401k Plan
401k Rules
Chapter 1:
ERISA, Retirement Plan, and Your Retirement Income
This chapter explains the purpose of the Employee Retirement Income Security
Act, what it covers, and what is excluded from its coverage. It tells which
plans are exempt from the law and who administers ERISA.
These questions are addressed:
What Is ERISA?
What are
defined benefit and defined contribution plans?
What Are Savings Incentive Match Plans for Employees of Small Employers (SIMPLE
IRAs)?
What are profit
sharing plans or stock bonus plans?
What are 401k plans?
What are employee
stock ownership plans (ESOPs)?
What is the role of the Labor Department in regulating retirement plans?
What other
Federal agencies regulate retirement plans?
The Employee Retirement Income Security Act of 1974 (ERISA) is a Federal law
that sets minimum standards for retirement plans in private industry. For
example, if your employer maintains a plan, ERISA specifies when you must be
allowed to become a participant, how long you have to work before you have a
nonforfeitable interest in your benefit, how long you can be away from your job
before it might affect your benefit, and whether your spouse has a right to part
of your benefit in event of your death. Most of the provisions of ERISA are
effective for plan years beginning on or after January 1, 1975. ERISA does not
require any employer to establish a retirement plan. It only requires that those
who establish plans must meet certain minimum standards. The law generally does
not specify how much money a participant must be paid as a benefit.ERISA does
the following:
Requires plans to provide participants with information about the plan,
including important information about plan features and funding. The plan must
furnish some information regularly and automatically. Some is available free of
charge, some is not.
Sets minimum standards for participation, vesting, benefit accrual and funding.
The law defines how long a person may be required to work before becoming
eligible to participate in a plan, to accumulate benefits, and to have a
non-forfeitable right to those benefits. The law also establishes detailed
funding rules that require plan sponsors to provide adequate funding for your
plan.
Requires accountability of plan fiduciaries. ERISA generally defines a
fiduciary as anyone who exercises discretionary authority or control over a
plans management of assets, including anyone who provides investment advice to
the plan. Fiduciaries who do not follow the principles of conduct may be held
responsible for restoring losses to the plan.
Gives participants the right to sue for benefits and breaches of fiduciary
duty.
Guarantees payment of certain benefits if a
defined benefit plan is terminated, through a federally chartered
corporation, known as the Pension Benefit Guaranty Corporation. ERISA also
creates standards for health plans and other employer-provided benefits, but
those plans are not discussed in this booklet.
Generally speaking, there are two types of retirement plans:
defined benefit plans and
defined contribution plans. A
defined benefit plan promises you a specified monthly benefit at
retirement. The plan may state this promised benefit as an exact
dollar amount, such as $100 per month at retirement. Or, more
commonly, it may calculate a benefit through a plan formula that
considers such factors as salary and service for example, 1 percent
of your average salary for the last 5 years of employment for every
year of service with your employer. A defined contribution plan, on
the other hand, does not promise you a specific amount of benefits
at retirement. In these plans, you or your employer (or both)
contribute to your individual account under the plan, sometimes at a
set rate, such as 5 percent of your earnings annually. These
contributions generally are invested on your behalf. You will
ultimately receive the balance in your account, which is based on
contributions plus or minus investment gains or losses. The value of
your account will fluctuate due to changes in the value of your
investments. Examples of defined contribution plans include
401k
plans,
403(b) plans,
employee stock ownership plans and
profit sharing plans. The
general rules of ERISA apply to each of these types of plans, but
some special rules also apply. To determine what type of plan your
employer provides, check with your plan administrator or read your
summary plan description. A
money purchase pension plan is a
plan that requires fixed annual contributions from your employer to
your individual account. Because a money purchase pension plan
requires these regular contributions, the plan is subject to certain
funding and other rules.
See
SEP IRA / SIMPLE IRA
for more information
A
profit sharing or
stock bonus plan
is a defined contribution plan under which the plan may provide, or
the employer may determine, annually, how much will be contributed
to the plan (out of profits or otherwise). The plan contains a
formula for allocating to each participant a portion of each annual
contribution. A profit sharing plan or stock bonus plan may include
a 401k plan.
What are 401k plans?
Your employer may establish a defined contribution plan that is a cash or
deferred arrangement, usually called a
401k plan. You can elect to defer receiving a portion of your salary which
is instead contributed on your behalf, before taxes, to the 401k plan. Sometimes
the employer may match your contributions. There are special rules governing the
operation of a 401k plan. For example, there is a dollar limit on the amount you
may elect to defer each year. The dollar limit is $12,000 in 2003 with annual
increases in $1,000 increments until the limit reaches $15,000 in 2006. Other
limits may apply to the amount that may be contributed on your behalf. For
example, if you are highly compensated, you may be limited depending on the
extent to which rank-and-file employees participate in the plan. Your employer
must advise you of any limits that may apply to you. As with other types of
retirement plans, a 401k can permit catch-up provisions for employees age 50 and
over. The catch-up amount in 2003 is $2,000 and increases in $1,000 increments
until the limit reaches $5,000 in 2006. Although a 401k plan is a retirement
plan, you may be permitted access to funds in the plan before retirement. For
example, if you are an active employee, your plan may allow you to borrow from
the plan. Also, your plan may permit you to make a withdrawal on account of
hardship, generally from the funds you contributed. The sponsor may want to
encourage participation in the plan, but it cannot make your elective deferrals
a condition for the receipt of other benefits, except for matching
contributions.
What are employee stock ownership plans (ESOPs)?
Employee stock ownership plans (ESOPs) are a form of defined contribution plan
in which the investments are primarily in employer stock. Congress authorized
the creation of ESOPs as one method of encouraging employee participation in
corporate ownership.
What is the role of the Labor Department in regulating retirement
plans?
The Department of Labor enforces Title I of ERISA, which, in part,
establishes participants‚„ rights and responsibilities and fiduciaries duties.
However, certain plans are not covered by the protections of Title I. They are:
Federal, State, or local government plans, including plans of certain
international organizations
Certain church or church association plans
Plans maintained solely to comply with State workers‚„ compensation,
unemployment compensation, or disability insurance laws
Plans maintained outside the United States primarily for nonresident aliens
Unfunded excess benefit plans - plans maintained solely to provide benefits or
contributions in excess of those allowable for tax-qualified plans. The Labor
Department's Employee Benefits Security Administration is the agency charged
with enforcing the rules governing the conduct of plan managers, investment of
plan assets, reporting and disclosure of plan information, enforcement of the
fiduciary provisions of the law, and workers‚„ benefit rights and
responsibilities.
|
Sources of Plan Information
|
Type of Document |
Who You Can Get It From |
When You Can Get It |
Your Cost |
|
Summary Plan Description (SPD):
This summary of your retirement plan tells you what the plan provides and how it
operates. |
Plan Administrator |
Upon written request |
Reasonable Charge |
|
Automatically within 90 days after you become covered under the plan |
Free |
|
Automatically every 5 years if your plan is amended |
Free |
|
Automatically every 10 years if your plan has not been amended |
Free |
| Department of Labor |
Upon Request |
Copying Charge |
| Summary of Material Modifications (SMM): This summarizes material
changes to your plan. |
Plan Administrator |
Automatically within 210 days after the end of the plan year for which the
plan has been amended or modified (distribution of a revised SPD satisfies this
requirement) |
Free |
|
Department of Labor |
Upon Request |
Copying Charge |
|
Summary Annual Report: This summarizes the annual financial reports that
most retirement plans file with the Department of Labor. |
Plan Administrator |
Automatically within 9 months after the end of the plan year, or 2 months after
the due date for filing the annual report |
Free |
| Annual Report (Form 5500 Series): Annual financial reports that most
retirement plans file with the Department of Labor. |
Plan Administrator |
Latest annual report upon written request |
Reasonable Charge |
|
Department of Labor |
Upon Request |
Copying Charge |
|
Individual Benefit Statement:
A statement describing your total accrued and vested benefits is required to be
provided by ;most retirement plans. |
Plan Administrator |
Upon written request once every 12 months |
Free |
| Documents and Instructions under which the plan is established or
operated:
This includes, for example, the
plan document, collective bargaining agreement, trust agreement, SPD, SMM,
and latest annual report . |
Plan Administrator |
Upon written request |
Reasonable Charge |
|
|
Available for Inspection upon request |
Free |
Notice to Participants in Underfunded Plans.
Generally,
single-employer pension plans that are less than 90% funded must give you notice
reporting the finding level of the plan describing the and limits on PBGC's
guarantees. |
Plan Administrator |
Within 2 months after the due date for filing the annual report |
Free |
*Documents filed with the Labor Department can be obtained by contacting the
U.S. Department of Labor, EBSA, Public Disclosure Facility, Room N-1513, 200
Constitution Avenue, NW, Washington, D.C. 20210, telephone: 202.693.8673.
The Treasury Department's Internal Revenue Service is responsible for
ensuring compliance with the Internal Revenue Code, which establishes the rules
for operating a ‚“tax-qualified‚ retirement plan, including funding and vesting
requirements. A plan that is ‚“tax-qualified‚ can offer special tax benefits
both to the employer sponsoring the plan and to the participants who receive
retirement benefits. The IRS maintains a toll-free taxpayer assistance line for
employee plans at 877.829.5500.
The Pension Benefit Guaranty Corporation, PBGC, a nonprofit, federally
created corporation, guarantees payment of certain pension benefits under
defined benefit plans that are terminated with insufficient money to pay
benefits. The PBGC may be contacted at 1200 K Street, N.W., Washington, D.C.
20005, telephone: 202.326.4000
Source: Department of Labor
