For many Americans, financial disarray is closer than they want to admit. In fact, according to assessments made by Statistica, roughly 24% of all Americans have less than $1,000 in savings and a staggering 45% of Americans have no savings at all.
In the era of coronavirus, the legal landscape is changing quickly to accommodate for the challenging life situation so many individuals are currently in. As the economy pulls through this present instability, the finances of retirees, and their retirement accounts, is a growing concern that must be addressed.
Particularly, with the passing of the CARES act, there are many restrictions that have been lifted on 401k accounts and the disbursements you may withdraw from them. While this is a profound change that can create short term relief, its necessary to understand the implications of doing so and how it might affect your future security and current investments.
While the full extent of damage and change caused to retirement accounts such as 401k plans is yet to be determined, there are some preliminary trends and changes to make note of as we move forward with the new state of normal.
A Difference in Approach: CARES Act Changes
The changes the CARES act looks to implement for employees affect 401k loans and early withdrawals alike. This is to help individuals remain flexible in their finances while still giving them a way to ensure hardship during a time where their work might be unstable. Some of these changes include:
- Exemption to the 10% early withdrawal penalty on up to $100,000 dollars or the full amount of smaller accounts
- Loans can be placed on a deferred payment cycle that does not require employees to begin repayment until a year after receiving disbursements. The employee will then have 5 years to repay this amount in full
- Unlike plan loans, distribution through CARES are not due back upon termination
However, just because these changes are made does not mean employees are free from peril or consequence. In the next section, we discuss some of the pitfalls to the CARES Act changes, in addition to what your employees should be aware of when using these benefits.
First and foremost, employees must understand that CARES Act measures are meant to provide immediate relief, and as such, are not permanent solutions. Employees have only until September 23, 2020, to take advantage of these exceptions before withdrawal rules return to normal.
Similarly, disbursements are still subject to income tax upon withdrawal, and similarly, are subject to fees should employees find themselves unable to pay back their loan amount in the specified period of time.
Finally, it is necessary that employees understand there are still strings attached to going this route. Particularly, there are requirements that must be met in order to take advantage of these relief benefits.
In order to qualify, you must prove you are “coronavirus affected” in one or more of the following ways:
- Either the employee or their spouse suffered from coronavirus and/or was put under quarantine
- The employee suffered a reduction in work hours, furlough, necessary time off due to a COVID-19 related lack of childcare
- Is experiencing financial hardship directly related to COVID-19
While this list is non-exhaustive, it represents the main categories plan sponsors should be aware of when navigating employee questions about withdrawals, loans, and eligibility— allowing them to make an informed decision about where to take their finances next.
A Balancing Act: Helping Employees Choose Wisely
It is important to note that while the CARES Act offers employees more flexibility around their financial stability, their actions could have unintentional, long-term side effects.
For instance, should an employee choose to withdraw a sizable portion of their 401k, not only will some of this money ultimately go to taxes, but they will have less in their account overall. This shrinks their future gains in an impactful way, especially for well-performing portfolios.
Working With Financial Experts
At a time like this, keeping a watchful eye on your employee investments is integral to their financial security and your fiduciary duty. It is a time when we must all work together to keep one another safe and informed while so many important decisions hang in the balance.
At Benchmark, we help you do this through a network of experienced financial advisors ready to benchmark your plan for the time ahead. We know how important these services are to both you and your employees, so we offer it free, at no cost to you.
To begin the process now and ensure the financial health of your employees and reduced personal liability, reach out. We are only a message away.