SIMPLE 401k

401(k) Plan Participants

If you're a participant in or eligible for your employers 401(k), you probably have questions. Since every plan is individually designed by the group, there are no pat answers to all your questions. Below we address some of the more common questions that have uniform answers. If your question is not answered, contact your plan administrator (usually a person in your human resources dept.) and request a copy of your 401(k) plan's "Summary Plan Description".

The 401(k) Basics:

Contributions

The maximum employee elective deferral amount is the lesser of 100% of compensation or the elective deferral limit for the year.

The elective deferral limits are as follows:

Investments

By law, your 401k plan is required to have at least 3 types of investments:

1. Stocks

2. Bonds

3. Cash

Many people don't feel they have any idea about how to invest their 401k assets. This is a question not easily answered because the answer needs to be tailored to your goals, risk tolerance and time horizon. Consult a financial advisor or ask your HR director what resources they offer employees to make these decisions.

Distributions:

Distributions form 401(k) plans are subject to the same rules that pertain to all qualified plans. Namely, in order to determine whether a participant is eligible for a withdrawal and whether such withdrawal is subject to the 10% early withdrawal penalty, largely depends on the answer to two questions:

401(k) Plan Information

1. Is the participant eligible for a withdrawal?

Generally, participants in a qualified plan are eligible for a withdrawal if the meet at least one of the following distributable events (unless plan document allows for in-service non-hardship, non-suspension withdrawals):

1. Death or total disability;

2. Separation of service with the employer

3. Attainment of age 59½

4. Plan termination (if ER has no other defined contribution plan other than an ESOP)

5. Financial Hardship

If a distributable event is met, then we can proceed to question 2:

2. Will the withdrawal be subject to the 10% early withdrawal penalty?

No, if distribution is due to:

1. Death;

2. Disability;

3. Attaining age 59 ½;

4. Separation of service form the employer at age 55 or older;

5. Distribution made for medical expenses, in excess of 7.5% of AGI; or

6. Distributions made as part of a series of substantially equal periodic payments (SUBS = PAYS or 72(t)) begun following separation from service

Financial Hardship:

As seen above, hardship is considered a distributable event. This means that a participant can make

an in-service withdrawal with no age restrictions from a qualified plan if he/she meets the hardship

guidelines set by the IRC.

The regulations require that hardship distributions meet two conditions:

1. The distribution must be necessary due to an immediate and heavy financial need, and

2. The funds must not be reasonably available form other sources to meet such need.

As guidance in interpreting the first requirement, the regulations list the following as meeting the immediate and heavy requirement:

1. Medical expenses incurred by the participant or the participant's spouse or dependents.

2. Purchase of a principal residence for the participant.

3. Payments of qualified higher ed expenses for the participant or the participants dependents.

4. Payments of amounts necessary to prevent the eviction of the participant from his principal residence or from foreclosure on the mortgage;

5. Funeral expenses for a participant s deceased parent, spouse, children, or dependent; or

6. Repairs for uninsured damage to participant s principal residence due to fire, theft, storm, or other casualty.

The second requirement is determined on the basis of the individual's fact and circumstances. A "safe harbor" test exists and if met, the distribution is deemed to have met the no other resources requirement. To meet the safe harbor test, the following circumstances must exist:

1. The distribution cannot exceed the amount of the immediate and heavy financial need,

2. The employee has obtained all distributions other than hardship distributions and all nontaxable loans available under all plans maintained by the employer, and

3. The plan provides that the employee s elective deferral contributions will be suspended for a period of six months after the distribution.

Note that hardship withdrawals will be subject to ordinary income taxes as well as the 10% early withdrawal penalty unless one of the exceptions cited above is met. Hardship withdrawals are limited to monies attributable to elective deferrals only. Employer contributions and earnings are generally not available. Only earnings that were in the account prior to 1989 can be withdrawn.

Required Minimum Distribution:

The participant is required to begin RMD's by the April following the year they turn 70 1/2. Distributions can obviously be more than the minimum if desired. Once the distribution is made, it cannot be rolled over into an IRA.

Year	401(k) Elective Limit	Age 50+ Catch-up
2004	$13,000	$3,000
2005	$14,000	$4,000
2006	$15,000	$5,000

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