2018 has brought changes to 401(k) plan policy that will impact employees and their retirement funds. It is important that employers are aware of these changes and help educate their employees of the impacts brought with them.
These new policies are designed to give employees more flexibility to use their 401(k) accounts. More money can be withdrawn, and loans can be repaid less quickly. This means employees might miss out on potential tax-deferred growth and end up with smaller 401(k) accounts overall: both create smaller funds for retirement.
1-Hardship Withdrawal Limit Increase
The first change an increase in the hardship withdrawal limit.
Hardship withdrawals are permitted by most 401(k) plans, but sponsors are not legally obligated to allow them. Hardship withdrawals are permitted only if an employee has already taken a loan from the account. The withdrawals are subject to income tax and the 10% early distribution tax penalty.
Traditionally hardship withdrawals have only been allowed from the funds that the employee contributed to his or her account. Beginning in 2019, the Bipartisan Budget Act (BBA) will loosen the limits on hardship withdrawals. Employees will be able to take funds from both their contributions and the employer matching contributions. This modification will substantially add to the amount available for withdrawal, especially for employees using the plan for several years.
2-Plan Loan Repayment Extension
The second important change is the extension of plan loan repayment. The Tax Cuts and Jobs Act (TCJA) extends the time a person has to pay back outstanding loan balances when leaving an employer.
Similar to hardship withdrawals, 401(k) plan sponsors are not required to allow loans, but many do.
Historically, if an employee left a company with an outstanding loan from their 401(k), the loan had to be repaid or contributed to an IRA or new employers retirement plan, within 60 days. If the loan was not settled by that time the amount was considered a taxable distribution. If the employee was younger than 59 ½, a 10% early distribution tax penalty was applied.
Beginning in 2018, under the TCJA the 60-day time frame is extended, and now employees have until their tax return filing due date, including extensions, to repay the loan, or contribute it to an IRA or new employers plan.
The additional freedom these policies give to using retirement funds early comes with the potential for them to significantly lessen retirement funds for individual employees. Most people aren’t saving enough for retirement as it is, so it may be helpful to educate your employees about the importance of leaving their 401(k) undisturbed.
If you have any questions about the recent tax changes and how they affect 401(k) sponsored plans please contact us at 949-860-9902 or click here and we will contact you.