Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
I am knee deep in scheduling and conducting 2nd quarter plan reviews with my 401k clients. And what a 2nd quarter is was! The end of the first quarter we were just hitting the bottom of the market, hope was in the air that COVID-19 would soon be behind us, and Congress was getting busy with stimulus and relief packages, particularly the CARES Act. How did all this play out?
There will certainly be much written and researched about our current times in the years to come, but we are already able to see some interesting outcomes. The Secure Retirement Institute just completed some research that showed American workers who lost their jobs or experienced a drop in income due to COVID-19 were at least twice as likely to take money from their retirement accounts as those who were not impacted. It's a fact that you can’t choose whether or not you will be hit by a pandemic, but you can choose how you react.
However, not everyone who was affected tapped into their retirement savings in the 2nd quarter. In fact, one group in the survey left their retirement accounts virtually untapped. Who were these people? The ones who had emergency savings set aside, particularly those who had set aside a year’s worth of expenses. I would term these people “super savers’ to be able to have an entire year’s worth of expenses set aside, but beyond these folks, there is certainly room for improvement by others.
26% of workers acknowledged that they had less than 1 month’s worth of savings to cover expenses, and 48% report having only enough emergency savings to cover 3 months or less. We need to help employees do better! Tapping retirement savings to “get through today” has devastating effects on long term retirement preparedness.
What would be the easiest way to help employees prepare an Emergency Savings reserve? The same way we help employees save for their retirement – through workplace deduction. Having money deposited into an account that would serve employees in an emergency is the simplest and easiest way to help employees prepare for their next financial challenge.
If you are an employer who would like to learn more about how to help your employees set up and manage Emergency Accounts to better prepare them, please give me a call at your convenience. I would love to show you how easy this can be.
Pete Welsh a/k/a 401kGuy
The recently passed CARES Act is designed to provide stimulus and economic support during the COVID-19 pandemic. The largest such relief of its kind in history, it’s not surprising that there is much to the legislation. The law itself runs for 880 pages. And like all big pieces of legislation, there are provisions affecting your retirement plan. Let’s take a look at one.
One of the provisions getting the most press permits eligible employees to take hardship distributions from their qualified accounts penalty free up to $100,000. Normally, a Hardship Distribution that occurs before 59 ½ is subject to both income taxes as well as a 10% early withdrawal penalty. Waiving the withdrawal penalty seems like a humanitarian gesture in this time of need. But as with most things like this, the initial gesture can get complicated quickly.
For one thing, the law permits the income tax on the distribution to be paid over a period of 3 years, but it does not require this. Presumably an employee would make some kind of election as to how to pay this tax – all at once, evenly spread, some here/some there, etc. But because the amount is treated as ordinary income, it would get lumped in with all other earned income and considered part of your Modified Adjusted Gross Income (“MAGI”). This by itself is going to require some real planning. But wait, it gets better.
On the top of page 159 of the CARES Act there is a specific provision that allows, but does not require, someone who has taken a distribution to repay the amount of the distribution into the same qualified account from which it came or another qualified account if the repayment occurs within 3 years. If the amounts taken, or some of the amounts taken are repaid, those amounts are not considered taxable income. It would sort of be like the distribution never actually occurred, and no tax would be owed on those amounts repaid.
What if an employee chose to pay all the tax this year, and in 2 ½ years when this whole crisis is in the rear-view mirror decides to repay some of the original distribution? It would seem as though the employee should receive credit for the taxes paid originally, right? Double taxing the same dollars would be inappropriate. I’m sure we will get guidance on this, but the law is silent.
And on top of all this, if the distribution is from an employer qualified retirement plan versus an IRA, this whole thing has to be approved by an employer. The employer is not required to permit hardship distributions. And what type of reporting might the employer need to consider if these distributions, repayments, and taxes all need to be tracked and monitored? What if the distribution comes from your plan but the employee repays the amount to an IRA? Or another plan?
If you are an employer looking for good counsel during these times, I would encourage you to give me a call. This is not the time to try to figure this stuff out on your own.
Pete Welsh a/k/a 401kGuy