Quick Guide: CARES Act Changes to 401k Plans

In the U.S., individuals from all demographics were, and continue, to be impacted by the coronavirus pandemic. While there will be an eventual end to the uncertainties we collectively face, the coming months are going to define my changes to adapt to the current reality.

Due to work restrictions and social distancing, many have been left in a difficult position financially. This results in employees who seek advice from plan advisors on how they can make the most of their finances to weather the storm.

As the person most intimately involved in their plan assessments, this places the plan advisor in a unique position of trust. Keep reading below on some of the new ways in which individuals can use their 401k plans to their advantage through the CARES act in a way they may not know.

Early Withdrawal Fees Were Removed

For employees who are younger than 59 ½ withdrawing money from their 401k plan creates two types of fees: taxes and early withdrawal penalties. After passing the CARES act, there are new benefits for individuals who are experiencing coronavirus-related hardship and need to make a withdrawal to protect their financial security.

One major change is that individuals no longer need to pay for the 10% penalty on early withdrawal so long as they can prove that they are suffering from coronavirus-related hardships. These hardships include being furloughed from work closure, suffering a reduction in hours, being sick with coronavirus, and having a sick or previously ill spouse.

Withdrawals can be made of either the full account value or up to $100,000, whichever is lesser.

Back Taxes Were Postponed

Another point of change on earthly withdrawals occurred when the CARES Act changes the repayment timeline of taxes owed on 401k funds.

While normally taxes on withdrawn amounts are due within the same year, the CARES Act has made it such that taxes are not owed for three years post-withdrawal. Conversely, if employees are able to reinvest their withdrawal amount back into their 401k within the same period, they will not owe taxes at all.

Similar to the above, this applies for account withdrawals for up to $100,000.

Loan Payments Are Deferred

Another area of change is related to individuals who are looking to take out a loan against their 401k to avoid making a withdrawal.

While typically loan amounts were limited to 50% of the total value of vested accounts or $50,000, whichever is lesser, the CARES Act increased this amount to the same $100,000 standard.

Employees are further allowed to differ the start of their loan repayment a full year after the loan was instated.

Like the above categories, in order to qualify for this level of relief, an employee must prove they have been negatively impacted by the coronavirus either through decreased hours, eradicated work, or illness.

These Changes End in September

Finally, while the CARES Act is here to help citizens, the aid is not going to be permanent. Plan sponsors and employees alike must be aware that these changes are only placed in effect until September 23, 2020. After that point, the rules will default back to normal.

Talking to Clients About Change

Over the course of meeting with clients, there are some main pieces of information they will need to know to make an informed decision about whether or not they want to participate in any of the above withdrawals.

Of particular importance is weighing the costs and benefits of pulling money out of their retirement savings. In times like these clients will need to know what the long term impact of taking a withdrawal will ultimately mean for their 401k and how that will affect the interest they accrue over time.

Keeping the 401K Experts by Your Side

Being a plan sponsor at a time like this can be a perilous endeavor which can create a tretersour landscape of personal liability. Maintaining due diligence and keeping your employees informed is integral to keeping yourself out of a potential legal battle later on.

At Benchmark, we understand the importance of this security to plan sponsors and employees alike. Since we know everyone can benefit from accurate information, we help offer it at no cost to you.

With a team of seasoned financial advisors, we can benchmark your plans, check your fees, and even answer some questions about the times ahead. Interested? We are just one message away.

Posted in

kevin.sting

Leave a Comment

Your email address will not be published. Required fields are marked *