Talk:401(k)/Archive 1

Archive 1

Assessment comment

The comment(s) below were originally left at Talk:401(k)/Comments, and are posted here for posterity. Following several discussions in past years, these subpages are now deprecated. The comments may be irrelevant or outdated; if so, please feel free to remove this section.

Needs references Morphh (talk) 1:47, 24 March 2007 (UTC)

Last edited at 01:47, 24 March 2007 (UTC). Substituted at 04:47, 15 April 2016 (UTC)

History

Does anyone have information about the origination of the 401K as a Congressional "favor" for Xerox? This was mentioned in the new Frontline episode regarding retirements. The gist is that the 401k was not intended for the general public, but was a favor for some executives at Xerox as a way of avoiding taxes. Here's the Frontline link (you can watch it online) http://www.pbs.org/wgbh/pages/frontline/retirement/ - Sublium 18:29, 20 May 2006 (UTC)

Anon, you didn't just add a source, you removed the other one. I've never heard of EBRI and multiple sources support the Benna story. Now they may have all been parroting from the same story, and EBRI may be reputable and in the right, but I'm not convinced. I'll try and get a copy of the 1978 Revenue act itself and look at the language. EBRI makes it sound like the act's intentions were a lot clearer than other sources do. Please see what you can find supporting EBRI's version and respond here, and sign your comments with four tildes as in ~~~~. That makes it clear what comments were from who. Thanks - Taxman 03:47, May 4, 2005 (UTC)

EBRI -- Employee Benefits Research Institute -- is one of the most credible sources of hard information about benefit plans now extant. Ted Benna is still alive. Last I spoke with him he agreed that he is one of many fathers of the 401(k). --Dcpi 01:00, 7 April 2007 (UTC)

I'm no expert, and in fact I reviewed this page to learn about a 401(k) (great article). But I'm suspicious that the hardship withdrawal information isn't correct. My understanding is that you can generally always take out your money from a 401(k) with a 10% fee, regardless of any hardship. If you show hardship, the 10% fee isn't assessed. The article makes it sound like you have to show hardship to be able ight, I may be wrong. --Rmalloy 19:54, 16 August 2005 (UTC)

Here's another source the details the hardship rules. It probably has some things that should be added to the article, but our article is correct. All hardship withdrawals are subject to the 10% penalty unless they qualify under an exemption as detailed in the article. What that linked article calls the "other type" of hardship withdrawal is not really a hardship withdrawal at all except for the one about debt for medical expenses. The others are all separation from service and disability which is essentially equivalent to a separation. Their third one is not a hardship withdrawal, but a QDRO or EDRO for divorce. That's just standard splitting of an account. Also, withdrawals do require a hardship to get, or a loan can be taken instead if the plan allows. Now not everybody knows or follows the rules perfectly, so an administrator or employer may allow withdrawals that don't fit into the hardship rules, but it's basically illegal, and tax is due on it. But it comes down to who is going to catch it in some cases, and like anything else illegal can be gotten away with. The trustee or plan admin is essentially liable if they were to not follow the rules correctly. - Taxman ^Talk 20:38, August 16, 2005 (UTC)

Thank you so much, that's interesting. I was thinking about putting my money in 401(k) for medium term (e.g. 10-year investments). Given an income tax rate of 30%, you only need above about a 3% ROI to make a 401(k) a better 10-year investment than a post-tax mutual fund. The tax exemption on interest outweighs the 10% early-withdrawal penalty. But now this plan seems risky :(. --rmalloy 21:06, 16 August 2005 (UTC)

Well keep in mind, the 401(k) is only tax deferred. All money withdrawn (a loan is not a withdrawal, you have to pay it back or else it is taxed as a withdrawal) from it is taxable income in the year withdrawn. I suppose I should make that more obvious in the article. - Taxman ^Talk 21:34, August 16, 2005 (UTC)

The article already mentions why it makes a huge difference. With the 401(k), the interest compounds without being taxed annually. It's only taxed on the back end. If P is the principal, T is the tax rate, and I is the interest rate (assume T and I constant), then after ten years you have the following. 401(k): 0.90*T*P*(1+I)^10. Regular investment: T*P*(1+I(1-T))^10. Given a reasonably high I and T, you come out substantially better with the 401(k). I think the article is totally correct right now, and very well-done. --Rmalloy 22:09, 16 August 2005 (UTC)

Well perhaps, but that should probably be 1-T everywhere, and the one for regular investments improperly both applies the initial 1-T to the whole amount and assumes all of the return is taxable income each year. It's more likely to be one or the other, or a mix. One one extreme, if all of the income is taxable each year, that adds to the basis, so there would be no initial (1-T) for the overall taxation. One the other, if all of the return is capital gain, with no taxable income each year, the second 1-T disappears. So having them both at the full tax rate (capital gains tax is lower than most of the income tax rates) overestimates the taxation. That means except in the extremes you can't make a simple formula like you are looking for for the regular investment, but you could spreadsheet it and/or run a stochastic simulation. I probably should have skipped all this, since even though it is interesting, we're well beyond the bounds of this particular article, and probably any that should be on Wikipedia. In any case, glad you found it a good article. I should probably more explicitly state my references though. - Taxman ^Talk 23:16, August 16, 2005 (UTC)

I'm fairly sure one part of that is inacurate. I work in the industry and I beleave that in a 401(k) plan the early withdrawal penaulty is still assesed under a hardship distribution. I think this common misconception comes from the fact that in an IRA these circumstances would make you exempt from the 10% tax. I'll see if I can find a source. It might be worth noting that the last two hardship were added in 2006, and it's very common for employers to use only the first four (as they've not chosen to update the plan document).

Also, I think the 402(g) contribution limit is going up $1000 a year, rather than $500, as is the catch-up contribution limit. This has historically been the case, but it might be changed for 2007. I'll try to find a source on this also. Rafngard169.200.225.34 14:20, 21 April 2006 (UTC)

Hello, I am in the industry and think we're missing an important note on hardships, the safe harbor rules are not the only reason an individual may take a hardship withdrawal. Taxman, as you mention, the administrator is the one who makes the decisions and my understanding is that as long as the hardship is immediate and necessary and the definition is applied consistently, the administrator can qualify other reasons for hardship withdrawals, ie bail, medical expenses outside the safe harbor definition, etc. Also, The rules note that a hardship may only be taken once other means are exhausted and most interpret this to mean if a loan feature is available it must be taken. That may be true, UNLESS the loan itself would cause the situation causing the hardship to worsen. When wouldn't it?! Thanks for your time. Jimi magic 17:49, 27 October 2006 (UTC)

The Catchup Contributions are not increasing for 2007 [1] This article says they are increasing $500. They have increased $1000 a year since 2002. This article should be changed. JohnB —The preceding unsigned comment was added by 64.246.202.2 (talk • contribs). (13 March 2007)

What the wording is meant to say is that they will go up with inflation, but will only increase in $500 increments. So it won't increase for a some number of years and then it will go up $500, then won't go up for some more years and then it will again by $500. That's what the wording that's in the article means, and is the IRS wording. Any idea on how to make that clearer without being even more confusing and overly wordy? - Taxman ^Talk 23:08, 13 March 2007 (UTC)

Governmental 401(k)'s

The 1986 date for when governmental plans had to be established by doesn't seem right to me, but I can't find the date definitively anywhere now. I seem to remember a cutoff more like 1994. Anyone know a way to find that? - Taxman ^Talk 18:26, 17 February 2006 (UTC)

Repeated text?

Tax benefits and considerations contains a section about the 10% penalty on premature withdrawl from a 401(k) twice (or so it seems to me). Is this a mistake or am I missing something? --Plamoni 20:08, 14 March 2006 (UTC)

Not really, 10% is metioned twice. Once for hardship withdrawals and again for withdrawals for people under the age of 59 1/2. Hardships are a type of withdrawal so both are subject to the 10% penalty. (unsigned)

401k crash of 2001

I lost a lot of money in my 401k during the stock market plunge in 2000-2001. I suspect a lot of other people did too. Any facts/stats on that? I am wary about re-investing. There are some who consider that the mass selling of the 401k to the rank and file was a class conspiracy to redirect more wealth to the top. Numbers? ---Ransom (68.121.52.29 20:00, 18 March 2006 (UTC))

I would say a discussion of the market downturn of 2001 would be better served in a separate article on that specific issue, if it doesn't already exist. Separately, the "conspiracy" you speak of is probably the product of a general misunderstanding of investing and the relationship to 401(k)'s and should be documented before being cited in any article. Jimi magic 19:17, 30 October 2006 (UTC)

Is "401K" an acceptable spelling?

I've noticed that while the article mostly uses "401(k)" with parentheses around the 'k', there are a few times where it is spelled "401K" or "401k" without parentheses. I was about to correct them, but I'm not 100% sure. Is 401K an acceptable alternate spelling?

Depends on what you mean by acceptable. This article should be consistent and probably with 401(k) which is most "correct". So if you're referring to this and other WP articles, changing to that is probably better, especially given we should be consistent with the article title, though for other purposes 401k lower case is fairly common too if the context is clear. - Taxman ^Talk 18:07, 6 June 2006 (UTC)

As the article mentions, 401(k) is the subsection containing the language that created tax deferred savings plans, hence the parentheses around the k. It should be written as such or is otherwise technically inaccurate. Jimi magic 16:38, 31 October 2006 (UTC)

A profit-sharing plan?

The article currently says: "A 401(k) plan is a profit sharing plan with a qualified Cash or Deferred Arrangement ...". The article for "profit-sharing plan" says it refers to one in which an employee shares in the profits of the company he works for. Yet a 401k can be (and often is) completely independent of your employer's profits -- the returns can have absolutely nothing to do with your current employer. So how can a 401k be a "profit sharing plan" in the conventional sense of the term? MrVoluntarist 16:49, 21 June 2006 (UTC)

It's just IRS technicalities. The type is a profit sharing plan, with a cash or deferred arangement. It's a result of the history of these plans. The cash or deferred arangement is what became known as the 401(k) and now you can have 401(k)'s without a profit sharing component. But you're also confusing how the plan works and it's type with how they are funded. A profit sharing plan in the US is where the employer makes a contribution to a qualified trust on behalf of the employees, based on the profits of the company that year and the decision of the company, etc. That contribution may be made in cash into employer stock or there may be investment options such as mutual funds, etc available in the profit sharing part of the plan, just as in the 401(k). So the returns on the contributions to the profit sharing plan can also be completely independent of the employer too. For the 401(k) portion the only difference is the employee makes the contributions (and there may be a match). I'm not sure my explanation made anything any clearer, the only other option is for you to dig into various materials that describe the technicalities of these plans. - Taxman ^Talk 18:10, 21 June 2006 (UTC)

Not quite sure I have that responsibility. Currently, this article's use of "profit-sharing plan" conflicts with the article on profit sharing plan. My responsibility is to make sure they are consistent at all times. They currently contradict each other. I think the best resolution now is to say that a 401(k) plan is a profit sharing plan under the IRS's definitions. Also, the employer's matching 401k contributions are not a function (in the mathematical sense) of the employer's profits, so even on the definition you gave it doesn't qualify as one. Where the money/shares from the profits go, I agree, may vary widely. But both the employee and employer 401k contributions have nothing to do (necessarily) with the employer's profits, so based on no definition, either Wikipedia's or the one you gave, would a 401k be a profit-sharing plan. MrVoluntarist 18:18, 21 June 2006 (UTC)

What I'm saying is the definitions don't conflict. There are other problems with that paragraph though, and I'll try to fix them more thoroughly when I get some time in front of the sources I need. - Taxman ^Talk 11:33, 22 June 2006 (UTC)

Yes, they do conflict. The profit sharing plan article gives the definition that I believe everyone understands the term to mean: you share in the profits of the the company you work for. A 401k, however, need not have any relationship to the company's profits whatsoever (except in the reductionist sense that they can't pay you unless they have enough to cover expenses for the time being). My employer contributes to my 401k, but the contribution does not depend on their profitability; it's a fraction of my contributions, up to a certain level. None of the investments in it are my employer. In what sense am I "sharing in the profits" of my employer? Are they making some miniscule profit-dependent deposit into my account that I don't know about? MrVoluntarist 13:11, 22 June 2006 (UTC)

You're taking your understanding of profit sharing as a concept and saying that conflicts with a 401(k) being technically a profit sharing plan. They don't conflict, your understanding of the concepts and applying it to specifics does. And yes, the match has to do with their profits, but that has nothing to do with it being classified as a profit sharing plan either. They don't have to make any profit sharing contributions for it to be a profit sharing plan. - Taxman ^Talk 14:57, 22 June 2006 (UTC)

Yes, yes they do, in the conventional sense of the term, and the sense of the term used in the profit sharing plan article. No, the match has nothing to do with their profits; it is purely a function of my contributions and salary. Now, the IRS can use whatever crazy definition of "profit-sharing plan" that it wants to. A 401k as such need not involve any profit-sharing; ergo, under the normal definition of the term, it is not a profit-sharing plan. The company could never make a profit, yet your 401k can still have value. Ergo, it is not a "profit-sharing plan", just a "plan". MrVoluntarist 15:19, 22 June 2006 (UTC)

Lot's of words have meanings beyond their obvious ones. That doesn't mean there's a contradiction. Part of your confusion might be that there is no article on the specific topic profit sharing plan, instead that redirects to profit sharing, the general concept. There's only one sentence in that article on profit sharing plans specifically. And yes, the match does have to do with profits, lots of large companies vary the level of their match as needed according to their profits. Auto companies do it all the time. The company could never again make a profit and the money contributed to a profit sharing plan would still have value and grow according to whatever it is invested in. Basically you don't have enough context about what you are arguing about, so why are you? What fixes do you propose? Nothing you can argue will change the fact that technically a 401(k) is a profit sharing type plan. - Taxman ^Talk 17:15, 22 June 2006 (UTC)

A profit-sharing plan, in common usage, must involve profit-sharing. I'm sorry, but that's just how English works. I accept (like I said probably thrice already) that the IRS may define the term divergent from common usage. All I ask is that it say this instead: "The IRS classifies the 401(k) as a profit-sharing plan, even though it need not involve any profit-sharing, nor have any direct relationship to the employer's profits." We could then make a separate "profit-sharing plan" article that clarifies the ingenious definition that somehow doesn't require profit-sharing. As for your point about "matching contributions being profit sharing" ... no. First of all, matching contributions aren't required. Second, it is still arbitrarly set after the fact, even if it's correlated with profits. Adjusting it due to having a good year is not "profit-sharing" it is just another instance of a company bidding higher compensation for labor due to better ability to sell its profucts. My company has had varying profitability yet always had the same formula for matching contributions.

Does my proposed change sound reasonable? MrVoluntarist 17:36, 22 June 2006 (UTC)

It's workable, but has two problems. It's too long and roundabout on a minor point already basically covered by the word technically which already alerts people to the fact that the common meaning is not being used, and I'm not sure where to check, but that may be a DOL regulatory issue, not technically an IRS one. They're intertwined. - Taxman ^Talk 19:06, 22 June 2006 (UTC)

Alright, we can leave it as "U.S. regulations classify a 401k as a profit-sharing plan, though it need not involve profit-sharing." Using the term "technically" isn't good enough -- that would probably be taken to mean "the 401k meets the literal definition of a profit sharing plan" when, as seen above, they don't, they just meet some regulatory agency's usage of the term, not the "technical" meaning. Is more confusing than clarifying. It should state that it need not involve profit-sharing, so as not to imply a 401k guarantees a share of the employer's profits. (Except in the useless sense that what they pay you must come from the difference between revenues and other expenses.) MrVoluntarist 19:18, 22 June 2006 (UTC)

Dear fellow editors:

I am definitely not an expert in this area of tax law. However, I would like to provide the following materials for discussion purposes with respect to "profit-sharing plan" and "401(k) plan."

The term "profit-sharing plan" apparently is not defined in either section 401 or 414, or in section 7701 of the Internal Revenue Code. However, the technical legal definition is found in the related Treasury Regulations. Immediately below is just the gist of the formal legal definition, and then I'll follow with a more understandable secondary authority summary of the definition -- from the tax law editors at CCH.

The Treasury Regulation at 26 C.F.R. sec. 1.401-1(a)(2) provides (in part):

(2) A qualified [ . . . ] profit-sharing [ . . . ] plan is a definite written program and arrangement which is communicated to the employees and which is established and maintained by an employer --

[ . . . ]

(ii) [ . . . ] to enable employees or their beneficiaries to participate in the profits of the employer's trade or business, or in the profits of an affiliated employer who is entitled to deduct his contributions to the plan under section 404(a)(3)(B), pursuant to a definite formula for allocating the contributions and for distributing the funds accumulated under the plan (see paragraph (b)(1)(ii) of this section) [ . . . ]

The Treasury Regulation at 26 C.F.R. sec. 1.401-1(b)(1)(ii) provides:

(ii) A profit-sharing plan is a plan established and maintained by an employer to provide for the participation in his profits by his employees or their beneficiaries. The plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment. A formula for allocating the contributions among the participants is definite if, for example, it provides for an allocation in proportion to the basic compensation of each participant. A plan (whether or not it contains a definite predetermined formula for determining the profits to be shared with the employees) does not qualify under section 401(a) if the contributions to the plan are made at such times or in such amounts that the plan in operation discriminates in favor of officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees. For the rules with respect to discrimination, see §§1.401-3 and 1.401-4. A profit-sharing plan within the meaning of section 401 is primarily a plan of deferred compensation, but the amounts allocated to the account of a participant may be used to provide for him or his family incidental life or accident or health insurance.

For more understandable secondary authority, the following is an excerpt from the editorial commentary by the staff lawyers and CPAs at CCH, one of the leading publishers of tax law materials in the United States (note: copyrighted material, excerpted under the Fair Use Doctrine):

Profit-sharing plan. A profit-sharing plan is established and maintained by an employer to provide for the participation in profits by employees or their beneficiaries. The plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the occurrence of some event such as layoff, illness, disability, retirement, death, or termination of employment. Amounts allocated to the account of a participant may be used to provide incidental life, accident, or health insurance for the participant or the participant's family.

As indicated by the name, contributions to a profit-sharing plan are characteristically made from the employer's profits. This is not, however, a requirement of the Internal Revenue Code. Contributions may be made even though the employer has no current or accumulated profits, and --contradictory as it may sound --a not-for-profit (tax-exempt) organization may maintain a profit-sharing plan.

--from: CCH Standard Federal Income Tax Reporter ¶17,507.028, Qualified Pension, Profit-Sharing, Stock Bonus and Annuity Plans: Types of Qualified Plans: Major types of defined contribution plans, Copyright CCH Incorporated, a Wolters Kluwer company (downloaded on 22 June 2006 from CCH Standard Federal Income Tax Reporter, CCH Tax Research Network) (bolding added by Famspear).

Now, regarding a 401(k) plan: 26 U.S.C. § 401(k)(2) states (with bolding added by Famspear):

A qualified cash or deferred arrangement is any arrangement which is part of a profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan which meets the requirements of [. . . .]

If a qualified "cash or deferred arrangement" (a qualified CODA) is the same as a "401(k) plan," then I suppose you could say that a 401(k) could part of a profit-sharing plan, or part of a stock bonus plan, or part of a pre-ERISA money purchase plan, etc. Again, this is not my area of expertise. It seems from the language that you could have a profit-sharing plan that was partly a 401(k) and partly "something else."

I hope these materials are of some help. I'll be back later - Yours, Famspear 21:05, 23 June 2006 (UTC)

Thank you very much! This is exactly the distinction I was hoping to add to the article: in the common usage of the term, a 401(k) as such is not a "profit-sharing plan" because it doesn't have to have anything to do with the employer's profits. But the IRS does classify it as one despite this. Remember that just because the employer's individual 401k plan can include contributions that depend on profits, that doesn't make a 401k a profit-sharing plan, just as the fact that your 401k could involve investments in bonds, does not mean you can say "A 401(k) is a bond investment account." MrVoluntarist 21:40, 23 June 2006 (UTC)

Your proposed wording works, go ahead and add it in, though I still think that's way too much explanation for a small point. The term "profit-sharing plan" does have very specific definition that is not necessarily the same as what you would think of when you think of the words themselves. This is very common with technical jargon. So you can't switch back and forth between using the technical definition that is applicable to the topic at hand (401(k) in this case) and the common understanding of the terms unless you're very specific about which you are referring to, and I just don't see the value for this article. Maybe the bit about profit sharing plan should be moved to the technical subsection so that it's even more clear the technical definition is being referred to, not the common understanding. - Taxman ^Talk 22:52, 26 June 2006 (UTC)

I just think it's confusing. I grabbed my hat when I saw that, and thought, "What??? Mine doesn't get me a share of the profits!" (Not that I want it to of course -- I prefer separating labor and investment income.) Someone less knowledgeable could be genuinely misled. ("But isn't my 401k supposed to go up in value because my company had a good year?") I don't know what section to move it to, so I'll just change it right there. I don't think it messes it up too much. Maybe the sentence could be broken up? MrVoluntarist 00:23, 27 June 2006 (UTC)

The point of this whole discussion (enlightening, really) is that the 401(k), which was originally written into law in order to create supplemental tax-advantaged profit-sharing plans, became a more generic vehicle for tax-deferred savings. The interesting parts seem to me to be that (1) employer contributions don't actually have to vary depending on the sponsor's profit; and (2) that participants can also voluntarily defer compensation into these plans regardless of whether the employer contributes. That has made the typical 401(k) a very different thing from the original "profit-sharing" notion - indeed, it appears to becoming a primary retirement savings vehicle in reality. Not a sufficient one, but one all the same. --Gary 19:59, 29 June 2006 (UTC)

Not a sufficient one? You mean, if someone contributed 25% of pre-tax income from age 25 to 65 into diversified investments into a 401(k), the resulting value would not suffice to retire on? Or did you mean something else? MrVoluntarist 20:54, 29 June 2006 (UTC)

It would be great if every participant contributed 25% of pre-tax income from age 25 to 65 into diversified investments in a 401(k), but does that actually happen? I think Taxman's point is that in general a 401(k) participant is now responsible for their own funding and investing of retirement benefits, and for knowing enough to do both well. Many articles have been written on the inadequacy of the 401(k) account and the disappearance of the employer funded plan. Check out http://www.contingencies.org/mayjun06/retirement_0506.asp for one. Jimi magic 19:40, 30 October 2006 (UTC)

What's the difference between a 401K and a 401a?

[The question "What's the difference between a 401K and a 401a was posed by an anonymous user at IP 66.119.205.51 on 25 June 2006.]

Answer: Subsection (a) of section 401 of the Internal Revenue Code relates to the general requirements for a trust to be classified as a "qualified trust" for purposes of section 401. If a trust is a section 401 "qualified trust" then that trust can be exempted from Federal income tax (but not other Federal taxes such as payroll taxes) under section 501(a).

A qualified "cash or deferred arrangement" (a qualified CODA) under subsection (k) of section 401 is simply (uhh, maybe "simply" is a bad word to use here) an "arrangement" that meets the requirements of subsection (k), and is part of either a profit-sharing plan, or a stock bonus plan, or a pre-ERISA money purchase plan, or a rural cooperative plan. Of course, the definitions of those terms are too complicated for me to describe right now (even if I knew what they were without having to look them up, which I don't).

Basically, certain "arrangements" under such plans might make the "trusts to which those plans relate" NOT qualify under subsection (a) of section 401, and therefore not qualify as exempt from Federal income tax under section 501(a). What subsection (k) basically says is: Well, yes, but if the arrangement meets the complicated standards of subsection (k), then you're OK, and the arrangement will NOT cause the trust to disqualify under subsection (a). Therefore, the profit-sharing plan, or stock bonus plan, or pre-ERISA money purchase plan, or rural cooperative plan, that includes a 401(k) will not be disqualified -- or at least, if it is disqualified, it won't be because of the CODA. Now, isn't that clear as a bell?

So, basically a 401(k) is something that can be PART of a plan (a trust) under section 401(a). This means the two concepts are not mutually exclusive.

If you're still confused, congratulations, so am I. That just means we're both paying attention. Yours, Famspear 20:41, 26 June 2006 (UTC)

Famspear, you got exactly the right sections, it makes sense to me and jives with the understanding I had. :) A 401(k) plan is a 401(a) plan that qualifies under the additional rules of section k to allow salary deferral by employees. A 401(a) without that is just a bare qualified plan. I'd have to go look this up (book is at home again), but a pure profit sharing plan without a cash or deferred (401(k)) arrangement would technically be a 401(a), and I can't think of anything else that would qualify under 401(a) and not 401(k). Non profit employers can set up 401(a) plans too if they want to contribute money to their employee's retirement accounts without making their 403(b) an ERISA plan (a whole other ball of wax for a different day). - Taxman ^Talk 22:52, 26 June 2006 (UTC)

401(k) Disbursement

I would like to suggest that an additional area of information for this topic could be the process of inheriting a 401(k) as a spouse or non-spouse beneficiary. The sponsoring company's Summar Plan Document is not mentioned but is important to understanding the process of receiving funds from a 401(k) in which you are named as beneficiary. I'm not qualified to write on the topic authoritatively but hoped someone reading this might be able to shed light on the issues.

Thanks. Joe

Thats a good point, thanks for bringing it up. Both distribution and suvivor issues should be considered along with explaining the plan document. - Taxman ^Talk 19:45, 4 August 2006 (UTC)

Another quibble

The article says:

In addition, 401(k) plans are tax-qualified plans covered by the Employee Retirement Income Security Act of 1974 (ERISA), so assets held by the plans are generally protected from creditors, which in the past was generally not true for IRA plans. This means that workers are generally more protected from their employer entering bankruptcy than with a pension program.

I don't understabnd what's meant here. Isn't a 401(k) in a separate account the employer has no control over and cannot count as an asset, nor be seized by the employer's creditors? So how is a 401(k) "more" protected than an employer pension? It seems the 401(k) is always completely protected during employer bankruptcy (except for the loss of value of shares held through it in the employer), while the employer pension is not protected. I don't see what the "more" here means. Either it's confusing language, or my understanding of 401(k)'s is poor. MrVoluntarist 18:17, 27 September 2006 (UTC)

The paragraph is mixing discussion of bankruptcy of the individual and bankruptcy of the employer, so that's part of why it is confusing. The first sentence is about individual bankruptcy and the second refers to employer bankruptcy as does the following sentences. Hopefully I've clarified it, let me know what you think. I also moved it to a more appropriate place. - Taxman ^Talk 20:02, 27 September 2006 (UTC)

Thanks, that's much better. As previously written it blurred separate issues. But in your edits, I'm not sure about "Erisa protection of 401(k) assets does not extend to workers who fail to diversify." That statement seems out of place in the passage, so I might want to modify it. I mean, ERISA doesn't extend to any loss of value of investment securities in a 401(k), so why specify that it's protection doesn't apply to those who lost money for that specific reason (failure to diversify)?MrVoluntarist 21:14, 27 September 2006 (UTC)

Good point, fixed that too. - Taxman ^Talk 21:26, 27 September 2006 (UTC)

WHICH IS BETTER 401(k) or SEP IRA???

I am a bit overwhelmed and trying to figure out which is better for me to start (per my accountant's advice), and I was wondering if there is a simple comparison chart to be able to see the details of what makes each unique, or if any of you would be able to explain it in basic terms?

My husband and I incorporated earlier this year and are now employees of our C-corp. We were advised to start either a 401K plan or a SEP. I understand the importance of saving for retirement, but don't really understand which might be best for us. And as my husband and I both already have Roth IRA's -- do we continue them as well?

Thanks so much.

Sorry, Wikipedia cannot give advice. Try either other online resources that may be able to give advice or hire an advisor that is paid to give advice. - Taxman ^Talk 21:37, 19 October 2006 (UTC)

You say that you have an accountant; he or she should be able to advise you which would be best for you, based on your particular situation.

That said, I think it would be useful for Wikipedia to have a chart which compares the different types of U.S. retirement accounts (401(k), 403(b), IRA, and the different varieties of each (Roth, Simple, Traditional, SEP, etc.)) objectively. Such a chart might include, for example, who is eligible to use it (self-employed? non-profit? government?), when taxes are taken out (when put in, or when withdrawn), how much you're allowed to contribute per year (and exceptions), what penalties may apply for early withdrawal (and exceptions, etc. That wouldn't be giving advice, just raw information, hopefully heavily referenced.

--Psiphiorg 02:51, 20 October 2006 (UTC)

Missing controvery section

Hey I was thinking that we might want to add a section on the controvery about employers getting rid of traditional pension plans in favor of 401 (K)s that are less expensive to the company.- Moshe Constantine Hassan Al-Silverburg | Talk 06:48, 8 November 2006 (UTC)

That's not really a 401(k) issue, it's a defined benefit vs defined contribution in general issue, and should probably be covered in the latter article as a separate one instead of in pension. It's also not terribly controversial, but is still worth covering. - Taxman ^Talk 13:17, 8 November 2006 (UTC)

What would such a section add to the user's understanding of 401(k) plans? While there are some authors out there who have argued that this was all just a big con, or a way for the government or big business to step on the little man, that's just their interpretation of the facts. It's not Wikipedia's place to interpret facts, merely to present them. The fact is that IRA's and 401(k)'s are the primary vehicles with which today's American workforce will provide for their retirement; the most I'd do is a short section referencing the books or films, such as [http://www.amazon.com/Great-401-Hoax-Financial-Security/dp/0738208523 The Great 401(k) Hoax.] -- A. 01:50, 7 August 2007 (UTC)

Getting back to Taxman's point, I don't think it's that big of a controversy; of the top 60 results Amazon provides, that's the only book suggesting 401(k)'s are a bad thing, or were a con job. The others were either neutral or [http://www.amazon.com/401-k-Millionaire-Brian-OConnell/dp/0375502130/ref=sr_1_13/002-7432809-8444841?ie=UTF8&s=books&qid=1186450908&sr=1-13 positive]. -- A. 01:50, 7 August 2007 (UTC)

What does 401(k) stand for?

I get the idea that it's some sub-section of some law, or bill, or legal code, but the article doesn't say exactly. It's probably worth adding a sentence in the introduction for. —Preceding unsigned comment added by 172.166.84.61 (talk) 07:41, 21 December 2007 (UTC)

I added a clarification and a link. Famspear (talk) 16:38, 12 January 2008 (UTC)

Section "Details"

I cannot understand the word "default" in the sentences related to fiduciary of a plan:

"And while ERISA (Employee Retirement Income Security Act of 1974) defaults reporting and disclosure to the plan sponsor, there is no default for a fiduciary, and the plan sponsor must either identify at least one "named fiduciary" in the plan document or it must write a procedure into the plan for appointing the named fiduciary. While ERISA defaults total discretion and control over plan assets and investments to the plan's trustee, many plan sponsors override this default structure by giving responsibility for selecting and monitoring plan investments to the named fiduciary, often a committee of internal employees, or a mix of internal employees and outside persons bringing in particular fiduciary expertise.

It seems there should be more appropriate word there or this thought should be lay out by another way. Besides, I cannot understand the difference between a trustee and a named fiduaciary - why do sponsors override required structure? —Preceding unsigned comment added by 81.25.53.40 (talk) 12:55, 17 February 2008 (UTC)

Well the quoted material makes sense to me, but that doesn't help you. It is certainly far too technical for jumping into right after the lead section, but that's a different issue. Default in all of those uses is the normal everyday usage of "in the absence of different instructions, this is what is done". What's really the hard part is to understand the difference between the sponsor, the trustee, and the named fiduciary. Basically they are different roles that are involved in running a plan. The section you quoted is accurate, but could be more clearly written for a layperson. The trustee by default has total discretion over the plan assets, but what it says is that is often delegated to a named beneficiary, which is a person or group assigned to take on a fiduciary role. To really understand it you'd have to do some background reading on trustees in general, fiduciaries, and then 401(k) plan administration. - Taxman ^Talk 03:35, 1 June 2008 (UTC)

HCE paragraph is dated and appears to be from some other source

The text uses examples from 2006 and uses "we" to discuss the comparisons which is not appropriate for this article. —Preceding unsigned comment added by 65.190.187.178 (talk) 19:57, 23 June 2008 (UTC)

401K was not executive package but a possible replacement of Social Security

We were told Social Security may not be available for us, when we retired. Therefore, the government set up the 401K program to allow us to save our own money, investing it in various plans with stipuulation we could not withdraw until 59. This program was not in lieu of our employer sponsored programs, but an addition. Employers did not have to contribute a dime, but many did. As with Medicare, information has been lost and employers got rid of pension plans, replacing with 401K programs only! —Preceding unsigned comment added by 69.149.66.37 (talk) 15:03, 6 November 2008 (UTC)

HCE paragraph is not what I remember

Before I was forceably retired in 2003, the criteria for setting the division between NHCEs and HCEs was not as is described in the HCE paragraph. Have the rules changed since then or is the paragraph flat wrong?

Where I worked, the company (or division) fund manager was required to periodically compute a salary cutoff based on the distribution of salaries within the company (or division) according to some arcane IRS rule. Employees with salaries above this level were labeled as "highly compensated" and were limited in the amount they could invest in their 401k account. The cutoff typically came in at about the national average income level, which implied that anyone earning an above-average salary was "rich" and, for some reason, must be treated differently. I would have invested more in my 401k account but was prevented from doing so by the HCE rule.

The HCE rule is discriminatory. Why should one employee's salary level have any influence on another's decision to participate? Why would the amount of my investment (which was solely my business) matter to anyone else? As I see it, the HCE rule is an example of class warfare conducted by some in the U.S. Congress (who of course, made the rules). This is probably a digression from current content, but I think issues like this need to be discussed if Wikipedia is to be truly unbiased in its coverage of the subject. Virgil H. Soule (talk) 14:48, 12 November 2008 (UTC)

I suppose your employer was using the "top paid group" definition and for the company you were at that happened to work out that way. And you're right, the article didn't reflect that part of it, so I fixed that. Thanks for the catch. I can't see any way it would benefit your company to elect that definition since typically they want anyone under the highest IRS HCE limit to contribute as much as they can in order to bring the non-HCE average up as much as possible so the HCE's can contribute as much as they can. Though I suppose anything can happen so if there was a strange income and 401(k) contribution distribution at your company, maybe defining the HCE limit lower with the alternate definition worked better for them somehow. It's also possible that whoever decided to do it that way was mistaken and didn't realize they could use the usual HCE test, but if it's a larger company it becomes less likely that someone either at the employer or the 401(k) administrator wasn't competent enough to catch it. As far as it being discriminatory, you're right and yes that was specifically planned. The goal was to make sure that 401(k)'s weren't just a tax benefit for the "rich" and that for the rich to benefit, others had to as well. But that is already in the article, so I'm not sure what more should be said. - Taxman ^Talk 22:27, 12 November 2008 (UTC)

Borrowing from your 401k

I’d like to question your statement that “Loans are paid back by post-tax monies, so there are substantial tax implications in taking a loan from pre-tax monies.”

It seems to me this is bogus reasoning. Consider, for example, a simple case in which I borrow $50,000 from my 401k, keep it in my sock drawer overnight, and then pay it back. I’m not paying the loan back with “post-tax monies”. It’s the same pile of money, and no taxes are paid. Now, you can argue that this example is not realistic, but it strips the transaction down to its bare essentials, and the truth it reveals holds in more complex scenarios.

Next consider that I need $50,000 to buy a gas-guzzling Hummer. I don’t have the cash, so my choices are to borrow commercially or borrow from my 401k. If I borrow from my 401k I take out $50,000 and I repay $50,000 plus interest. If I borrow commercially I leave the $50,000 in my 401k, and I borrow $50,000 from the bank and repay the $50,000 commercial loan plus interest. Either way, I have to repay the $50,000 capital. It’s irrelevant that the money is indeed “post-tax” because I paid income tax on it as I earned it: there’s no additional tax penalty on the capital when I borrow from the 401k vs. borrowing commercially.

Now let’s look at the interest. Consider your finishing position in the two scenarios described above. If you borrow from your 401k, at the end of the loan period you have the $50,000 returned to your 401k, plus the loan interest. If you borrow commercially, at the end of the loan period you have the $50,000 in your 401k (it never moved), plus the investment return earned on the $50,000 during the loan period. If your 401k is invested in interest-bearing instruments like money market and bond funds, you’re probably worse off borrowing commercially because you typically borrow money at a higher rate than you can make on it. (We could get into a lot of arcane tax detail here, e.g., deductibility of interest on a home equity loan vs. later taxing of the interest you pay yourself in your 401k, but these are second-order issues.) If, on the other hand, your 401k is invested primarily in stocks, your finishing position is that you either have loan interest (guaranteed) or stock gain (or loss) in your 401k. Essentially, this means that if you choose to borrow commercially rather than from your 401k, you’re borrowing money to invest in stocks, which in my mind is always a bad idea for individual investors.

Now there is a very good reason not to borrow from your 401k, and it’s that you have to repay the loan immediately if you lose your job. That’s a serious risk. But not for everybody. Let’s consider a third situation, which is my own. I need money to pay for my sons’ college tuition. I have the money in traditional IRA’s, but I’m in such a punitive tax bracket that if I withdraw the funds from the IRA (penalty free, thanks to the exception for tuition), the government will take half of it. Borrowing from my 401k therefore looks attractive. Do I need to worry about losing my job and having to repay the loan immediately? No. If I lose my job, I can repay the loan by withdrawing from my IRA. As long as one of the boys is still in school (true for the next three years), I don’t pay a penalty, because it costs as much for a year at college (almost $50,000) as I can borrow from my 401k. Furthermore, if I lose my job my income will plummet in that tax year, so I’ll pay far less tax on the IRA withdrawal. In short, I have a good emergency plan to combat that one valid reason for not borrowing from my 401k. —Preceding unsigned comment added by Chicago07 (talk • contribs) 19:50, 24 November 2007 (UTC)

As far as I know, you're right. Many popular financial writers contradict you, and as far as I know, they're just wrong. The tax treatment of a 401(k) loan, if it is repaid on time, is designed to be identical to that of any other loan.

Simplifying, one might imagine a world with one interest rate: you can buy a money market fund in your 401(k), and that returns 10%, or you can borrow money from your 401(k) at 10%, or you can borrow money elsewhere at 10%. I have $30k the plan, and I need a $10k loan, that I will repay a year from now.

I could borrow from my 401(k). In that case, I have $20k left invested in the fund. At the end of the year, my fund has grown to $22k, I've repaid the $10k loan, and I also paid $1k interest. So the plan is at $33k. The loan wasn't a taxable event, so my tax situation for this year was unchanged. I paid $1k in after-tax interest.

Or, I could borrow the money commercially, and leave my 401(k) untouched. In that case, I've got $30k invested in the fund. That grows to $33k by the end of the year. Once again, my tax situation for this year is unchanged, and I've paid $1k in after-tax interest to the commercial lender.

A real 401(k) might invest in stocks, or other instruments that achieve a higher return than the interest rate you're paying on the loan; so you might be losing out a bit more on your investments than in the example above. But, you've also avoided the risk. (If you prefer, then you can take out a margin loan, and use that to buy more stock, to get your risk and return back up.) 74.61.11.168 (talk) 10:48, 19 December 2007 (UTC)

If you borrow from your 401(k), you pay it back with post-tax money. Then when you withdraw from it later (say, at retirement), you are taxed again on everything. This is detailed, for example, on the Fidelity FAQ about 401(k) loans. Omehegan (talk) 00:22, 7 August 2008 (UTC)

Fidelity states (correctly) that a 401(k) loan is repaid with after-tax dollars. This does not mean that these loans have tax disadvantages, or that you somehow get taxed twice! The "income" that you received when you borrow the money is not taxed; if you imagine borrowing ten thousand dollars from your 401(k), then repaying it the next day, then it should be obvious that your tax obligation for the current year is unchanged, and the balance of your 401(k) is unchanged. The tax treatment of 401(k) loans is identical to that of any other loan. 96.26.222.129 (talk) 21:48, 13 February 2009 (UTC)

Then, isn't the last sentence of the Wikipedia paragraph covering this topic incorrect? Currently it says the opposite, with "Therefore, upon distribution/conversion of those funds the owner will have to pay taxes on those funds a second time." Asked another way, is there a "NOT" missing before "have to pay taxes on those funds A SECOND TIME." ? Thhowl (talk) 16:41, 19 July 2011 (UTC)

Ted Benna

It seems he should be credited with discovering the 401k. Here is a story about him at Time Magazine http://www.time.com/time/80days/800920.html How about a brief mention in the history section. 05:47, 1 March 2009 (UTC)jojopuppyfish —Preceding unsigned comment added by Jojopuppyfish (talk • contribs)
Although Ted Benna claims to be the father of the 401(k), this is disputed by other people familiar with the introduction of the first 401(k)'s.

My link is often reverted. why?

The links I submitted were for the individual blog entries which are purely informative in nature and have no commercial interests in them whatsoever.
Hence I kindly consider the links in your external links section.
spam://www.brooklyntroy.com/index.php/blog/Using-your-Self-Directed-IRA-to-obtain-non-recourse-loans.html —Preceding unsigned comment added by Sundar77 (talk • contribs) 09:18, 26 October 2009 (UTC)

Looks like it was reverted automatically by a Bot. This is down to external link policy WP:ELNO - links normally to be avoided: "Links to blogs, personal web pages and most fansites, except those written by a recognized authority. (This exception is meant to be very limited; as a minimum standard, recognized authorities always meet Wikipedia's notability criteria for biographies). " Cassandra 73 (talk) 13:03, 26 October 2009 (UTC)

Can i resubmit the links to the blog? Please advice. —Preceding unsigned comment added by 202.129.197.234 (talk • contribs) 05:07, 30 October 2009 (UTC)

Risk

I plan to put the following 2 paragraphs on the main page:Attorney18 (talk) 15:34, 24 October 2011 (UTC)

Unlike defined benefit ERISA plans or banking institution savings accounts, there is no government insurance for assets held in 401(k) accounts. Plans of sponsors experiencing financial difficulties, sometimes have funding problems. Fortunately, the bankruptcy laws give a high priority to sponsor funding liability. In moving between jobs, this should be a consideration by a plan participant in whether to leave assets in the old plan or roll over the assets to a new employer plan. Attorney18 (talk) 10:38, 22 October 2011 (UTC)

Recent court decisions have vastly increased the risk associated with holding assets in company sponsored defined contribution accounts. Prior to these court decisions, the contributions made into company sponsored defined contribution accounts could not be reduced due to the anti-cutback rule of ERISA §204(g)2, which prohibits the reduction of accrued benefits or the imposition of greater restrictions on the receipt of accrued benefits. However, since 2007 in the case: Register v. PNC Fin.Servs. Grp., Inc., 477F.3rd 56 (3d Cir. 2007), the courts have held that plan sponsors may take back prior contributions to defined contribution accounts. As the plan sponsor owns all defined contribution accounts until the moment of disbursement, the courts allow the sponsors to take back contributions, not distinguishing between the sponsor attributable contributions and the employee attributable contributions. In the June 2011 case: Engers v. AT&T, 10-2752 (3d Cir. 2011), that also relied on the case: Jensen v. Solvay Chemicals, Inc., 625 F.3rd 641 (10th Cir. 2010) the court legitimized the action of a large, continually profitable, national employer that instituted a policy to take back all the contributions made to employees’ defined contribution accounts. In the 2011 Engers case, the employer, AT&T, felt it had over-compensated its older workers in prior years and had instituted a policy of taking back the contributions to such employees’ defined contribution accounts at the moment of each employee’s retirement. As this policy would be upsetting to its workers, the company publicized its continued annual contributions to employee defined contribution accounts, including providing periodic, detailed bookkeeping statements, without informing the employee it was also taking back all the contributions it was making at the time an employee requested disbursement. Some employees had 8 years of contributions, the entire assets of their defined contribution account, taken back. The courts condoned AT&T’s actions. Participants in pension plans having defined contribution accounts may wish to consider whether they should withdraw company contributions as soon as received, even though suffering penalties, rather than running the risk of having the sponsor take back all account assets at the time the employee requests disbursement.Attorney18 (talk) 15:34, 24 October 2011 (UTC)

A few comments

The article is rather hard to read and could be improved. A few comments are necessary.

1. The last paragraph in the "Withdrawal of funds" is ugly and needs to be re-written. Expressions like "Some will argue" and words like "you" and "your" should be avoided.

2. In the RMD section I read "Other than the exception for continuing to work after age 70½ differs from the rules for IRA minimum distributions. The same penalty applies to the failure to make the minimum distribution. The penalty is 50% of the amount that should have been distributed, one of the most severe penalties the IRS applies." First of all, the first sentence needs to be fixed. Secondly, no penalty is mentioned before "The same penalty applies".

3. "That is for plans whose first day of the plan year is in calendar year 2007, we look to each employee's prior year gross compensation (also known as 'Medicare wages') and those who earned more than $100,000 are HCEs. Most testing done now in 2009 will be for the 2008 plan year and compare employees' 2007 plan year gross compensation to the $100,000 threshold for 2007 to determine who is HCE and who is a NHCE." "we" should not be used. "now" is unnecessary.

4. "Note: an unincorporated business person is subject to slightly different calculation." Is it proper to start a sentence like this? I don't think so.

ICE77 (talk) 05:19, 23 July 2012 (UTC)

"...these contributions are made on an after-tax basis and all earnings."

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