Tracking Down Refunds and Retirement Plans

This week, Gail tries to help an irate taxpayer and explains the difference between pension plans and 401(k) plans.

Dear Gail;

Last summer, when everyone else we know was getting a tax refund from the federal government because of the new 10% income tax rate, my husand and I got a letter saying we were not eligible because we didn't pay enough in taxes the previous year.

That's #%&*/@ ! Our income exceeds $150,000! Every time I try to call the IRS to get to the bottom of this, I either get a busy signal or else I run out of time because their phone system keeps shifting you to yet another list of options form which to choose.

Can you help?


Dear Maria,

Due to privacy considerations, the IRS cannot discuss the particulars of a taxpayer's situation with anyone but that individual taxpayer. However, I spoke with a representative in general terms about your situation and here's what it comes down to:

The IRS readily admits it could have made a mistake. After all, there were millions of letters and checks sent out. (To its credit, the IRS pulled off this major undertaking with relatively few hitches and in a very short timeframe.)

However, this doesn't mean you're simply out the money. The checks sent out last year — $300 to single filers, $600 to those married, filing jointly and $500 if you're a head of household — were really an early refund of your 2001 taxes. You may recall that this was supposed to spur a wave of consumer spending and jump-start the sluggish economy. It might have worked, except for the events of 9/11.

You're correct that the refund checks reflected the new, lower 10% income tax bracket authorized in the legislation signed into law last June. But if you are truly entitled to this credit — and it sounds as if you are — you will get it when you calculate your 2001 taxes.

When you sit down to fill out your tax return for last year, you'll notice there's a new line on Form 1040 — Line #47. It asks you you to enter the "rate reduction credit" to which you are entitled. Those who received this credit last year will put a "0" in the box. If you weren't in that group, then you're directed to a special worksheet in the 1040 instructions which walks you through a relatively simple process to determine how much of a credit you're entitled to. This amount will be subtracted from your 2001 income tax bill.

On a related note, have you and your husband decided what you will do with this "found" money? While it might be tempting to splurge on something, consider using it for something of more lasting value.

Maybe you could split the money and each contribute $300 to your 2002 IRAs. As readers of this column know, the maximum contribution this year rose to $3,000, so you'd have a headstart in terms of coming up with the extra money. The point is, don't just let this "gift" get frittered away.



I worked for Bayer (formerly Mobay) in Pittsburgh, PA from 1973 to 1981; I then accepted employment with USAir and worked with them from 1981 until 1987.

My question is: would I have earned any retirement benefits? I performed clerical work at both organizations. Many thanks.


Dear Grace,

The term "pension" is often used rather loosely to describe just about any kind of retirement plan. However, to professional, it actually refers to a specific type known as a "defined benefit" plan. (This is what your parents might have had.) In a defined benefit plan, only the employer makes contributions.

Based on complex formulas that takes into consideration the years you've spent on the job, your age and salary, retirement benefits are pegged at a fixed (i.e. "defined") amount, guaranteed to be paid for as long as you live. (You could also choose a joint payout that would last as long as either you or your spouse are alive.)

The company is responsible for investing its contributions to the plan in order to meet its future income obligations to retirees.

Because they require significant paperwork and reporting, defined benefit plans are costly to maintain and fell out of favor when a new kind of retirement plan was introduced in the late 1970s: the 401(k) plan.

Contributions to a 401(k) plan are made not by the company, but by each employee. That's why it and similar plans are called "defined contribution" plans — each participating employee defines how much money he/she wishes to contribute, subject to government limits. While an employer might offer to "match" part or all of the money an employee puts into his account, there is no requirement that a company contribute anything at all.

401(k) plans are less costly for a company to maintain and they have significant benefits for today's more mobile workforce because the money you yourself contribute, as well as company contributions you are "vested" in, belong to you if you leave to take a job elsewhere. By contrast, defined benefit plans tend to reward older, higher paid workers and those who stay with the company for decades. If you leave too soon, you are entitled to nothing.

Another significant difference is that the responsibility for investing 401(k) money rests with the individual employee. With a defined contribution plan, your retirement benefit is not a "fixed" amount, but instead will depend upon how well the investments you chose perform. As thousands of Enron employees have discovered, if your investments do poorly, your retirement income will suffer.

I'm afraid this is a rather convoluted way of explaining that I can't tell you what — if any — benefits you are entitled to under either company's plan. I have no way of knowing what kind of retirement plans they had or the specific terms of each plan, which can vary widely.

The best approach would be to contact the human resources departments at each of your former employers. They're required to keep a record of who's entitled to what in terms of retirement benefits. Ask for a copy of the "plan summary," which highlights the most important provisions in the plan.

Let me know if you run into problems,


If you have a question for Gail Buckner and the Your $ Matters column, send them to  along with your name and phone number.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.