Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
The pendulum of life is always swinging. With respect to employees and employers the pendulum swang in the direction of paternalism in the middle 20th Century. Employees and their employers had informal contracts that implied that if employees worked there long enough, their employers would take care of them. That pendulum swung in the other direction for a good part of the last 50 years with employees assuming more and more responsibility for their own wellbeing and employers taking a more hands off approach. Is the pendulum swinging back again?
Some new research from PIMCO, a large asset management firm on the west coast, is suggesting that the pendulum is indeed swinging back at least a little bit. In the last couple of years, more and more research has come out that employees trust their employers more than they used to. They are looking to their employers for help and guidance in a number of areas from better health and wellbeing advice to retirement and financial planning tools. This new research from PIMCO is now showing a further iteration in employees and employers working together.
It has long been known that most employees when they retire have almost no idea how to arrange their assets in such a way as to provide a lifetime of income. And why should they? After all, they have been spending a lifetime accumulating assets and saving, not figuring out how to make their assets last the rest of their lives. It appears that employers are starting to take notice and help out. The PIMCO Study shows that in the Small Plan Market (<$50mm in plan assets), the top client priorities in 2020 are Improving Participant Retirement Education, Evaluating Retirement Income for Participants, and Minimizing Fiduciary Liability, in that order.
So what does this mean, or could this mean, to you as a Plan Sponsor? The first question to ask, of course, is do you have any interest in helping your employees prepare for retirement beyond just helping them save through the retirement or 401k plan? If yes, then it is probably a good idea to begin exploring what this assistance would look like. It should begin with education and helping employees understand how to use their assets in retirement. It could then move to helping employees work with an advisor to put together a plan for transitioning into retirement and living the life they want and can afford.
But where does it truly begin? It begins with working with an advisor with experience in helping pre-retirees plan for retirement. Experience helping employees understand their asset mix and the tax implications of using those assets. Experience with Social Security and estate planning.
If you are concerned with your current advisor’s level of experience, please give me a call. I would love to work with you and your employees as they prepare for a retirement they have earned.
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