A: A cash or deferred election is a salary-reduction agreement between employer and employee under which a contribution is made to a plan (in the case of 401(k) plans, a retirement savings plan) conditioned on the employee's request to reduce his or her cash compensation, on a pre-tax basis, by the amount of that contribution. 

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A: Actually, there are two limits. Under the first limit, an employee cannot defer more than $7,000 (indexed annually for inflation) to the CODA portion of a 401(k) plan in any one year. Under the second limit, the total of an employee's elective deferrals, after-tax contributions, and nonelective employer and matching contributions generally cannot exceed either $30,000 (indexed annually for inflation) or 25 percent of the employee's compensation in that year, whichever is less. Highly compensated employees (HCEs) also may be limited as a result of nondiscrimination testing under the actual deferral and actual contribution tests.

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A: For purposes of the reporting, disclosure, vesting, testing and other requirements that apply to 401(k) plans, most employers find it necessary to keep track of an employee's date of birth, date of hire, Social Security number, service each year, marital status and any breaks in service.

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A: No. The United States Supreme Court resolved a long-standing question by holding that benefits in a plan subject to Title I of ERISA are not available to pay creditors in a bankruptcy proceeding. [Patterson v Shumate, 112 S Ct 2242 (1992)] 

Under bankruptcy law the estate available for distribution to creditors includes all legal and equitable property interests owned by the debtor. [Bankruptcy Code § 541(a)] There is an exception from this rule for property held in a trust that restricts the transfer of trust property under applicable nonbankruptcy law. [Bankruptcy Code § 541(c)(2)] The Supreme Court ruled that ERISAs anti-alienation provisions constitute applicable nonbankruptcy law. Therefore, a participant's benefits in a qualified plan are not part of the bankruptcy estate and are thus not available to pay claims of creditors. 

Several lower court cases have created exceptions to the Patterson v. Shumate ruling in cases where the only employees covered by a plan are owner-employees. However, these rulings should not have any impact on a 401 (k) plan.

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A: Solely for the purpose of determining whether an employee has incurred a one-year break in service, an employee absent from work on account of a maternity or paternity leave of absence must be credited with up to 500 hours of service. 

The number of hours of service credited during the absence will be the number of hours of service that otherwise would normally have been credited or, if that number cannot be determined, eight hours of service per day. 

The hours will be credited to the computation period in which the absence begins if an employee would be prevented from incurring a one-year break in service: otherwise, they will be credited to the immediately following computation period. 

A maternity or paternity leave of absence is an absence from work as a result of the pregnancy of the employee, the birth of the employee's child, the placement of the employee's adopted child, or the caring for the child after its birth or placement. 

Additional hours are not explicitly required for unpaid leave under the Family and Medical leave Act of 1993 (FMLA). However, the FMLA regulations do state that any period of unpaid FMLA purposes of eligibility to participate in a retirement plan. 

In addition to maternity and paternity leave, FMLA leave can include up to 12 weeks during the course of a serious health condition affecting the employee or a family member.

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A: A year of service means any vesting computation period during which an employee completes the number of hours of service specified in the plan. Not more than 1,000 hours may be specified for this purpose.

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A: A 401(k) plan may disregard any years of service completed with respect to vesting computation periods ending before a participant's eighteenth birthday. Years of service completed before an employer maintained a 401(k) plan or any predecessor plan may also be disregarded.

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A: If the 401(k) plan will consist only of elective contributions, the maximum deferral percentage is 25 percent. For limitation years beginning before January 1, 1998, the maximum percentage in this case would have been 20 percent. The lower maximum percentage for pre-1998 limitation years reflected the Code's requirement that elective contributions be subtracted from compensation for purposes of applying the annual additions limit. Thus, the 25 percent limitation was applied after reducing compensation by the amount of the elective contribution. 

Example. For the limitation year beginning January 1, 1997, Alfred's annual pay was $40,000. Alfred elects to defer 20 percent of pay into the 401(k) plan, or $8,000 ($40,000 x 20 %). For purposes of computing the Section 415 limit, Alfred's compensation was $40,000 less the $8,000 elective contribution, or $32,000. The maximum annual additions limit was the lesser of 25 percent pay or $30,000. Computing this limit for Alfred yielded a limit $8,000 ($32,000 x 25%).

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A: In general, the maximum deductible amount for a taxable year of the employer is 15 percent of the compensation paid during the taxable year to the participants under the plan. [IRC § 404 (a) (3) (A) (i)] If an employer maintains two or more profit sharing plans, they will be treated as a single plan for purposes of applying the 15 percent limit. 

Example. Employer XYZ maintains a 401 (k) plan as well as a profit sharing plan covering the same employees. Contributions to the 401 (k) plan amount to 7 percent of participant compensation. If Employer XYZ wishes to contribute the maximum deductible amount, it can make a contribution to the profit sharing plan equal to 8 percent of compensation.

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A: Under Code Section 404(l), the amount of compensation that taken into account with respect to any participant is to $150,000 ($160,000 for taxable years beginning after This limit is adjusted in increments of $10,000, as explain here. 

In addition, for taxable years beginning before 1997, an HCE who is a 5 percent owner or one of the ten most highly compensated HCEs and his or her spouse and any child who has not reached age 19 before the close of the taxable year will be treated as a single employee for purposes of this limit. This is known as family aggregation. Note that family aggregation has been repealed for tax years beginning after 1996. 

Example. Claire owns 100 percent of ABC Company, which sponsors a 401(k) plan. The compensation of the employees of ABC Company for its taxable year beginning July 1, 1996, is as follows:

Employee	Relationship  to Claire	Compensation	Subject to Family Aggregation
Claire		$180,000	Yes
Dave	Husband	75,000	Yes
Derek	Son (over 19)	75,000	No
Danny	Son (under 19)	5,000	Yes
Vincent	None	100,000	No
N1	None	30,000	No
N2	None	25,000	No
N3	None	24,000	No
N4	None	23,000	No
N5	None	20,000	No

 Claire's compensation of $180,000 is aggregated with Dave's and Danny's compensation ($180,000 + $75,000 + $5,000 = $260,000) and limited to $150,000 for the 1996 tax year. Hence, the maximum deductible amount for the 1996 tax year is $67,050 [($150,000 + $75,000 + $100,000 + $30,000 + $25,000 + $24,000 + $23,000 + $20,000) x 15%]. If the compensation amounts are identical for the taxable year beginning July 1, 1997, the maximum deductible amount is $80,550 [($160,000 + $75,000 + $75,000 + $5,000 + $100,000 + $30,000 + $25,000 + $24,000 + $23,000 + $20,000) x 15%]. This amount is greater than the 1996 maximum deductible amount on account of the elimination of family aggregation.

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A: Yes. Although after-tax contributions cannot be made to a CODA, a CODA may form a part of a 401(k) plan under which after-tax contributions may be made. Those contributions must be allocated to a separate account. After-tax contributions to a plan that includes a CODA must be combined with employer matching contributions (if any) and must satisfy the actual contribution percentage test. Also, special restrictions apply to the vesting and distribution of after-tax amounts.

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A: A minimum hours requirement of up to 1,000 hours may be posed. For example, if a plan requires 1,000 hours of service, an active or terminated participant who works fewer than 1,000 hours will not be entitled to an allocation of discretionary nonelective contributions. 

A requirement that the participant be employed on the last day of the plan year may also be imposed. This requirement would generally preclude any terminated employees from receiving a portion of the nonelective contribution.

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A: There is a limit on the amount of compensation that can be taken into account for computing plan contributions and benefits and for applying nondiscrimination tests. The 1998 limit is $160,000. This amount will be adjusted for inflation in $10,000 increments. 

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A: The amount of annual additions allocated to a participant cannot exceed the lesser of $30,000 or 25 percent of the participant's com­pensation. 

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A: There is an annual limit on the amount of elective contributions that may be made by an individual to the 401 (k) plan. The 1998 limit is $10,000, and it will be adjusted for inflation in $500 incre­ments. 

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A: A 401(k) plan may require up to one year of service before allowing employees to make elective contributions. If a 401(k) plan also provides for employer contributions, employees can be required to complete up to two years of service before becoming entitled to receive those contributions. In that case, however, the law requires employees to be 100 percent vested in their accounts attributable to employer contributions.

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A: Solely for the purpose of determining whether an employee has incurred a one-year break in service, an employee absent from work on account of a maternity or paternity leave of absence must be credited with up to 500 hours of service. The number of hours of service credited during the absence will be the number of hours of service that otherwise would normally have been credited or, if that number cannot be determined, eight hours of service per day. The hours will be credited to the vesting computation period in which the absence begins, if an employee would be prevented from incurring a one-year break in service, or in the immediately following vesting computation period. A maternity or paternity leave of absence is any absence from work as the result of the pregnancy of the employee, the birth of the employee's child, the placement of the employee's adopted child, or the caring for the child after its birth or placement. Additional hours are not explicitly required for unpaid leave under the Family and Medical Leave Act of 1993 (FMLA). However, the FMLA regulations do state that any period of unpaid FMLA leave shall not be treated as or counted toward a break in service for purposes of vesting in a retirement plan. In addition to maternity and paternity leave, FMLA leave can include up to 12 weeks for a serious health condition affecting the employee or a family member.

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A: The forfeiture of a participant's non-vested accounts will ordinarily occur only after the participant's termination of employment.

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A: If a participant has excess deferrals (the amount by which a participant's elective deferrals exceed the annual cap) based only on the elective contributions made to a single 401(k) plan, then the plan must return the excess deferrals to the participant. It could happen, however, that a participant has excess deferrals as a result of making elective contributions to 401(k) plans, SARSEPs, SIMPLE retirement plans, and 403(b) annuity contracts of different employers. If the 401(k) plan so provides, the participant may notify the plan of the amount of excess deferrals allocated to it no later than April 15 (or any earlier date specified in the plan). The plan is then required to distribute to the participant no later than April 15 the amount of the excess deferrals allocated to the plan by the participant.

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A: The income allocated to excess deferrals is the amount of the allocable gain or loss for the taxable year of the participant. If the plan so provides, it also includes the allocable gain or loss ,for the gap period, which is the period between the end of the participant's taxable year and the date of distribution. 

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A: It depends on how they arise. If excess deferrals arise out of elective deferrals made to one or more plans maintained by the same employer, then the qualification of the plan is at risk. This is because Code Section 401(a)(30) provides that a plan cannot accept elective contributions in excess of the annual cap. If, on the other hand, the excess deferrals arise out of elective deferrals made to plans maintained by unrelated employers, the excess deferral will be included in gross income twice: in the taxable year in which the excess deferral was contributed, and in the taxable year in which the excess deferral is ultimately distributed to the participant. 

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A: Code Section 415 limits the annual additions that may be allocated to an individual's account in any limitation year. The limitation year is the calendar year unless another 12-month period is designated in the plan document. For 1998, the maximum annual addition is the lesser of 25 percent of compensation or $30,000.

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A: Yes, the $30,000 limit is indexed for inflation. However, under the General Agreement on Tariffs and Rade (GATT) pension provisions, the dollar limit must always be a multiple of $5,000 and will always be rounded to the next lowest multiple of $5,000. 

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A: Maximum contribution funding in 401(k) from all employee and employer sources is $35,000, using a 401(k) combined with a money purchase plan. Without a money purchase plan the maximum is $22,500. Maximum annual employee 401(k) contribution: $10,500 Maximum annual employer 401(k) contributions: $12,000.

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A: No. A SIMPLE IRA is still an IRA, not a qualified plan, and therefore a distribution from a SIMPLE IRA cannot be rolled over to a qualified plan, including a 401(k). (TAG 4/25/2001)

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A: Yes. There is a private letter ruling that allows HCEs to contribute to a nonqualified plan, and then the have the contributions transferred to a 401(k) plan, up to the level where the plan can still pass the ADP test. Example: An employer maintained both a qualified 401(k) plan and a nonqualified deferred compensation plan, both of which provided for salary deferrals. If, for a plan year, a participant elected to have salary deferrals under the nonqualified plan transferred to the qualified 401(k) plan, the lesser of the calculated ADP and ACP limits or the participant's salary deferrals under the nonqualified plan would be transferred to the 401(k) plan. According to an IRS letter ruling, if the transfers of salary deferrals as contributions to the 401(k) plan are timely paid and allocated, they can be excluded from gross income under Code Sec. 402(e)(3). The IRS also ruled that the maximum permissible salary deferrals that can be transferred to the 401(k) plan would be determined with reference to the year in which they were earned rather than the year in which they were transferred.(TAG)

A: The earliest date on which such contributions can reasonably be segregated from the employer's general assets, or the 15th business day of the month following the month in which they would otherwise have been payable to the participant in cash. The regulations provide three examples of what constitutes a reasonable period of time. Small company with a single payroll system: In this case, two business days is a reasonable period of time. Large national corporation with several payroll centers and outside payroll processing: Each payroll center has a different pay period. Each center maintains separate accounts on its books for purposes of accounting for that center's payroll deductions and provides the outside payroll processor the data necessary to prepare employee paychecks and process deductions

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