Top Frequently Asked Questions about 401(k) Plans

a) Contributions

I quit my previous employer and came back six months later. I participated in the 401k plan before I left. Do I have to wait one year before I can contribute to the 401(k) plan again?

- No you do not have to wait 1 year to contribute to your company’s 401(k) plan if your break in service is less than 1 year. If you have already satisfied the eligibility requirements the first time, you do not have to do it the 2nd time if your break is less than 1 year.
I cannot afford to contribute to my 401(k) plan right now. If I don’t join my plan as soon as I am eligible, do I lose my right to contribute later?

- If you cannot contribute right now, you can join your company’s 401(k) plan later or whenever you become eligible and the plan rules allow you to. However, it is advised to contribute to a 401(k) because your retirement years will demand the kind of money that social security cannot guarantee you. Even if you contribute only 1% of your gross pay towards your 401(k), it means something.
I changed jobs last year and contributed to 2 401(k) plans administered by my 2 employers. When I got my W-2 forms, I realized that I contributed more than the maximum 401(k) contribution limit. What should I do?

- You can leave the extra contributed money in the plans but you could be taxed on it twice – once in the year of contribution and another when you withdraw it. However, you will be taxed only once if you notify your organization and withdraw the excess money before April 15 of the year in which you contributed too much. You have to decide from which plan you will withdraw the money from. It can be either of the plans, or you can split the withdrawal between the two plans. Before you do so, be sure to check whether your plan allows ’corrective distributions’ which are meant to correct these kinds of situations.

- Before you withdraw from either of the plans, be sure to check in which plan you received more employer matching 401(k) contributions, obviously you will want to withdraw lesser or not at all from the plan where you got the higher match rate. Also consider your employer’s 401(k) vesting rules to determine if you will be with the employer for a longer period of time, and how sooner your matching contributions get vested.

When can I change how much I contribute and how often?

- These rules are set by your 401(k) plan administrator and they can be very flexible or restrictive. The most flexible these plans can get is to allow you to have varying contributions each pay period, while others may allow you to change this only once in the beginning of the year. This is a restrictive 401(k) plan.

I recently changed jobs but my new employer does not offer a 401(k) retirement plan. Can I continue to make contributions to my old 401k?

- You can’t make additional contributions to your old 401(k) with your old employer simply because you are no longer an employee of your former organization. However, you can make contributions to an Individual Retirement Account (IRA), although the contribution limit is lower than a 401(k). Also, whether your IRA contributions are tax deductible depends on the type of IRA you contribute to, and your income levels.
Should I stop contributing after I have contributed enough to get the full employer match each year?

- You should contribute as much as your budget allows, as well as try to get the full employer match. Remember, the reason you are saving is for your retirement years when you will NOT have that employment income you have now, so the more you put away now, the more you will have later.

Can my company change the employer 401(k) match in times when it is not doing so well?

- Your employer can change the match at any time by notifying you. The only time it cannot change is when it has a contractual obligation with a union or employee body or a collective bargaining agreement that requires a specific matching contribution. Most companies will tell you a few months in advance before they change the matching contributions.
Participants in my company’s 401(k) plan are not able to choose their investments while other employers allow this flexibility. Is this legal and fair?

- By law, employers are not required to let you choose your own set of investments for your company administered 401(k) plan. The employer is allowed to plan with your plan’s trustee to see how the money will be invested. Thus, it is legal for employers to determine where your 401(k) money is invested, however very few employers do this and most will take your input and allow you to make your own decisions.

- Employers sometimes prefer to choose the investments for their employees because it makes the cost of administering the 401(k) plan easier and saves the cost of having to educate employees about their investments.

- Most employers however will give you the choice of several mutual funds from different industries of the economy to allow you to be diversified.