If an employer had a salary reduction SEP in effect on December 31, 1996, the employer may continue to allow salary reduction contributions to the plan.  Employees are generally permitted to contribute up to 15 percent of pay, or $10,500 for 2001 ($11,000 for 2002).  SEP participants may also be required to earn at least $450 (this number is indexed for inflation) (for 2001) to make salary reduction contributions.

Q: What are 401(k) plans?

A 401(k) plan is a defined contribution plan that is a cash or deferred arrangement.  An employee can elect to defer receiving a portion of his or her salary which is instead contributed on the employee's behalf, before taxes, to the 401(k) plan.  Sometimes the employer may match the employee's contributions.  There are special rules governing the operation of a 401(k) plan.  For example, there is a dollar limit on the amount the employee may elect to defer each year.  The dollar limit is $11,000.  The amount may be adjusted annually by the Treasury Department to reflect changes in the cost of living.  Other limits may apply to the amount that may be contributed on the employee's behalf.  For example, highly compensated employees may be limited depending on the extent to which rank and file employees participate in the plan.  An employer must advise employees of any limits that may apply to them.

Although a 401(k) plan is a retirement plan, an employee may be permitted access to funds in the plan before retirement.  For example, an active employee may be able to borrow from the plan.  Also, the plan may permit employees to make a withdrawal on account of hardship, generally from the funds he or she contributed.  The sponsor may want to encourage participation in the plan, but it cannot make the employee's elective deferrals a condition for the receipt of other benefits, except for matching contributions.

The adoption of 401(k) plans by a state or local government or a tax-exempt organization is limited by law.

Q: What are profit sharing plans or stock bonus plans?

A profit sharing or stock bonus plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise).  The plan contains a formula for allocating to each participant a portion of each annual contribution.  A profit sharing plan or stock bonus plan may include a 401(k) plan.

Q: What are employee stock ownership plans (ESOPs)?

Employee stock ownership plans (ESOPs) are a form of defined contribution plan in which the investments are primarily in employer stock.  Congress authorized the creation of ESOPs as one method of encouraging employee participation in corporate ownership.

Q: What information is a pension plan required to disclose?

The Employee Retirement Income Security Act (ERISA) requires plan administrators - the people who run plans - to give employees in writing the most important facts they need to know about their pension plan.  Some of these facts must be provided to the employee regularly and automatically by the plan administrator.  Others are available upon request, free of charge or for copying fees.  An employee's request should be made in writing.

One of the most important documents employees are entitled to receive automatically when they become a participant of an ERISA-covered pension plan or a beneficiary receiving benefits under such a plan, is a summary of the plan, called the summary plan description or SPD.  A plan administrator is legally obligated to provide to employees, free of charge, the SPD.  The SPD is an important document that tells employees what the plan provides and how it operates.  It tells employees when they begin to participate in the plan, how service and benefits are calculated, when a benefit becomes vested, when employees will receive payment and in what form, and how to file a claim for benefits.  If a plan is changed employees must be informed, either through a revised SPD, or in a separate document, called a summary of material modifications, which also must be given to employees free of charge.

In addition to the SPD, the plan administrator must automatically give employees each year a copy of the plan's summary annual report.  This is a summary of the annual financial report that most pension plans must file with the Department of Labor.  These reports are filed on government forms called Form 5500 or 5500-C/R.

Q: When must employers deposit withheld employee contributions into a 401(k) plan or other pension plan?

Employers must transmit employee contributions to pension plans as soon as they can reasonably be segregated from the employer's general assets, but not later than the 15th  business day of the month immediately after the month in which the contributions either were withheld or received by the employer.