will be limited to 50% of their vested account balance, or $50,000, minus the outstanding loan balance in the preceding 12-month period, whichever is less. Be aware that most employers limit the number of loans a participant may have outstanding at any one time.

Taxes and Penalties

Funds obtains from a retirement plan loan are not subject to income tax or the 10% early withdrawal penalty (unless the loan defaults). Remember, there may be fees associated with a loan distribution and loan maintenance.

Loan Processing and Estimated Times

Once a loan is approved by your plan administrator, the request to withdraw the funds will be forwarded to the plan’s custodian, or the company that holds the plan’s funds. Every custodian has its own internal procedures for distribution requests. Typically, plan funds can be released within one to two weeks following receipt of the distribution instructions. Then, a check will be forwarded to you.

Changing Jobs and Loan Defaults

If you should terminate employment with an outstanding loan balance, you will be required to repay the loan in full within 60 days. If you cannot do this, the loan will be classified as distributable income and will be in default. The outstanding balance will then be subject to income tax (both federal and state) and subject to a 10% early withdrawal penalty (if you are under age 59½.

This will also affect the distribution of your entire plan balance, in that you will be taxed and amounts will be withheld for the full value of your account, but your net distribution will be reduced by your outstanding loan balance. In rare circumstances, some employers allow new employees to rollover loan balances from a prior retirement program. However, a loan cannot be rolled into an IRA.

When your loan defaults, you will receive a Form 1099-R which will show you the exact amount to report. (A copy of this form is submitted to the IRS.) You should receive this form by January 31^st following the year in which your distribution occurs.

TECHNICAL ISSUES

Employer Bankruptcy or Plan Termination

If an employer declares bankruptcy, it will generally take one of two forms: reorganization under Chapter 11 of the Bankruptcy Code, or liquidation under Chapter 7. A Chapter 11 (reorganization) usually means that the company continues in business under the court’s protection while attempting to reorganize its financial affairs. A Chapter 11 bankruptcy may or may not affect your retirement plan. In some cases, plans continue to exist throughout the reorganization process. In a Chapter 7 bankruptcy, the company liquidates its assets to pay its creditors and ceases to exist. Therefore, it is likely your retirement plan will be terminated.

When your employer files for bankruptcy you should contact the plan administrator or your union representative (if you are represented by a union) to request an explanation of the status of your plan or benefits. Your summary plan description (SPD) will tell how to get in touch with the plan administrator.

Documents you might need include your summary plan description (SPD), a summary annual report (not available for some plans) that can contain names and addresses you may need, earnings and leave statements to help you establish your employment dates, compensation, and contributions to a plan, and individual benefit statements showing how much money is in your retirement account (for individual account plans) or the value of your pension benefit (for defined benefit plans).

Workers in bankruptcy situations face two important issues when it comes to their retirement benefits: access to pension benefits and the continued safety of their pension assets. Generally, your pension assets should not be at risk when a business declares bankruptcy because ERISA requires that promised pension benefits be adequately funded and that pension monies be kept separate from an employer’s business assets and held in trust or invested in an insurance contract. Thus, if an employer declares bankruptcy, the retirement funds should be secure from the company’s creditors. In addition, plan fiduciaries must comply with the ERISA provisions that prohibit the mismanagement and abuse of plan assets. If contributions to a plan have been withheld from your pay, you may want to confirm that the amounts deducted have been forwarded to the plan’s trust or insurance contract.

In addition, some pension benefits may be insured by the federal government. Defined benefit plans are protected by the Pension Benefit Guaranty Corporation (PBGC), a federal government corporation. If a plan is terminated because an employer has financial difficulty and cannot fund the plan, and the plan does not have enough money to pay the promised benefits, the PBGC will assume responsibility for the plan. The PBGC pays benefits after termination, up to a certain maximum guaranteed amount. On the other hand, defined contribution plans, such as 401(k) plans, are not insured by the PBGC.

In the event the pension plan is terminated, the plan must vest your accrued benefit 100 percent. This means that the plan owes you all the pension benefits that you have earned so far, even benefits you would have lost if you had voluntarily left your employment. You should review the summary plan description for the plan rules regarding payment of benefits. Also remember that taking a distribution of pension benefits before retirement may have important tax consequences. You may need to consult with a tax advisor before accepting the distribution.

You should contact the EBSA regional office nearest you if you are unable to obtain information or documents about your benefits, you suspect contributions deducted from your pay check have not been deposited to the plan, or the assets are not prudently invested.

If your retirement plan is a defined benefit pension plan, all or a portion of the benefits may be insured by the Pension Benefit Guaranty Corporation (PBGC). For further information contact the Pension Benefit Guaranty Corporation, Administrative Review and Technology Assistance Department, 1200 K Street, NW, Washington DC 20005. The telephone number is (202) 326-4000.

Plan Fees and Account Expenses

Fees and expenses are one of the factors that will affect your investment returns and will impact your retirement income. We’ve provided you with a simplified explanation of 401(k) fees. It is not a legal interpretation of the nation’s major pension protection law, nor is this information intended to be investment advice.

Fees and expenses paid by your plan may substantially reduce the growth in your account. (Be aware that your employer also has specific legal obligations to consider the fees and expenses paid by your plan.) Plan fees and expenses generally fall into three categories:

Plan Administration Fees. The day-to-day operation of a retirement plan involves expenses for basic administrative services, such as plan record keeping, accounting, legal and trustee services, that are necessary for administering the plan as a whole. Today a retirement plan may also offer a host of additional services, such as voice response systems, access to customer service representatives, educational seminars, retirement planning software, investment advice, online access to plan information, daily valuation and online transactions.

In a bundled approach, the costs of administrative services will be covered by investment fees that are deducted directly from investment returns. In an unbundled approach, administrative costs are charged separately. These fees will be paid directly by your employer or charged against the assets of the plan. When paid directly from plan assets, administrative fees are either allocated among individual accounts in proportion to each account balance (i.e., participants with larger account balances pay more of the allocated expenses) or passed through as a flat fee against each participant’s account. Either way, generally the more services provided, the higher the fees.

Individual Service Fees. In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under a retirement plan. Individual service fees are charged separately to the accounts of individuals who choose to take advantage of a particular plan feature. For example, individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.

Investment Fees. By far the largest component of plan fees and expenses is associated with managing plan investments. Fees for investment management and other investment-related services generally are assessed as a percentage of assets invested. You should pay attention to these fees. You pay for them in the form of an indirect charge against your account because they are deducted directly from your investment returns. Your net total return is your return after these fees have been deducted. For this reason, these fees, which are not specifically identified on statements of investments, may not be immediately apparent.

There are three basic types of fees that may be charged in connection with investment options in a retirement plan. These fees, which can be referred to by different names, include:

Sales charges (also known as loads or commissions). These are basically transaction costs for the buying and selling of shares. They may be computed in different ways, depending upon the particular investment product.

Management fees (also known as investment advisory fees or account maintenance fees). These are ongoing charges for managing the assets of the investment fund. They are generally stated as a percentage of the amount of assets invested in the fund. Sometimes management fees may be used to cover administrative expenses. You should know that the level of management fees can vary widely, depending on the investment manager and the nature of the investment product. Investment products that require significant management, research and monitoring services generally will have higher fees.

Other fees. This category covers services, such as record keeping, furnishing statements, toll-free telephone numbers and investment advice, involved in the day-to-day management of investment products. They may be stated either as a flat fee or as a percentage of the amount of assets invested in the fund.

Mutual funds also may charge what are known as Rule 12b-1 fees, which are ongoing fees paid out of fund assets. Rule 12b-1 fees may be used to pay commissions to brokers and other salespersons, to pay for advertising and other costs of promoting the fund to investors and to pay various service providers to a 401(k) plan pursuant to a bundled services arrangement. They are usually between 0.25 percent and 1.00 percent of assets annually.

More Information. If you have questions about the fees and expenses charged to your plan account, contact your plan administrator. You can also find out if expenses and fees are paid by your plan or by your employer by consulting your summary plan description.

When you consider the fees in your 401(k) plan and their impact on your retirement income, remember that all services have costs. Remember that higher investment management fees do not necessarily mean better performance. Nor is cheaper necessarily better. Compare the net returns relative to the risks among available investment options.

Reservists Called on Active Duty

USERRA protects all persons absent from work due to their service in the Army, Navy, Marine Corps, Air Force, Coast Guard, or Commissioned Corps of the Public Health Service. The service can be voluntary or involuntary, including active duty, active duty for training, initial active duty for training, inactive duty training, reserves, and full-time national guard duty. It also includes any absence from work for an examination to determine a person’s fitness for any of the above types of duty.

If you have an outstanding plan loan, the payments can be suspended for the entire period of leave with no maximum time limit. The length of the loan can also be extended to the maximum allowable length of the loan plus the period of military leave. Loan payments must resume when you return to work.

Essentially, all other plan functions are suspended until your return. When you return from military service, you are entitled to certain retirement benefits. Essentially, plans must recognize military service for benefit accrual and vesting purposes. A reemployed veteran will not suffer a break in service due to military service. Reemployed veterans are entitled to make up employee contributions over the period of time beginning at reemployment and continuing for three times the period of military service or five years, whichever is less. Employers must also make up all contributions that would have been allocated to the returning employee had he or she not left. This would include matching contributions (and other contributions contingent on employee contributions) if the employee chooses to make up missed employee contributions. These contributions need not include any gains and losses that would have occurred. In order to calculate such contributions, an employer can use either the “would be” compensation level of the individual or the average compensation for the 12 month period preceding the military leave.

USERRA rules can be quite complex. Please contact our offices for assistance with these rules

Black Out Period

In response to the Enron situation, Congress has recently adopted the Sabanes-Oxley Act issuing new regulation regarding “blackout periods.” A blackout period is a period lasting more than three consecutive business days during which the plan administrator temporarily suspends your right to direct account investments, obtain a plan loan, or receive a distribution. Under the Act, the DOL requires a notice be given to plan participants if a blackout period is to occur. This notice must be written in a manner that can be understood by the average plan participant and be issued to the participants at least 30 days but not more than 60 days in advance of the last date on which participants can exercise the rights affected by the blackout.

There are also requirements on the content of the notice, including the reason for the blackout, a description of the rights affected, the expected ending date and contact information for the plan administrator.

The Sarbanes-Oxley Act also places restrictions on the activities of directors or executive officers during blackout periods, prohibiting them from dealing in employer securities both directly and indirectly. These prohibitions generally do not apply to small, privately held companies. Exceptions are also made for prearranged transactions and transactions outside the officer’s control, such as dividend reinvestments, stock splits, acquisitions via gifts, wills, or domestic relations orders, and similar transactions. Violators are subject to SEC enforcement and may be sued by the issuer or shareholders for the difference between the amount involved on the date of the transaction and the amount which would have been received after the blackout period.

RETIREMENT

Retirement Defined

You probably know what it means to retire: no longer being active in your profession. But in order to retire and take advantage of the retirement benefits available to you under your retirement program, you must meet the minimum age requirement stated in your plan document. This age may be different than what is set by the social security administration. You should consult your plan document. Most plans consider a participant fully vested in his/her accounts at retirement age.

Early Retirement

Some plans allow participants to retire earlier than the minimum age specified provided the participant has completed a minimum number of years of service and meets a younger age requirement. If you qualify for early retirement, you will be able to receive all of the retirement benefits available to normal retirees. You should consult your plan document to determine if your plan has an early retirement provision.

Distributions at Retirement

When you retire, you have essentially the same distribution options as other participants who have terminated employment. (For a detailed description of these distribution options, please see the section Distributions After I Leave My Employer.) In most cases, though, your distribution will not be subject to the 10% early withdrawal penalty as you will have reached age 59½.

You will be responsible for all federal (and state) income taxes owed on any distributions taken from your retirement account. You will only be taxed on the amount withdrawn in any given year, not the entire account balance (unless you take a distribution of the entire balance). If you have more questions regarding distributions at retirement, please contact us or consult with a financial adviser. Remember, Randall & Hurley, Inc. cannot give investment advice.