This article is intended to help businesses better administer their employer-sponsored retirement plan(s).
What Plan provisions have changed due to the CARES Act?
Under that CARES Act, both the withdrawal and loan provisions have been changed to allow employees increased access to their retirement savings accounts. These new provisions reduce or delay penalties or payments on withdrawn money, provided that their personal situation meets the criteria outlined in PART 1- How the CARES Act impacts your Employer Sponsored Retirement Savings Plan.
Here are new scenarios created by these new provisions.
- ENHANCED PLAN WITHDRAWALS
- If a COVID -19 withdrawal is taken, the 10% premature excise tax does not apply
- The usual 20% mandatory Federal Tax Withholding is reduced to 10%
- The maximum amount available to withdrawal is $100,000, which may be taken all at once or as multiple withdrawals
- Withdrawals may be redeposited into an eligible retirement account within 3 years as a rollover contribution without regard to contribution limits.
- If not redeposited, the income tax due, may be spread over 3 years.
- Any distribution after 12/31/2020 also qualifies as a ‘Corona- eligible’ related distribution if meets criteria.
- ENHANCED LOANS (Available for 180 days beginning March 27, 2020)
- These provisions only apply to Plans that already have Loan Provisions. If the Plan limits the number of loans per employee, or does not currently offer loans, the CARES Act cannot FORCE the Plan to change their loan provisions. In this situation the Plan Document MUST be amended to take advantage of the new loan provisions.
- Loan limits are increased from 50% of a participant’s vested account balance up to 100% of their vested balance.
- Maximum loans are increased from $50,000 to $100,000.
- Plan loan payments due through December 31, 2020 may be delayed for 1-year.
Things to consider with the enhanced withdrawal and loan provisions.
Historically, employers have provided retirement plans to their employees to help guide them on the path to financial stability and retirement success. These new provisions provide employees quick access to their retirement savings, without providing appropriate education regarding the potential long-term implications and irrevocable impact on an employee’s ability to retire timely and with confidence.
If you elect to adopt the CARES Act provisions for your Plan, our goal is to help you help your employees make the most informed decisions.
Aside from lost investment returns, selling investments at a very in-opportune time (while the market is down), or missing out on the time value of money and the power of compounding interest, here are some examples of what your employees need to consider before they take a large loan or withdrawal from their accounts.
- If an employee takes a large loan, will they be able to repay it over the required timeframe?
- If an employee takes a large withdrawal can they afford to pay the it back to their account over the next 3-years?
- If an employee takes a large withdrawal, and elects NOT to repay it, can they afford to pay the income taxes due over the next 3-years?
- If an employee takes a large loan and a large withdrawal, do they clearly understand the significant repayment and/or tax consequences?
- If an employee “cashes out” all or nearly all their savings, will they be able to retire?
There are several combinations of options under this new legislation, but for most people, they are all just a short-term fix with a long-term trade-off. We would like to help you make sure that any of your employees who utilize any of these provisions, have every opportunity to be informed and aware of the details.
Please feel free to call or email us with questions before you make any decisions regarding amending your Plan, if need a resource to provide personalized guidance to your employees, or if you would like to discuss this topic and how it relates to your Plan and employees in further detail.
SUITE(k) is a division of S.E.E.D. Planning Group focused on helping employers with retirement plan administration, fiduciary oversight, and employee education for a flat-fee
S.E.E.D. Planning Group LLC (S.E.E.D.)is a Registered Investment Advisor (RIA) with the Securities Exchange Commission. S.E.E.D.’s team provides investment fiduciary and fee-only financial planning services to clients. Our fees are disclosed, easy to understand, and not predicated on product sales.
Kerstin Driscoll leads our Business Retirement Plan Team. In her role as Retirement Plan Navigator, she provides fiduciary investment services to our business clients. Kerstin has accumulated over 30 years of industry experience. She holds a Bachelor of Arts degree in Pre-Law and a business minor from Penn State. Throughout her career, she has guided employers and retirement plan committees to design cost-effective retirement plans for their employees and their companies. To contact Kerstin, you can email her at firstname.lastname@example.org