FAQ: Participants

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 Hardship Withdrawals


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What are the qualifying reasons for a hardship withdrawal?

In accordance with IRS regulations, a participant may apply for an in-service withdrawal based upon financial hardship. The safe harbor qualifying reasons are as follows:



  • Purchase of a primary residence
  • Educational expenses for the next 12 months of post-secondary education for the participant, participant’s spouse, participant’s child (children) or other dependent(s)
  • To prevent eviction from, or foreclosure on, the participant's principal residence
  • Medical expenses for oneself, one's spouse or one's dependents
  • Funeral expenses for the participant’s parents, spouse or dependents
  • Expenses for the repair of damage to the participant’s principal residence that would qualify for the casualty deduction.



Please be aware that the plan administrator is the final arbiter for certifying participant applications in all cases.


 


What amount is available for the hardship distribution?


The distribution cannot exceed the amount of the immediate and heavy financial burden. The amount of the immediate and heavy burden may include any amount necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution.


 


How soon can the participant expect to receive a check for hardship distribution?

By taking into account the time necessary for our affiliated investment companies to process the participant request, and the time necessary for the participant (or financial institution) to receive payment, we estimate the total time for this process to be 7 to 10 business days.


 


What are the tax consequences associated with the hardship distribution?

Depending on the age of the participant, there are different tax scenarios that may apply. If the participant has not attained age 59 ½ an IRS penalty of 10% will apply. Regardless of the amounts withheld at the time of a distribution, the full tax consequence will ultimately be decided upon the completion of the participant's personal tax return. Hardship withdrawal funds cannot be rolled over, and IRS withholding on funds withdrawn from Salary Deferral accounts is not mandatory at the time of distribution.


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Loans 


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How much can a participant borrow from his or her 401(k) Plan?



401(k) loans are limited to the lesser of 50% of the participant's vested plan balance or $50,000 and are repaid over five years via payroll deduction (or in a lump sum upon separation from the employer). Details are outlined in the Plan Document or SPD. There is also a small processing fee.


 


Is it now allowable for owners and partners to take out loans from their 401(k) plans?


Yes; the law was amended, effective in 2002. Owners of small businesses of all types (including sole proprietorships and partnerships) may now take participant loans from a plan they sponsor, subject to the same participant loan rules that apply to all retirement plans.


 


Should I take a hardship distribution or a loan?


Regulations require that the participant make use of available loans before applying for a hardship distribution. Regulations also require that a plan applies reasonable standards in determining whether to grant a request for a loan, including the credit worthiness of the participant, and the participant’s ability to repay the loan. In this case, the plan administrator can reject the loan application.


 


What is the negative tax impact on taking a 401(k) Loan?


When you pay back your loan, you do so with post-tax (after-tax) dollars. Consequently, a $100 loan repayment reduces your take-home pay by $100. Worse, when you take the money out of your 401(k) plan during retirement, you will pay tax on the same money again.


 


Will a 401(k) loan affect my credit?


Regardless of your credit score, you’ll pay a competitive interest rate. No credit check. The rate is often in the neighborhood of prime, consistent with typical consumer loans. Better yet, you’ll pay the loan, including the interest, to yourself - not to a bank. The entire amount of each loan repayment goes to your 401(k) account.


 


What happens if I default on a Loan?


One point to consider with 401(k) loans is that you will have to repay the loan in full before you take a plan distribution.  Otherwise, the full unpaid loan balance will be considered a taxable distribution, and you could also face a 10% federal tax penalty on the unpaid balance if you are younger than age 59 1/2. Individuals often are given a grace period of 60 days to arrange plan-loan repayment after leaving work.


 


How long do I have to pay off my loan if I quit my job?


Typically, if you quit working or change employers, it is not uncommon for plans to require full repayment of a loan within 60 days of termination of employment or it will default.


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Regular 401(k) vs. Roth 401(k)


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What is the difference between a regular 401(k) deferral and a Roth 401(k) deferral?




Under either a regular 401(k) deferral or a Roth 401(k) deferral, you make a deferral contribution by electing to set aside part of your pay (by either a certain percentage or a certain dollar amount). For a regular 401(k) deferral, the taxable wages on your W-2 are reduced by the deferral contribution; therefore, you pay less current income tax.   However, you will eventually pay tax on these contributions and earnings when the plan distributes the regular 401(k) deferrals and earnings to you. The result is that the tax on the regular 401(k) deferrals and earnings is only postponed.  


 


A Roth 401(k) deferral is an after- tax contribution, which means that you must pay current income tax on the deferral.   Since you have already paid tax on the deferral, you will not pay tax on it again when you receive a distribution of your Roth 401(k) deferral. In addition, if you satisfy certain distribution conditions, then you will not have to pay tax on the earnings either.  This means that the distribution of the Roth 401(k) earnings can be tax-free, not just tax-postponed.   


 


How do I get a tax-free distribution of Roth 401(k) earning?


 


If the distribution of your Roth 401(k) deferral account is made when you are at least


59 1/2, or upon your death or disability, then you may be entitled to a tax-free distribution of earnings. However, you must also satisfy the “5-year participation requirement.”   The “5-year participation requirement” is satisfied once you have had funds in your Roth 401(k) account for 5 years. However, you do not have to make Roth 401(k) deferrals in each of the 5 years.


 


If a distribution from my Roth 401(k) does not meet the conditions for a tax-free treatment, what are my income tax consequences?


 


If a distribution from your Roth 401(k) deferral account does not satisfy the conditions to be tax-free, then you will pay income tax on your distributed Roth 401(k) earnings, but you will not be taxed again on the distributed Roth 401(k) deferrals. However, you may avoid the tax on the Roth 401(k) earnings by rolling over the Roth 401(k) deferral account to a Roth IRA, or other retirement plan that includes Roth deferral provisions. 


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Termination Options


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What are my options now that I have terminated employment with my former employer?



 


As a participant of a plan administered by GF Pension Corp., contact us to discuss your options with a financial professional by calling (610) 974-9525.


 


 -  Roll over to an IRA


 


A rollover IRA is a type of IRA that is set up to receive distributions from a 401(k) or other qualified retirement plan. Once the rollover IRA account is opened and your 401(k) assets are transferred to it, you can invest your money in a variety of investment options at your discretion according to your financial goals and tolerance for risk.


 


 -  Stay in your existing plan or move to a new employer plan


 


You may be able to keep your money in your previous employer’s plan. Also, a new employer may allow you to transfer your 401(k) money to their plan. Check with your plan administrator for rules that may be specific to your plan.


 


 -  Take a cash distribution


 


You can remove your money from your 401(k) plan and take it in cash. Depending on your age, there are different tax scenarios that may apply. If you have not attained age 59 ½ an IRS penalty of 10% will apply. Regardless of the amounts withheld at the time of a distribution, the full tax consequence will ultimately be decided upon the completion of your personal tax return. 


 


 -  Roll over to a conversion Roth IRA


 


Beginning in 2010, the annual income restrictions will be lifted, allowing taxpayers the option of converting assets in previous employer’s 401(k)’s to a Roth IRA. This decision should be reviewed with your tax advisor.


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Contribution Limits


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