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401Kafe
Eligibility -
Frequently Asked Questions |
When can
I begin to participate?
That depends on the rules of
your specific plan. Many companies require new employees to complete six months or even up
to a year of service before they're eligible. Some companies also require employees to be
at least 21 years old to participate.
Ask your company's human resources or benefits representative for information on your
plan.
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What
does vesting mean?
The "vested" portion of your 401(k) account is the part that belongs to
you and cannot be forfeited if you leave your job.
There are two types of 401(k) contributions: the contributions you make and the
contributions your employer makes (such as "matching" contributions). The money
you contribute, adjusted for any investment gain or loss, is always 100% vested. That
means this money is always 100% yours. The contribution your employer makes, on the other
hand, may be subject to a vesting requirement. This means that you must earn your
employer’s contribution over time.
Vesting requirements are very common in 401(k) plans. The two most common types of vesting
schedules are graded vesting and cliff vesting.
With graded vesting you own an increasing portion of the employer contribution each year
you are with your company. If your company had a five-year vesting schedule, you would be
20% vested after one year, 40% vested after two years, etc. By law, the longest vesting
schedule a 401(k) plan can have is 7 years. Employees must be at least 20% vested after 3
years, 40% vested after 4 years, 60% after 5 years, 80% after 6 years and 100% after 7
years.
With cliff vesting you become 100% vested after a set period of time. So if your vesting
requirement is 5 years and you leave your company after 4 years, you won’t get any of
the employer contributions.
The reason companies include a vesting requirement in their 401(k) plan is that it
provides an incentive for employees to stick with the company.
Say, for example, your company's 401(k) plan has a 4-year vesting schedule. But after two
years, when you are 50% vested, you decide to leave your job.
Your 401(k) account balance consists of:
Your contributions (adjusted for investment gain or loss) = $7,000
Employer contributions (adjusted for investment gain or loss) = $3,500
Your total account balance is $10,500. But your vested account balance is only $8,750
($7,000 plus 50% of $3,500). So by leaving your job after only two years, you've
essentially "lost" $1,750.
One last tip: if you are planning to leave your job, make sure you find out when the
employer matching contributions are deposited into the account. Some employers deposit
matching contributions every pay period, but others only make the deposits once a year. In
such a case, if you were to leave your job before the contribution for the most recent
year were deposited, you could lose a whole year's worth of matching contributions.
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When
will my company's contribution be vested?
That depends on the rules of your particular plan. Plan sponsors have some flexibility in
deciding vesting schedules when the plan is set up. In some plans, participants are 100%
vested as soon as they join the plan, while in others, participants have to complete a
number of years of service before they're fully vested.
By law, all participants must be fully vested after seven years of service with the
company. Additionally, there are a few guidelines that typically apply to most plans. For
instance, in most plans, a participant automatically becomes fully vested when he or she
turns 65, becomes disabled, or dies, or if the plan is terminated.
You should check with your company's human resources or benefits representative regarding
the rules of your specific plan.
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Can
I have a 401(k) account with my current employer even after rolling over a 401(k) from my
previous employer into an IRA? Can I have both accounts?
You may have a 401(k) with
your present employer after rolling over a previous 401(k) into an IRA. You may hold any
number of IRA accounts in addition to your 401(k), as long as you meet the necessary
requirements and do not exceed the aggregate limits for contributing to them (a total of
$2,000 a year for the combined IRAs).
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Can
a self-employed individual establish a 401(k)?
Regular 401(k) plans are
normally established by for-profit companies that have "more than a few"
employees. While there is no set minimum for the number of employees required, a regular
401(k) is probably not the best plan choice for a self-employed person due to plan set-up
expenses and the time commitment surrounding plan administration.
For self-employed people, there are several great tax-deferred retirement savings options
available beyond the traditional IRA. They include:
Simplified Employee Pension IRA (SEP-IRA) Plans – SEP plans are essentially
individual retirement accounts (IRAs). Like an IRA account, the money you contribute to a
SEP-IRA is tax-deductible and your investment earnings grow tax-free until you withdraw
funds at retirement. You can contribute up to 15% of your compensation or $30,000,
whichever is less, each year.
Keogh Plans – If your business is not incorporated, you may be eligible to establish
a Keogh plan. Keogh plans are generally more flexible than SEPs and may allow you to save
even more toward your retirement than you can in a SEP plan. Keoghs can be set up as
either a defined contribution plan (like a 401(k) or SEP) or as a defined benefit plan
(like a traditional pension). Along with added flexibility, Keogh plans also bear
additional complexity – if you're considering a Keogh plan, you should probably seek
the advice of a pension professional.
SIMPLE IRA – A SIMPLE IRA works a lot like a traditional IRA except that you can
contribute more (up to $6,000, or 15% of salary) and employer matching contributions are
allowed. If you are self-employed, you can contribute $6,000 as an individual and your
company can match your contributions dollar-for-dollar, for a total annual contribution of
$12,000. Another plus is that the SIMPLE plan you set up now can grow with your company
(up to 100 employees).
SIMPLE 401(k) – A SIMPLE 401(k) works much like the SIMPLE IRA with a few notable
exceptions. On the downside, it requires a lot more reporting and administration than a
SIMPLE IRA. On the upside, a SIMPLE 401(k) allows for hardship withdrawals and loans. The
maximum annual contribution is $10,000, and the maximum annual employer match is $4,800.
Setting up any of these plans for yourself is as easy as visiting your local bank, broker,
insurance agent or mutual fund company.
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