Help for retirement plan participants - FAQs Part 1

Participants in retirement plans often have questions about their plan, and sometimes it’s difficult to find a quick answer to those questions.  As Third Party Administrators of retirement plans, we have put together this set of Frequently Asked Questions (FAQs) with the hope that we might be able to help people find a quick answer to several basic questions.

These FAQs are general in nature.  A participant in a retirement plan should confirm with their Plan Administrator any details specific to their own plan.

Q1.       Where can I look to find basic provisions for my plan?

A1.       Every retirement plan should have a Summary Plan Description (SPD).  The SPD should be provided to each employee within 90 days of employment or meeting the plan’s eligibility requirements. 

            The SPD provides a “plain English” description of the plan’s basic features including eligibility, contribution types, distribution procedures, and claims information.

            The SPD is typically updated once every five years or so.  If there is a change to the SPD before it is updated a Summary of Material Modifications should be provided to explain the change.


Q2.       Can I request a distribution (payment) from my plan at any time?

A2.       Distributions from retirement plans are restricted.  Payments may be requested when one of the following events occurs:

  • You reach the retirement age as defined by the plan
  • You suffer a disability (total and permanent)
  • Upon your death payment can be made to your beneficiary
  • You are no longer employed by the company that sponsors the plan


Q3.       Is there any way I can request a payment from my plan while I’m still working for the company?

A3.       Maybe.  Check your plan’s SPD to see if one of the following options is available to you while you’re still working for the company:

  • Loan – some plans allow you to borrow funds and pay the money back over time (see Q7 below)
  • Hardship withdrawal – you may be able to request a distribution of your own contributions from the plan for certain financial hardships.
  • In-service withdrawal – your plan may allow you to withdraw funds while you’re still working for the company if you have attained a certain age.


Q4.       When can I receive a distribution (payment) of benefits from my plan?

A4.       The law says that a plan must pay benefits when the last of the following events occurs:

  • The participant attains the retirement age as defined by the plan
  • The employee participated in the plan for 10 years or more
  • The participant dies
  • The participant is no longer employed by the company that sponsors the plan.

Many plans have a policy to pay benefits sooner than the times outlined under the law.  Some plans will offer payment as soon as all contributions have been posted to a participant’s account.  Others require a waiting period of a year or more before payments are made.  The distribution timing for your plan should be outlined in your plan’s SPD.


Q5.       Are there tax consequences when I receive a payment from the plan?

A5.       In general, yes cash payments from a retirement plan are taxable.  The amount of tax depends on your tax bracket for the year.  The payment you received from the plan will be added to your other income on your tax return. 

            If you are not at least age 59 ½ when you take a cash payment from the plan, you may also be subject to a 10% federal excise tax and state excise taxes (2 ½% in California).

            Federal taxes are withheld from cash payments made to you (20% of the payment amount is withheld).  That withholding is applied to your tax liability.  If you owe more than the amount withheld, then you may owe more when you file your taxes the following year.  If you owe less than the amount withheld, then you may be eligible for a refund.


Q6.       Can I choose a rollover to avoid paying taxes?

A6.       Yes, if you ask to have your distribution paid directly to another retirement plan or IRA of yours then you will not have to pay any federal or state taxes on the payment.

            Some distributions are not eligible for rollover though.  For example, you cannot rollover:

  • Required minimum distributions paid after attainment of age 70 ½
  • Hardship withdrawals


Q7.       Can I borrow money from my account?

A7.       If your plan has a loan feature, then the details should be outlined in your plan’s SPD.  Common loan rules are as follows:

  • You can borrow up to 50% of your vested account balance
  • There may be a minimum loan of $1,000
  • You must pay the loan back within 5 years
  • You must make level payments of principal and interest at least once per quarter
  • The interest rate charged is typically prime rate plus 1% or 2% (prime rate is 3.25% in 2012)
  • If you fail to make payments on time, the principal balance may become taxable to you
  • If you terminate employment, then your loan may become payable immediately


View Help for retirement plan participants - FAQs Part 2.

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