The GM top 5 guys raked in nearly $39,000,000 in 2007, while running their companies into the ground.

The top 5 at Ford raked in almost $50,000,000 in fiscal year ending 2007, while running their company into the ground.

The top 5 at Chrysler LLC. made, oh wait, we don’t know as they went private in 2007 - “Cerberus Capital Management owns 80.1% of Chrysler and Daimler A.G. owns the remaining 19.9%. ”

Let’s break this down: Between the big 3 automakers there are an estimated 628,699 employees working at these companies. The request is to give these guys 25 billion dollars (25,000,000,000) in aid. This equates to roughly $39,675 per employee, right at the average annual income for all Full time workers between the age of 25-64 in the US per the census bureau.

With money to hold them over for at least year, they could surely find equal paying jobs in other, more efficient and effective industries.

Now, we turn our heads to the news to see the big 3 automakers are crying for help and Pelosi and President-Elect Obama have willfully obliged their requests for help and are pushing through congress attempts to fund them with an additional $25 billion dollars in help. Additional as in, they’ve already received help back in the late 70’s and early 80’s in a similar manner.

Here are some reasons (if they’re not already evident) why giving out money to these guys is a recipe for disaster and will make things worse than they already are for consumers and workers of those companies:

• Their tax dollars are being used to destroy their own jobs.

• These inefficient and failing companies will squeeze billions of dollars from a credit market that would have sent funds to new smaller and much more efficient businesses which will likely create more lasting jobs for the future. Not to mention, it raises the cost of borrowing for all of the workers, from buying their homes to various other purchases.

• They have already been provided bailout money nearly 30 years ago and they’re back in the same situation.

• This screws over every other business that has ran efficient and been successful in managing their companies as it penalizes them by rewarding the failures with capital and other resources they would not have had otherwise and it raises costs of borrowing for those efficient businesses. Why would you reward the failures and hurt the good businesses?

• There are already 100’s of thousands of auto employees whom have been laid off and have been successful in finding new employment. Whether that mean with those other huge car manufacturers here in the US, or other manufacturing companies. You certainly wouldn’t be smart in putting additional pressure on the other guys when they could easily expand and employ this workforce.
• As the giants crumble, hundreds of new business are created and new opportunities are opened. Allow the new businesses to freely grow, encourage their creation through incentives.

• This raises the cost of all American cars, as naturally the more efficient car makers would have gobbled up these guys. So, in essence, Americans are paying and will pay more for every car they buy because these companies are rewarded with bailout money.
• We have no guarantee what they will do with the money, shafting non management employees will be first on their list though when the going gets worse. Don’t count on management to cut themselves until last.
• These companies have ran themselves in the ground and will simply do the same again, and this time at our expense. They can blame economic conditions or whatever they want, bottom line their ineffective management put them in the situation they are facing. We cannot and should not enable them to do further damage and cause further losses at our expense.
• We are opening a massive can of worms, soon you will witness more and more companies crying for help, asking for hand-outs, but soon it will be us, when they bankrupt our country.

Combine the above points with the summary of what has already gone on with bailout money for banks and you should have major reason to lobby your senators and representatives in congress (and President-Elect Obama) to kick this stupidity to the curb, and quit enabling the problem to worsen. Seriously people, we are merely delaying the inevitable and costing ourselves much, much more in doing so. Please, put aside partisan politics, use common sense and fight against these guys from adding more to our National deficit in the name of saving what cannot be saved.

(some of these points are paraphrased from this Heritage article)

Virtually all employers impose severe restrictions on withdrawals while a person remains in service with the company and is under the age of 59½. Any withdrawal that is permitted before the age of 59½ is subject to an excise tax equal to twenty percent of the amount distributed, including withdrawals to pay expenses due to a hardship, except to the extent the distribution does not exceed the amount allowable as a deduction under Internal Revenue Code section 213 to the employee for amounts paid during the taxable year for medical care (determined without regard to whether the employee itemizes deductions for such taxable year).

In any event any amounts are subject to normal taxation as ordinary income. Some employers may disallow one, several, or all of the previous hardship causes. Someone wishing to withdraw from such a 401(k) plan would have to resign from their employer. To maintain the tax advantage for income deferred into a 401(k), the law stipulates the restriction that unless an exception applies, money must be kept in the plan or an equivalent tax deferred plan until the employee reaches 59½ years of age. Money that is withdrawn prior to the age of 59½ typically incurs a 10% penalty tax unless a further exception applies.^[1] This penalty is on top of the “ordinary income” tax that has to be paid on such a withdrawal. The exceptions to the 10% penalty include: the employee’s death, the employee’s total and permanent disability, separation from service in or after the year the employee reached age 55, substantially equal periodic payments under section 72(t), a qualified domestic relations order, and for deductible medical expenses (exceeding the 7.5% floor). This does not apply to the similar 457 plan.

Many plans also allow employees to take loans from their 401(k) to be repaid with after-tax funds at pre-defined interest rates. The interest proceeds then become part of the 401(k) balance. The loan itself is not taxable income nor subject to the 10% penalty as long as it is paid back in accordance with section 72(p) of the Internal Revenue Code. This section requires, among other things, that the loan be for a term no longer than 5 years (except for the purchase of a primary residence), that a “reasonable” rate of interest be charged, and that substantially equal payments (with payments made at least every calendar quarter) be made over the life of the loan. Employers, of course, have the option to make their plan’s loan provisions more restrictive. When an employee does not make payments in accordance with the plan or IRS regulations, the outstanding loan balance will be declared in “default”. A defaulted loan, and possibly accrued interest on the loan balance, becomes a taxable distribution to the employee in the year of default with all the same tax penalties and implications of a withdrawal.

These loans have been described as tax-disadvantaged, on the theory that the 401(k) contains before-tax dollars, but the loan is repaid with after-tax dollars. This is not correct. The loan is repaid with after-tax dollars, but the loan itself is not a taxable event, so the “income” from the loan is tax-free. This treatment is identical to that of any other loan, as long as the balance is repaid on schedule. (A residential mortgage or home equity line of credit may have tax advantages over the 401(k) loan; but that is because the interest on home mortgages is deductible, and unrelated to the tax-deferred features of the 401(k).)

Traditional 401(k) and Roth IRA plans

In a traditional 401(k) plan, introduced by Congress in 1978, employees contribute pre-tax earnings to their retirement plan, also called “elective deferrals“. That is, an employee’s elective deferral funds (currently up to $15,500 per tax year for those under age 50 and $20,500 for those over) are set aside by the employer in a special account where the funds are allowed to be invested in various options made available in the plan.

Employers may also add funds to the account by contributing matching funds on a fractional formula basis (e.g., matching funds might be added at the rate of 50% of employees’ elective deferrals), or on a set percentage basis. Funds within the 401(k) account grow on a tax deferred basis. When the account owner reaches the age of 59-and-a-half, they may begin to receive “qualified distributions” from the funds in the account; these distributions are then taxed at ordinary income tax rates. Exceptions exist to allow distribution of funds before 59 and a half, such as Substantially equal periodic payments, disability, and separation from service after the age of 55, as outlined under IRS Code section 72(t).

Under a Roth IRA, first enacted in 1998, individuals, whether employees or self-employed, voluntarily contribute post-tax funds to an individual retirement arrangement(IRA). In contrast to the 401k plan, the Roth plan requires post-tax contributions, but allows for tax free growth and distribution, provided the contributions have been invested for at least 5 years and the account owner has reached age 59 and a half. The amounts of income that can be invested in a Roth IRA are significantly more limited than those to a 401(k) are. For 2008, individuals are limited to contributing no more than $5,000 to a Roth IRA, if under age 50, and $6,000, if age 50 or older. Additionally, Roth IRA contributions are prohibited when taxpayers earn a Modified Adjusted Gross Income of more than $110,000, ($160,000 for married filing jointly). Here is a 401(k) versus IRA matrix that compares various types of IRAs with various types of 401(k)s.

The Roth 401(k) plan

The Roth 401(k) combines some of the most advantageous aspects of both the 401(k) and the Roth IRA. Under the Roth 401(k), employees can decide to contribute funds on a post-tax elective deferral basis, in addition to, or instead of, pre-tax elective deferrals under their traditional 401(k) plans. An employee’s combined elective deferrals– whether to a traditional 401(k), a Roth 401(k), or to both– cannot exceed $15,500 for tax year 2008 if a participant is under 50; if they are over 50, they may contribute an additional $5,000. Employer’s matching funds are not included in the $15,500 elective deferral cap, but are considered for the maximum section 415 limit, which is $46,000 for 2008. Employers are permitted to match contributions to a designated Roth account, but the matching funds must be made on a pre-tax basis, not be made into the designated Roth account, and cannot receive the Roth tax treatment. (Pub 4530)

In general, the difference between a Roth 401(k) and a traditional 401(k) is that the Roth version is funded with after-tax dollars while the traditional 401(k) is funded with pre-tax dollars. After-tax dollars represent money for which taxes are paid in the current year, and pre tax dollars are those which do not represent federal taxable income in the current year. Typically, the earnings on Roth contributions will be tax free as long as the distribution is made at least 5 years after the first Roth contribution and the attainment of age 59 and one half, unless an exception applies.

A Roth 401(k) plan will probably be most advantageous to those who might otherwise choose a Roth IRA, for example, younger workers who are currently taxed in a lower tax bracket, but expect to be taxed in a higher bracket upon reaching retirement age. The Roth 401(k) offers the advantage of tax free distribution, but is not constrained by income limitations. For example, normal Roth IRA contributions are limited to $5,000; whereas, up to $15,500 could be contributed to a Roth 401(k) account, provided no other elective deferrals were taken for the tax year (no traditional 401(k) deferrals taken).

Adoption of Roth 401(k) plans has been relatively slow, and stated reasons for this include the fact that they require additional administrative recordkeeping and payroll processing^[1]. However some larger firms have now adopted Roth 401(k) plans, and this is expected to spur their adoption by other firms including smaller ones^[2].

Additional considerations

• Roth 401(k) contributions are irrevocable, such that once money is invested into a Roth 401(k) account; it cannot be moved to a regular 401(k) account.
• Employees are able to roll their Roth 401(k) contributions over to a Roth IRA account upon termination of employment.
• It is the employer’s decision as to whether the company will provide access to the Roth 401(k) in addition to the traditional 401(k). Many employers may feel that the added administrative burden outweighs the benefits of the Roth 401(k)
• The Roth 401(k) plan will now be available after December 31, 2010 since the Pension Protection Act of 2006 was passed to extend the program. The program was originally set up to sunset, or no longer be in place, after 2010 along with the rest of EGTRRA 2001.
• Unlike Roth IRAs, owners of Roth 401(k) accounts (designated Roth accounts) must begin distributions upon reaching age 70 and a half, similar to required minimum distributions for IRA and other retirement plans. (Pub 4530)

See also

• 401(k) IRA matrix - 401k & IRA comparisons (401k vs Roth 401k vs Traditional IRA vs Roth IRA)

In the United States of America, a 401(k) plan allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wage paid directly, or “deferred,” into his or her 401(k) account. In participant-directed plans (the most common option), the employee can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above. Many companies’ 401(k) plans also offer the option to purchase the company’s stock. The employee can generally re-allocate money among these investment choices at any time. In the less common trustee-directed 401(k) plans, the employer appoints trustees who decide how the plan’s assets will be invested.

Some assets in 401(k) plans are tax deferred. Before the January 1, 2006, effective date of the designated Roth account provisions, all 401(k) contributions were on a pre-tax basis (i.e., no income tax is withheld on the income in the year it is contributed), and the contributions and growth on them are not taxed until the money is withdrawn. With the enactment of the Roth provisions, participants in 401(k) plans that have the proper amendments can allocate some or all of their contributions to a separate designated Roth account, commonly known as a Roth 401(k). Qualified distributions from a designated Roth account are tax free, while contributions to them are on an after-tax basis (i.e., income tax is paid or withheld on the income in the year contributed). In addition to Roth and pre-tax contributions, some participants may have after-tax contributions in their 401(k) accounts. The after-tax contributions are treated as after-tax basis and may be withdrawn without tax. The growth on after-tax amounts not in a designated Roth account are taxed as ordinary income.

Details

As an employee benefit, a 401(k) must be sponsored by an employer, typically a private sector corporation. A self-employed individual can set up a 401(k) plan, and, until 1986, a government entity could do so as well. The employer is responsible for creating and designing the plan. And while ERISA (Employee Retirement Income Security Act of 1974) defaults reporting and disclosure to the plan sponsor, there is no default for a fiduciary, and the plan sponsor must either identify at least one “named fiduciary” in the plan document or it must write a procedure into the plan for appointing the named fiduciary. While ERISA defaults total discretion and control over plan assets and investments to the plan’s trustee, many plan sponsors override this default structure by giving responsibility for selecting and monitoring plan investments to the named fiduciary, often a committee of internal employees, or a mix of internal employees and outside persons bringing in particular fiduciary expertise.

A 401(k) plan is a type of defined contribution plan (under the IRS’s definition). It is a salary reduction plan, where employees must choose a percentage of their salary to contribute to the plan, and the plan spells out the extent of employer matching, if any (regardless of profits). Employee taxable salaries are reduced by these contributions, the contributions are invested, and any earnings are tax-deferred, i.e., until the employee draws the money out at retirement. Two other types of defined contribution plans are profit-sharing plans, in which the plan specifies, for example, that the employer will contribute 10% of net profits each year (divided among participant accounts), and money purchase pension plans, in which the plan defines the contribution as 10% of participants’ annual salary, for example. 401(k) plans are not a defined benefit plan, because the benefit formula (specifying what participants will receive at retirement) is not spelled out in the plan. 401(a) profit sharing plans and money purchase pension plans, and 401(k) plans, are individual account plans, because each participant’s benefit is the value of an individual account to which the contributions have been made plus any investment income and less any losses. If investments do well, there will be more in the account at retirement; if investments do poorly, there will be less.

In addition, 401(k) plans are tax-qualified plans covered by ERISA such that assets held by the plans are generally protected from creditors of the account holder, which in the past was generally not true for IRA plans. In the case of employer bankruptcy, all 401(a) (pension and defined contribution plans) and 401(k) plans are protected, because of the rule that contributions must accrue to the exclusive benefit of employees in general. Even though pension plans are backed by insurance through the Pension Benefit Guaranty Corporation, workers whose company enters bankruptcy may not receive the full value of their pension. ERISA protection of 401(k) assets does not extend to losses in the value of investments that participants choose. Employees investing their 401(k) in their own employer stock face the possibility of losing the value of their retirement accounts that is invested in employer stock along with their jobs if their employer goes out of business.

Defined benefit plans have a definitely determinable benefit amount that usually has a fixed formula, regardless of how the underlying plan assets perform. Defined contribution plans according to Section 414(i) of the IRC have individual accounts. Because plan sponsors want to take advantage of the exemption from the fiduciary duty to diversify plan assets to minimize the risk of large losses by using ERISA Section 404(c), these plans usually provide each worker the ability to control the contents of his account. The account value may fluctuate in value based on the underlying investments. There is a risk that returns may even be negative.

Some companies match employee contributions to some extent, paying extra money into the employee’s 401(k) account as an incentive for the employee to save more money for retirement. Alternatively the employer may make profit sharing contributions into the 401(k) plan or just contribute a fixed percentage of wages. These contributions may vest over several years as an inducement to the employee to stay with the employer.

When an employee leaves a job, the 401(k) account generally stays active for the rest of his or her life, though the accounts must begin to be drawn out beginning the April 1st of the calendar year after the attainment of age 70½ (except that under SBJPA 1996, those still employed can defer). In 2004 some companies started charging a fee to ex-employees who maintained their 401(k) account with that company.^{[citation needed]} Alternatively, when the employee leaves the company, the account can be rolled over into an IRA at an independent financial institution, or if the employee takes a new job at a company that also has a 401(k) or other eligible retirement plan, the employee can “roll over” the account into a new 401(k) account hosted by the new employer.

Comparable types of salary-deferral retirement plans include 403(b) plans covering workers in educational institutions, churches, public hospitals, and non-profit organizations and 457 plans which cover employees of state and local governments and certain tax-exempt entities.

Significant new rules are allowing benefits companies (Plan Providers) and those involved in selling benefits to plans (Plan Advisors) to expand their capabilities to sell services to Plan Sponsors (those responsible for managing employer-sponsored retirement plans for companies).

Tax consequences

Most 401(k) contributions are on a pre-tax basis. Starting in the 2006 tax year, employees can either contribute on a pre-tax basis or opt to utilize the Roth 401(k) provisions to contribute on an after tax basis and have similar tax effects of a Roth IRA. However, in order to do so, the plan sponsor must amend the plan to make those options available. With either pre-tax or after tax contributions, earnings from investments in a 401(k) account (in the form of interest, dividends, or capital gains) are not taxable events. The resulting compound interest without taxation can be a major benefit of the 401(k) plan over long periods of time.

For pre-tax contributions, the employee does not pay federal income tax on the amount of current income that he or she defers to a 401(k) account. For example, a worker who earns $50,000 in a particular year and defers $3,000 into a 401(k) account that year only recognizes $47,000 in income on that year’s tax return. Currently this would represent a near term $750 savings in taxes for a single worker, assuming the worker remained in the 25% marginal tax bracket and there were no other adjustments (e.g. deductions). The employee ultimately pays taxes on the money as he or she withdraws the funds, generally during retirement. The character of any gains (including tax favored capital gains) are transformed into “ordinary income” at the time the money is withdrawn.

For after tax contributions to a designated Roth account (Roth 401(k)), qualified distributions can be made tax free. To qualify, distributions must be made more than 5 years after the first designated Roth contributions and not before the year in which the account owner turns age 59 and a half, unless an exception applies as detailed in IRS code section 72(t). In the case of designated Roth contributions, the contributions being made on an after tax basis means that the taxable income in the year of contribution is not decreased as it is with pre-tax contributions. Roth contributions are irrevocable and cannot be converted to pre-tax contributions at a later date. Administratively Roth contributions must be made to a separate account, and records must be kept that distinguish the amount of contribution that are to receive Roth treatment.

Withdrawal of funds

Virtually all employers impose severe restrictions on withdrawals while a person remains in service with the company and is under the age of 59½. Any withdrawal that is permitted before the age of 59½ is subject to an excise tax equal to twenty percent of the amount distributed, including withdrawals to pay expenses due to a hardship, except to the extent the distribution does not exceed the amount allowable as a deduction under Internal Revenue Code section 213 to the employee for amounts paid during the taxable year for medical care (determined without regard to whether the employee itemizes deductions for such taxable year).

In any event any amounts are subject to normal taxation as ordinary income. Some employers may disallow one, several, or all of the previous hardship causes. Someone wishing to withdraw from such a 401(k) plan would have to resign from their employer. To maintain the tax advantage for income deferred into a 401(k), the law stipulates the restriction that unless an exception applies, money must be kept in the plan or an equivalent tax deferred plan until the employee reaches 59½ years of age. Money that is withdrawn prior to the age of 59½ typically incurs a 10% penalty tax unless a further exception applies.^[1] This penalty is on top of the “ordinary income” tax that has to be paid on such a withdrawal. The exceptions to the 10% penalty include: the employee’s death, the employee’s total and permanent disability, separation from service in or after the year the employee reached age 55, substantially equal periodic payments under section 72(t), a qualified domestic relations order, and for deductible medical expenses (exceeding the 7.5% floor). This does not apply to the similar 457 plan.

Many plans also allow employees to take loans from their 401(k) to be repaid with after-tax funds at pre-defined interest rates. The interest proceeds then become part of the 401(k) balance. The loan itself is not taxable income nor subject to the 10% penalty as long as it is paid back in accordance with section 72(p) of the Internal Revenue Code. This section requires, among other things, that the loan be for a term no longer than 5 years (except for the purchase of a primary residence), that a “reasonable” rate of interest be charged, and that substantially equal payments (with payments made at least every calendar quarter) be made over the life of the loan. Employers, of course, have the option to make their plan’s loan provisions more restrictive. When an employee does not make payments in accordance with the plan or IRS regulations, the outstanding loan balance will be declared in “default”. A defaulted loan, and possibly accrued interest on the loan balance, becomes a taxable distribution to the employee in the year of default with all the same tax penalties and implications of a withdrawal.

These loans have been described as tax-disadvantaged, on the theory that the 401(k) contains before-tax dollars, but the loan is repaid with after-tax dollars. This is not correct. The loan is repaid with after-tax dollars, but the loan itself is not a taxable event, so the “income” from the loan is tax-free. This treatment is identical to that of any other loan, as long as the balance is repaid on schedule. (A residential mortgage or home equity line of credit may have tax advantages over the 401(k) loan; but that is because the interest on home mortgages is deductible, and unrelated to the tax-deferred features of the 401(k).)

Required minimum distributions

An account owner must begin making distributions from their accounts at least no later than the year after the year the account owner turns 70½ unless the account owner is still employed at the company sponsoring the 401(k) plan. The amount of distributions is based on life expectancy according to the relevant factors from the appropriate IRS tables. The only exception to minimum distribution are for people still working once they reach that age, and the exception only applies to the current plan they are participating in. Required minimum distributions apply to both pre-tax and after-tax Roth contributions. Only a Roth IRA is not subject to minimum distribution rules. Other than the exception for continuing to work after age 70½ differs from the rules for IRA minimum distributions. The same penalty applies to the failure to make the minimum distribution. The penalty is 50% of the amount that should have been distributed, one of the most severe penalties the IRS applies.

History

In 1978, Congress amended the Internal Revenue Code, later called section 401(k), whereby employees are not taxed on income they choose to receive as deferred compensation rather than direct compensation.^[2] The law went into effect on January 1, 1980,^[2] and by 1983 almost half of large firms were either offering a 401(k) plan or considering doing so.^[2] By 1984 there were 17,303 companies offering 401(k) plans.^[2] Also in 1984, Congress passed legislation requiring nondiscrimination testing, to make sure that the plans did not discriminate in favor of highly paid employees more than a certain allowable amount.^[2] In 1998, Congress passed legislation that allowed employers to have all employees contribute a certain amount into a 401(k) plan unless the employee expressly elects not to contribute.^[2] By 2003, there were 438,000 companies with 401(k) plans.^[2]

Originally intended for executives, the section 401(k) plan proved popular with workers at all levels because it had higher yearly contribution limits than the Individual Retirement Account (IRA); it usually came with a company match, and in some ways provided greater flexibility than the IRA, often providing loans and, if applicable, offered the employer’s stock as an investment choice. Several major corporations amended existing defined contribution plans immediately following the publication of IRS proposed regulations in 1981.

A primary reason for the explosion of 401(k) plans is that such plans are cheaper for employers to maintain than a defined benefit pension for every retired worker. With a 401(k) plan, instead of required pension contributions, the employer only has to pay plan administration and support costs if they elect not to match employee contributions or make profit sharing contributions. In addition, some or all of the plan administration costs can be passed on to plan participants. In years with strong profits employers can make matching or profit-sharing contributions, and reduce or eliminate them in poor years. Thus 401(k) plans create a predictable cost for employers, while the cost of defined benefit plans can vary unpredictably from year to year.

The danger of the 401(k) plan is if the contributions are not diversified, particularly if the company had strongly encouraged its workers to invest their plans in their employer itself. This practice violates primary investment guidelines about diversification. In the case of Enron, where the accounting scandal and bankruptcy caused the share price to collapse, there was no PBGC insurance and employees lost the money they invested in Enron stock. Congress inserted trust law fiduciary liability upon employers who did not prudently diversify plan assets to avoid the chance of large losses inside Section 404 of ERISA, but it is unclear whether such fiduciary liability applies to trustees of plans in which participants direct the investment of their own accounts.

Technical details

Contribution Limits

There is a maximum limit on the total yearly employee pre-tax salary deferral. The limit, known as the “402(g) limit”, is $15,500 for the year 2008 and $16,500 for 2009.^[3] For future years, the limit may be indexed for inflation, increasing in increments of $500. Employees who are 50 years old or over at any time during the year are now allowed additional pre-tax “catch up” contributions of up to $5,000 for 2008 and $5,500 for 2009. The limit for future “catch up” contributions may also be adjusted for inflation in increments of $500. In eligible plans, employees can elect to have their contribution allocated as either a pre-tax contribution or as an after tax Roth 401(k) contribution, or a combination of the two. The total of all 401(k) contributions must not exceed the maximum contribution amount.

If the employee contributes more than the maximum pre-tax limit to 401(k) accounts in a given year, the excess must be withdrawn by April 15th of the following year. This violation most commonly occurs when a person switches employers mid-year and the latest employer does not know to enforce the contribution limits on behalf of their employee. If this violation is noticed too late, the employee may have to pay taxes and penalties on the excess. The excess contribution, as well as the earnings on the excess, is considered “non-qualified” and cannot remain in a qualified retirement plan such as a 401(k).

Plans which are set up under section 401(k) can also have employer contributions that (when added to the employee contributions) cannot exceed other regulatory limits. The total amount that can be contributed between employee and employer contributions is the section 415 limit, which is the lesser of 100% of the employee’s compensation or $44,000 for 2006, $45,000 for 2007, $46,000 for 2008, and $49,000 for 2009. Employer matching contributions can be made on behalf of designated Roth contributions, but the employer match must be made on a pre-tax basis.^[4]

Governmental employers in the US (that is, federal, state, county, and city governments) are currently barred from offering 401(k) plans unless they were established before May 1986. Governmental organizations instead can set up a section 457(g).

Highly Compensated Employees (HCE)

To help ensure that companies extend their 401(k) plans to low-paid employees, an IRS rule limits the maximum deferral by the company’s “highly compensated” employees, based on the average deferral by the company’s non-highly compensated employees. If the rank and file saves more for retirement, then the executives are allowed to save more for retirement. This provision is enforced via “non-discrimination testing”. Non-discrimination testing takes the deferral rates of “highly compensated employees” (HCEs) and compares them to non-highly compensated employees (NHCEs). An HCE in 2008 is defined as an employee with compensation of greater than $100,000 in 2007 or an employee that owned more than 5% of the business at any time during the year or the preceding year. That is for plans whose first day of the plan year is in calendar year 2007, we look to each employee’s prior year gross compensation (also known as ‘Medicare wages’) and those who earned more than $100,000 are HCEs. Most testing done now in 2008 will be for the 2007 plan year when we compare employees’ 2006 plan year gross compensation to the $95,000 threshold for 2006 to determine who is HCE and who is a NHCE.

The average deferral percentage (ADP) of all HCEs, as a group, can be no more than 2% greater (or 150% of, whichever is less) than the NHCEs, as a group. This is known as the ADP test. When a plan fails the ADP test, it essentially has two options to come into compliance. It can have a return of excess done to the HCEs to bring their ADP to a lower, passing, level. Or it can process a “qualified non-elective contribution” (QNEC) to some or all of the NHCEs to raise their ADP to a passing level. The return of excess requires the plan to send a taxable distribution to the HCEs (or reclassify regular contributions as catch-up contributions subject to the annual catch-up limit for those HCEs over 50) by March 15th of the year following the failed test. A QNEC must be an immediately vested contribution.

The annual contribution percentage (ACP) test is similarly performed but also includes employer matching and employee after-tax contributions. ACPs do not use the simple 2% threshold, and include other provisions which can allow the plan to “shift” excess passing rates from the ADP over to the ACP. A failed ACP test is likewise addressed through return of excess, or a QNEC or qualified match (QMAC).

There are a number of “safe harbor” provisions that can allow a company to be exempted from the ADP test. This includes making a “safe harbor” employer contribution to employees’ accounts. Safe harbor contributions can take the form of a match (generally totalling 4% of pay) or a non-elective profit sharing (totalling 3% of pay). Safe harbor 401(k) contributions must be 100% vested at all times with immediate eligibility for employees. There are other administrative requirements within the safe harbor, such as requiring the employer to notify all eligible employees of the opportunity to participate in the plan, and restricting the employer from suspending participants for any reason other than due to a hardship withdrawal.

401(k) plans for certain small businesses or sole proprietorships

Many self-employed persons felt (and financial advisors agreed) that 401(k) plans did not meet their needs due to the high costs, difficult administration, and low contribution limits. But the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made 401(k) plans more beneficial to the self-employed. The two key changes enacted related to the allowable “Employer” deductible contribution, and the “Individual” IRC-415 contribution limit.

Prior to EGTRRA, the maximum tax-deductible contribution to a 401(k) plan was 15% of eligible pay (reduced by the amount of salary deferrals). Without EGTRRA, an incorporated business person taking $100,000 in salary would have been limited in Y2004 to a maximum contribution of $15,000. EGTRRA raised the deductible limit to 25% of eligible pay without reduction for salary deferrals. Therefore, that same businessperson in Y2008 can make an “elective deferral” of $15,000 plus a profit sharing contribution of $25,000 (i.e 25%), and — if this person is over age 50 — make a catch-up contribution of $5,000 for a total of $45,000. For those eligible to make “catch up” contribution,and with salary of $136,000 or higher, the maximum possible total contribution in 2008 would be $51,000. To take advantage of these higher contributions, many vendors now offer Solo-401(k) plans or Individual(k) plans, which can be administered as a Self-Directed 401(k), allowing for investment into real estate, mortgage notes, tax liens, private companies, and virtually any other investment.

Note: an unincorporated business person is subject to slightly different calculation. The government mandates calculation of profit sharing contribution as 25% of net self employment (Schedule C) income. Thus on $100,000 of self employment income, the contribution would be 20% of the gross self employment income, 25% of the net after the contribution of $20,000.

Other countries

The term “401(k)” has no intrinsic meaning; it is a reference to a specific provision of the U.S. Internal Revenue Code section 401. However the term has become so well-known (it is almost a “brand“) that some other nations use it as a generic term to describe analogous legislation. E.g., in October 2001, Japan adopted legislation allowing the creation of “Japan-version 401(k)” accounts even though no provision of the relevant Japanese codes is in fact called “section 401(k).” India, Hong Kong, Singapore, and Malaysia refer to their equivalents of the U.S. 401(k) plan as Provident Funds. Egypt and Lebanon have a similarly structured retirement fund, and Israel has its own retirement fund.

A Registered Retirement Savings Plan or RRSP is an account that provides tax benefits for saving for retirement in Canada. RRSP refers to a provision in the Income Tax Act that allows a person to shelter financial property from income taxes.

RRSPs may reduce taxes in up to three ways:

1. Contributions to RRSPs, up to limits described below, may be deducted from income before calculating income tax due.
2. Income earned within the account (interest, corporate dividends, trust distributions, capital gains) is not taxed until money is withdrawn from the plan, allowing the plan to grow faster than the same investments would grow if they were held outside the plan and thus subject to tax.
3. Money may be withdrawn from an RRSP in tax years when one is in a lower income-tax bracket because of lower income (due to retirement, unemployment, etc.) than tax years when one makes contributions.

Examples of financial property that can be held in an RRSP are: savings accounts, guaranteed investment certificates (GICs), bonds, mortgage loans, mutual funds, income trusts, corporate shares (stocks), and labour-sponsored funds.

Taxation

Registered retirement savings plans provide a form of deferred taxation to individuals. For the most part, contributions to RRSPs are deductible from taxable income, reducing income tax payable. Since Canada has a progressive tax system, taxes are reduced at the highest marginal rate. Increases in the value of the plan assets (whether capital gains, interest income or other) are not subject to income or other taxes in Canada until funds are removed from the RRSP.

Disbursements from an RRSP are taxable as income at the time of withdrawal. Since an RRSP is intended for retirement (when many taxpayers will have lower taxable income), the tax paid may be lower, although this will also depend on the increase in the value of the plan assets, or investment returns, and other factors. All disbursements from the RRSP are taxed at the same rate regardless the type of income. This implies capital gains will lose their 50% exemption, and dividends will lose their dividend tax credit. Thus, interest income becomes much more attractive as an RRSP instrument.

Since RRSPs allow many taxpayers to substantially defer (delay) or reduce income taxes payable, there are limits established on maximum allowable contributions, timing of certain contributions, and many other details. RRSPs are intended to allow individual taxpayers to save funds for retirement, and hence minimum disbursement (withdrawal) levels are established above a certain age.

Types of RRSPs

RRSP accounts can be setup with either one or two associated individuals:

Individual RRSP

An Individual RRSP is associated with only a single individual, termed an account holder. With Individual RRSPs, the account holder is also called a contributor, as only they contribute money to their RRSP.

Spousal RRSP

A Spousal RRSP allows a higher earner, termed a spousal contributor, to contribute to an RRSP in the spouse’s name. In this case, it is the spouse who is the account holder. The spouse can withdraw the funds, subject to tax, after a holding period. A spousal RRSP is a means of splitting income in retirement: By dividing investment properties between both spouses each spouse will receive half the income, and thus the marginal tax rate will be lower than if one spouse earned all of the income.

Group RRSP

In a group RRSP, an employer arranges for employees to make contributions, as they wish, through a schedule of regular payroll deductions. The employee can decide the size of contribution per year and the employer will deduct an amount accordingly and submit it to the investment manager selected to administer the group account. The contribution is then deposited into the employee’s individual account and invested as specified. The primary difference with a group plan is that the contributor realizes the tax savings immediately, instead of having to wait until the end of the tax year.

Account structure

Both Individual and Spousal RRSPs can be held in one of three account structures. It should be noted that one or more of the account types below may not be an option depending on what type of investment instrument (example stocks, mutual funds, bonds) is being held inside the RRSP.

All three of the accounts below must normally be opened up by an individual through an investment advisor. That is to say, individuals interested in opening up accounts without an advisor usually find themselves unable to do so.

Client-held accounts

Client-held, or client-name accounts, exist when an account holder uses their RRSP contributions to purchase an investment with a particular investment company. Each time an individual uses RRSP contribution money to purchase an investment at a different fund company, it results in a separate client-held account being opened. For example, if an individual buys investment # 1 with Fidelity Investments and investment # 2 with Mackenzie Financial, this would result in the individual having two separate RRSP accounts held with two different companies.

The main benefit of client-held accounts is that they do not generally incur annual fees. The main detriment is that investors must keep track of each RRSP investment made with each separate company.

Nominee accounts

Nominee accounts are so named because individuals with this type of account nominate a nominee, usually one of Canada’s five major banks or a major investment dealer, to hold a number of different investments in a single account. For example, if an individual buys investment # 1 with Fidelity Investments and investment #2 with Mackenzie Financial, both investments are held in a single RRSP account with the nominee.

The main benefit of a nominee account is the ability to keep track of all RRSP investments within a single account. The main detriment is that nominee accounts often incur annual fees.

A “self-directed” RRSP (SDRSP) is special kind of nominee account. It is essentially a trading account at a brokerage that has tax-sheltered status. The holder of a self-directed RRSP instructs the brokerage to buy and sell securities on their behalf as with any brokerage account. The reason that it’s described as “self-directed” is that the holder of this kind of RRSP directs all the investment decisions themselves, and does not normally have the service of an investment advisor.

Intermediary accounts

Intermediary accounts are essentially identical in function to Nominee accounts. The reason an investor would have an Intermediary account instead of a Nominee account has to do with the investment advisor they deal with. If the advisor is not aligned with a major bank or investment dealer, they may not have the logistical ability to offer nominee accounts to their clients.

As a result, the advisor will approach an intermediary company which is able to offer the investor identical benefits as those offered by a nominee account. The three main Canadian companies who offer intermediary services are B2B Trust, M.R.S. Trust, and Canadian Western Trust (CWT).

The main benefits and detriments of Intermediary accounts are identical as those offered by Nominee accounts.

Contributing

A RRSP deduction limit is the maximum amount of RRSP contributions that can be claimed on a tax return for a given tax year.

A deduction limit is generally calculated as 18% of a person’s earned income from the previous tax year, minus any “pension adjustment”, up to a specified maximum. This specified maximum has been rising as shown in the table.

After 2010 the RRSP contribution limit will be indexed to the annual increase in the average wage. Any RRSP deductions not taken in a tax year are carried forward indefinitely to future tax years. So, for example, if a person’s RRSP deduction limit is $8,000 and he deducts only $3,000, the unused $5,000 deduction is carried forward. Furthermore, it would be increased by the deduction limit as calculated by the formula above.

After filing a tax return (or any adjustments to the tax return), each tax payer receives a Notice of (Re)Assessment from the Canada Revenue Agency, indicating their new RRSP deduction limit.

One of the major advantages of RRSPs in Canada is that they are tax deductible. This means that the amount of money put into an RRSP will be deducted from one’s income. It is deducted based on the marginal tax bracket, or the amount of tax paid on the last dollar of earned income. For a person with a marginal tax bracket of 40%, this could mean that in an investment of $1000 in an RRSP, they would receive $400 back in taxes. Furthermore, an RRSP’s tax deduction also carries forward; for example, a student with their eyes on a doctorate in a lower tax bracket could contribute to their RRSP for the term of their schooling and not deduct the taxes. When they graduate and become employed as a practicing professional, they could use their RRSP deductions to deduct their RRSP contributions from the previous years at their current marginal tax rate.

A RRSP can be contributed to until the annuitant is aged 71, when it must be either cashed out or matured into a RRIF.

While it is possible to contribute more than the contributor’s deduction limit, it is generally not advised as the excess amount (presently $2,000 over the deduction limit) is subject to a significant penalty tax removing all benefits (1% per month on the overage amount).

RRSP contributions within the first 60 days of the tax year (which may or may not be the calendar year) must be reported on the previous year’s return, according to the Income Tax Act. Such contributions may also be used as deduction for the previous tax year. Note that reporting and using are two different things. All other contributions may be used in the same tax year or held for future use.

Withdrawals

For a complete article on Registered Retirement Income Funds (RRIF), see Registered Retirement Income Fund.

An account holder is able to cash out an amount from an RRSP at any age. However, any amount withdrawn qualifies as taxable income and is therefore subject to withholding tax.

Before the end of the year the account holder turns 71, the RRSP must either be cashed out or transferred to a Registered Retirement Income Fund (RRIF) or an annuity. Previous to 2007, account holders were required to make this decision at age 69 rather than 71.

Investments held in an RRIF can continue to grow tax-free indefinitely, though an obligatory minimum RRIF withdrawal amount is cashed out and sent to the account holder each year. At that time, an individual’s income is expected to be lower and therefore subjected to less tax.

Special withdrawal programs

Home Buyer’s Plan (HBP)

While the original purpose of RRSPs was to help Canadians save for retirement, it is possible to use RRSP funds to help purchase one’s first home under what is known as the Home Buyer’s Plan. Canadians can borrow, tax-free, up to $20,000 from their RRSP (and another $20,000 from a spousal RRSP) towards buying their residence. This loan has to be repaid within 15 years after two years of grace. Contrary to popular belief, this plan can be used more than once per lifetime, as long as the borrower did not own a residence in the previous five years, and has fully repaid any previous loans under this plan.

Lifelong Learning Plan (LLP)

Similarly to the Home Buyer’s Plan, the Life-Long Learning Plan allows for temporary diversions of tax-free funds from an RRSP. This program allows individuals to borrow from an RRSP to go or return to post-secondary school. The user may withdraw up to $10,000 per year to a maximum of $20,000. The first repayment under the LLP will be due at the earliest of the following 2 dates:

1. 60 days after the 5th year following the 1st withdrawal

2. The 2nd year after the last year the student was enrolled in full-time studies

From Wikipedia

Basics

The employees’ accounts earn a fixed rate of return that can change over a period of time from year to year. Although it works much like a defined contribution plan, it is actually a defined benefit plan for legal purposes. In 2003, over 20% of workers with defined benefit plans were in cash balance plans, according to Bureau of Labor Statistics data. Most of these plans resulted from conversions from traditional defined benefit plans. However the status of such plans is currently in legal limbo due to court decisions (see below), and the number of conversions has slowed. Congress was considering legislation to clarify the status of cash balance plans and there is legislation which would permit the moratorium on new conversions to end.

Conversion controversy

Cash balance conversions have been controversial and have raised the ire of workers and their advocates. In 2005 the Government Accountability Office (GAO) released a report analyzing the effects of cash balance conversions on worker benefits. They found that in a typical conversion the cash balance plan would provide lower benefits for most workers than if the defined benefit plan had remained unchanged and the worker had stayed in their job until retirement age. This decline in benefits tends to be largest for older workers. This is because in a traditional plan, where benefits are based on final average pay, the “value” of the benefits accrues much faster for older workers than for younger workers. In contrast, in a DC or cash balance plan, all workers contribute at the same rate, and a dollar contributed by a younger worker is actually more valuable because it has more time to compound before retirement. Thus some argue that cash balance plans hurt workers.

On the other hand, this may not be the relevant comparison. If the alternative to cash balance conversion is that the plan is frozen or terminated (with the vested balance going to the worker), all workers would be much worse off than in a cash balance conversion. This is a realistic possibility; tens of thousands of defined benefit plans have been frozen and/or terminated in the last two decades, far more than have been converted to cash balance plans. Likewise, for the many employees who leave their job before retirement (whether voluntarily or not), many would be better off under the cash balance conversion than under the original defined benefit plan. In addition, about half of cash balance conversions have grandfathered in some or all of the existing participants in the defined benefit plan.

Types of pensions

The ubiquitous 401(k) plan is an example of a defined contribution plan because the Internal Revenue Code §414(i) states [t]hat the term defined contribution plan means any plan that provides retirement benefits to a worker based solely on the amount contributed to the (worker’s individual) account and any (investment) income, gains net of any expenses and losses.

Under the definition of accrued benefit under Code §411(a)(7)(ii) in the case of a plan that is not a defined benefit plan, [the term accrued benefit] means the balance [in] the employee’s [individual] account. On the other hand for defined benefit plans, Section §411(a)(7)(i) states that “accrued benefit” means “the employee’s [] annual benefit” as it is “determined under the plan … expressed in the form of an … [annuity] … commencing at normal retirement age.” Finally, the Code’s definition for defined benefit plans are all plans that are not defined contribution plans.

Cash balance plans are defined benefit plans that look like defined contribution plans. A worker’s right to a pension in a defined benefit plan represents a contingent and hence uncertain financial obligation to the employer sponsoring the plan. Section 412 of the Code requires the employer to make annual contributions to the plan to ensure that the plan assets will be sufficient to pay the promised benefits later at retirement. As part of this process the plan is required to have an actuary perform annual “actuarial valuations” in which the present value of each worker’s “accrued benefit” is estimated and then each present value for each worker covered by the plan is added up so that the minimum annual contribution can be determined.

The “actuarial present values” for the “accrued benefit” for each worker is the lump sum dollar amount that represents the financial value of the employer’s liability on the date of the valuation. It does not include the future accrual of pension benefits nor does it include the effect of projected future salary increases. Thus the lump sum value for each worker is not based on that worker’s projected final salary at retirement, but only the worker’s salary on the date of valuation.

Design of plans

Some cash balance plans communicate to workers that these “actuarial present values” are “hypothetical accounts” because upon termination of service, the employer will give the former worker the option to take “all his money” from the pension plan out. In reality, if both the worker and employer agree, even in a normal defined benefit plan a former worker may take away “all his money” from the pension plan. There are no legal differences in this “portability” aspect between a traditional defined benefit plan and a cash balance plan.

A typical “design” for a cash balance plan would provide each worker a “hypothetical account” and pay credits in the current year of say 5% of current salary. In addition, the cash balance plan would provide an interest credit of say 6% of the prior year’s balance in each worker’s “hypothetical account” so that the current year’s balance would be the sum of the prior year’s balance and the current year’s pay credit and an interest credit on prior year’s balance. For a worker who starts at age 25 with a $2000 a month starting salary, he would start with a zero account balance and the first year’s pay credit would be $1200 leaving him with an end of first year balance of $1200 in his “hypothetical” account. Because his beginning of first year balance was zero, his interest credit for the first year is also zero. In his second year, with a 3.5% salary increase his monthly salary would be $2070 on his 26th birthday. The 5% pay credit for this second year would be $1242. Because his second year “hypothetical account” starts the year with a $1200 balance, the interest credit at 6% would be $72. Adding the beginning balance of $1200 to the $1242 pay credit and $72 interest credit would give an ending balance in the “hypothetical” account of $2514 ($2514 = $1200 + $1242 + $72) for the second year. Repeat this process for each ensuing year until termination. This creates a hypothetical account balance from which the legally required benefit — an annuity payable for the life of the participant or beneficiary who elects to commence payment at normal retirement age(NRA) — can be calculated. This is due to requirement that benefits be definitely determinable found in the IRS Regulations Section 1.401.

Lump sum calculation cases

In 1993, the Third Circuit decided in Goldman v. First National Bank of Boston that the terminated worker did not demonstrate that the adoption of the cash balance plan violated age discrimination rules. In 2000, the Eleventh Circuit in Lyons v. Georgia Pacific and the Second Circuit in Esden v. Bank of Boston decided that the employer violated rules for calculating lump sums, and a district court in Eaton vs. Onan Corp. decided that adopting the cash balance plan did not violate age discrimination rules. In early 2003, the First Circuit in Campbell v. BankBoston did not decide that the employer violated the age discrimination rules against a former worker because the former worker made a procedural error and brought the issue up late.

Then in summer of 2003, the Seventh Circuit in Berger v. Xerox Corp. Retirement Plan, decided that the lump sum calculation for workers terminating service prior to retirement who were covered by the defendant cash balance pension plan cannot violate the rules for defined benefit plans and in a district court in Illinois in Cooper vs. IBM Personal Pension Plan, decided that the very design of the cash balance plan – the issue that the Campbell court only reached in dicta – had indeed violated the age discrimination rules because the “rate of benefit accruals” did “decrease” on account the “attainment of any age.”

The Lump Sum cases all held that because cash balance plans were defined benefit plans, they had to abide by the rules for defined benefit plans when the employer calculates the lump sum actuarial present value by first accruing the account balance to normal retirement age and then converting the account balance at retirement age into a life annuity before then discounting back to the current date. Because these cash balance plans were designed to “look like” defined contribution plans, the defendants asserted that these cash balance pension plans were not true defined benefit plans but were “hybrid” plans instead. Therefore, because, they were “hybrids” and looked like defined contribution plans and because workers are only entitled to the actual balance in defined contribution plans, the plaintiffs should get lump sums equal only to their “hypothetical” account balances. In Berger v. Xerox, Judge Richard Posner in a stinging phrase – “for hybrid read unlawful” – held that the lump sum amounts should have been larger. So the cash balance plan is not an exotic “hybrid” plan in the eyes of the law but remained in the defined benefit part of the pension taxonomy.

This process of taking the account balance forward from the terminated worker’s current age up to the worker’s normal retirement age, before discounting back to the current age is sometimes called the “whipsaw.” If the interest rate used for discounting back is lower than the rate used for interest credits on the hypothetical account balances, then the legally required lump sum values would be higher than the worker’s account balance in his hypothetical account.

The age discrimination cases

Age discrimination is not the US pension law’s highly compensated employee nondiscrimination which requires that any plan which covers both highly compensated employees and non-highly compensated employees.

Proponents of cash balance plans advocate that these plans do not violate the age discrimination statutes applicable to defined benefit pension plans. The statutes forbid – in virtually the same words – any plan from reducing “the rate of benefit accrual” for any worker on account “of the attainment of any age”.

Although the Code defines the “accrued benefit” for any worker covered by defined benefit plans as “expressed in the form of an annual benefit commencing at normal retirement age” and defines “normal retirement benefit” as the “greater of the early retirement benefit under the plan, or the benefit under the plan commencing at normal retirement age”, the supporters of such cash balance plans still argue that the terms “accrued benefit” and “rate of benefit accrual” are ambiguous or undefined.

In Onan Corp., District Court Judge Hamilton agreed with the supporters of cash balance plans and held that the cash balance plan design did not violate age discrimination because the terms “rate of benefit accrual” and “accrued benefit” were not defined in the relevant statutes. He then engaged in an exercise of statutory construction that Professor Edward Zelinsky found fault with. But the terms “accrued benefit” and “rate of benefit accrual” have long been very familiar and unambiguous to pension actuaries. It was because the terms were so unambiguous to actuaries that they could construct the initial balances in each worker’s “hypothetical” account for these new cash balance pension plans. Also, §411(a)(1)(7) of the Code defines “accrued benefit”. Thus pension actuaries are very familiar with changes in accrual rate factors used in a traditional defined benefit pension plan’s formula.

In Cooper, District Court Judge Murphy came to the opposite conclusion because to him, the terms accrued benefit and rate of benefit accrual were not ambiguous. Because benefits accrued at a decreasing rate solely based on increases in age, the plan design of the cash balance plan violated the age discrimination statutes. If this rule is upheld, then all “flat rate pay credit” design cash balance plans would violate age discrimination. A plan sponsor could avoid these problems by setting up a cash balance plan with steadily increasing – or age graded – rates for pay credits. This has the same economic effect as adopting a “career average salary” traditional defined benefit plan. Murphy has just been reversed! [1]

Legislative developments

Because of the troublesome age discrimination suits and misunderstanding and frustration by older workers covered by such plans, Congress, notably Senator Charles Grassley (R) of Iowa, has a proposal to statutorily fix the problem. It involves outlawing “wearaway”.

The Pension Protection Act of 2006 was signed into law in August 2006 and prospectively made the flat salary credit type plans immune from age discrimination. Also the use of a higher interest rate for calculation of lump sums is now allowed as the new law eliminates the whipsaw. The act only fixes age discrimination prospectively.

All of the above was found here.