401(k) Plans - Safe harbor, tax liability at distribution, Catch-up Contributions, withdraw, hardship distribution, Loan, benefits, retirement Investment asset allocation advise
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Know your retirement plan

Traditional

Traditional There are several types of 401k plans available to employers - traditional, SIMPLE and safe harbor and different rules apply to each.

It is important that you become familiar with your 401k plan so that you understand the special rules that apply to you.

A traditional plan allows eligible employees (employees eligibility depends on company polices to participate in the plan) to make pre-tax elective contribution through payroll deductions.


In the traditional plan employees contributes through payroll deduction & that contribution is a pre-tax.

In the traditional 401k plan, employers have the option of making contributions on behalf of all the participants, making matching contributions based on employees’ elective deferrals, or both.

These employer contributions can be subject to a vesting schedule, which provides that an employees right to employer contributions becomes no forfeitable only after a period of time, or be immediately vested. Rules relating to traditional plans require that contributions made under the plan meet specific non-discrimination requirements.

Safe harbor

Safe harbor There are several types of 401k plans available to employers - traditional , safe harbor & SIMPLE. Different rules apply to each.

It is important that you become familiar with your 401k plan, so that you understand the special rules that apply to you.

A safe harbor 401k plan is similar to a traditional but, among other things, it must provide for employer contributions that are fully vested when made.


These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals.

The safe harbor 401k plan is not subject to the complex annual nondiscrimination tests that apply to traditional.

These employer contributions can be subject to a vesting schedule which provides that an employee’s right to employer contributions becomes no forfeitable only after a period of time, or be immediately vested. Rules relating to traditional require that contributions made under the plan meet specific nondiscrimination requirements.

Simple 401(k) plan

Simple 401(k) plan There are several types of 401k plans available to employers - traditional, safe harbor and SIMPLE. Different rules apply to each.

It is important that you become familiar with your 401k plan, so that you understand the special rules that apply to you.

The SIMPLE plan was created so that small businesses could have an effective and cost-efficient way to offer retirement benefits to their employees.


Employees who are eligible to participate in a SIMPLE plan may not receive any contributions or benefit accruals under any other 401k plans of the employer.

These employer contributions can be subject to a vesting schedule which provides that an employee’s right to employer contributions becomes no forfeitable only after a period of time, or be immediately vested. Rules relating to Simple plans require that contributions made under the plan meet specific nondiscrimination requirements.

What benefits will I receive at normal retirement?

What benefits will I receive at normal retirement? There are several types of 401k plans available to employers - traditional , safe harbor and SIMPLE 401k plans. Different rules apply to each.

It is important that you become familiar with your plan so that you understand the special rules that apply to you.

You will be entitled to all of your accounts under the plan if you retire on or after your normal retirement age.


In a traditional, employers have the option of making contributions on behalf of all participants, making matching contributions based on employees’ elective deferrals, or both.

Please visit to Learn more about Benefits from Investing in a retirement plan

What is my tax liability when I receive a distribution?

What is my tax liability when I receive a distribution? There are several types of 401k plans available to employers - traditional , safe harbor and SIMPLE. Different rules apply to each.

It is important that you become familiar with your plan so that you understand the special rules that apply to you.

You must include any You must include any 401k plan distribution in your taxable income in the year in which you receive the distribution.


The tax treatment may also depend on your age when you receive the distribution. Certain distributions made to you when you are under age 59-1/2 could be subject to an additional 10% tax.



Contributions

As a participant, you may elect to defer a percentage of your compensation instead of receiving in cash. There is a limit on the amount of elective deferrals that you can contribute to your traditional or safe harbor 401(k) plan.

The amount you elect to contribute, and any earnings on that amount, will not be subject to income tax until it is actually distributed to you.
As a participant, you may elect to defer a percentage of your compensation instead of receiving in cash. There is a limit on the amount of elective deferrals that you can contribute to your traditional or safe harbor 401(k) plan.

The limit is $15,500 for 2007 and 2008 and 16,500 for 2009


The amount you elect to contribute, and any earnings on that amount, will not be subject to income tax until it is actually distributed to you.

Limits on the amount of elective deferrals that you can contribute to a SIMPLE 401(k) plan are different from those in a traditional or safe harbor and the limit is $10,500 for 2007 and 2008.

Catch-up contributions

For tax years beginning after 2001, a plan may permit participants who are age 50 or over at the end of the calendar year to make additional elective deferral contributions. These additional contributions (commonly referred to as catch-up contributions) are not subject to the general limits that apply to 401k plan.

An employer is not required to provide for catch-up contributions in any of its plans. However, if your plan does allow catch-up contributions, it must allow all eligible participants to make the same election with respect to catch-up contributions.

Can I withdraw money from my retirement account in the event of financial hardship?

Yes, if you satisfy certain conditions. You may request a hardship distribution from your vested accounts in the Plan.

There are restrictions placed on hardship distributions which are made from certain accounts. Only amounts that can be distributed to you on account of a hardship from these accounts are your salary deferrals. The earnings on your salary deferrals and special Employer contributions may not be distributed to you on account of a hardship.


What conditions must I satisfy to receive a hardship distribution from 401k Plan?

A hardship distribution may only be made for payment of

  • For education – Tuition, educational fees, and room and board expenses for next twelve months of post-secondary education for you, your spouse or dependent.
  • To purchase principal residence.
  • Medical care expenses that previously incurred by you, your spouse or your dependent, or necessary for you, your spouse or you’re dependent to obtain medical care.
  • Amounts necessary to prevent foreclosure on the mortgage of your principal residence.
  • Funeral Expenses - Payments for burial or funeral expenses for the employee's deceased parent, spouse, children or dependents.
  • Principal Residence Repair - expenses for repair of damage to the employee's principal residence that qualifies for the casualty deduction.
Loan from 401k Plan
401k loan
You can borrow money from the 401k Plan. Your ability to obtain loan depends on several factors. To get loan you need to fulfill some Loan rules and requirements
There are various rules and requirements to obtain any loan.
Loans are available to participants on reasonably equivalent basis.

  • All loans must be adequately secured. You must sign a promissory note along with a loan pledge. Generally, you must use your vested interest in the 401k plan as security for the loan; in any case your balance of all loans does not exceed 50% of vested interest in the plan.
  • You will be charged a reasonable rate of interest for your loan on 401k vested balance.
  • The term of your loan may not exceed five years.
  • If the loan on 401k vested balance is for the purchase of your principal residence, the administrator may permit a longer repayment term.
  • You must repay your loan through payroll deduction.
  • All payments of principal and interest by you on a loan will be credited to your account.
  • The amount the 401k Plan may loan to you is limited by IRS code.
  • No loan in an amount less than $1000 will be made on 401k vested balance.
  • The maximum number of loans on 401k that you may have outstanding at any one time is 1.
  • If you fail to make payments when they are due under the terms of the loan, you will be considered to be "in default". The administrator will consider your loan to be in default if any scheduled loan repayment is not made by the end of calendar quarter. In this case the plans have authority to take all reasonable actions to collect the balance owed on the loan. This could include filing lawsuit or foreclosing on the security for the loan. Under certain circumstances, a loan that is in default may be considered a distribution form the 401k plan and could result in taxable income to you.
  • If you become entitled to a distribution from the plan (except in the case of an in-service distribution or a hardship distribution), your loan becomes due and payable in full immediately. You may repay the entire outstanding balance of the loan including any accrued interest.
Default Loan payments | Fail to make payments for my 401k Loan

If you fail to make payments when they are due under the terms of the 401k loan, you will be considered to be "in default".

The administrator will consider your 401k loan to be in default if any scheduled loan repayment is not made by the end of calendar quarter.

In this case the plans have authority to take all reasonable actions to collect the balance owed on the 401k loan. This could include filing lawsuit or foreclosing on the security for the loan. Under the certain circumstances, a loan that is in default may be considered a distribution form the plan & could result in taxable income to you.
  


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401k plan - Safe harbor, tax liability,Contributions, withdraw, hardship distribution,Loan

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