Earlier this year, Congress passed (and the President signed) the Bipartisan Budget Act which included several provisions affecting qualified retirement plans. As employers look ahead at planning for a new calendar year, let’s take a moment to discuss the change to hardship distributions employers may consider adopting. Effective for 401(k) plan years beginning in 2019, qualified nonelective and matching contributions, along with earnings, will be available for hardship distributions. Additionally, participants will no longer be required to take a loan prior to requesting a hardship distribution, and the IRS is directed to remove the six-month prohibition on new contributions.
As background, 401(k) plans are permitted, but not required, to allow participants to request in-service distributions when faced with certain financial hardships known as “immediate and heavy financial needs.” Under current rules:
This new legislation did not change what might constitute an individual hardship, but it does make hardship withdrawals easier to obtain for participants. The IRS has been clear that, while a 401(k) plan can interpret what constitutes an immediate and heavy financial need, the IRS offers plans a safe harbor to those situations involving:
Of course, 401(k) plans are not required to offer hardship distribution opportunities. Similarly, those that do allow participants to withdraw money for hardship reasons may choose whether or not to adopt these expanded changes. Plan sponsors will be wise to consider the philosophical implications to making it easier to allow people to take in-service distributions, especially from vested employer contributions. We recommend that you work with your plan advisors to weigh the advantages and disadvantages of these new features and the implications they might have on employees’ retirement savings.
401(k) and 403(b) plans’ annual deferral contributions limits will raise to $19,000 (from $18,500) in 2019. Catch-up contributions remain unchanged at $6,000 for those age 50 and over. While plans are unable to increase these limits above the statutorily set amounts, employers will want to remember to consult with their plan advisors about opportunities to increase participation and contributions. Perhaps a 401(k) plan with automatic enrollment and acceleration of contribution with the proper investment options and educational resources is a good place to start.
The concept of auto-enrollment helps new employees save without realizing they are saving. With their first paycheck, employees begin contributing to their 401(k) accounts without the conscious longing for the cash they might otherwise see in their take-home pay. If the same plan calls for the amount that is automatically deducted from an employee’s paycheck to increase each year, the employee will likewise not “notice” the increase in the context of wage increases. The IRS understands the importance of such a design, as they’ve carved out special rules to encourage employers to sponsor auto-enrolled plans.
There are three basic types of automatic enrollment:
While auto-enrollment can help solve the problem of the younger employee getting involved early, how does it help employees who are already saving but are closer to retirement and are concerned about not saving enough? Alone, the impact of implementing an auto-enrollment strategy can be limited. However, combined with the right educational pieces about savings and the proper investment choices, it can be a valuable plan design tool aimed at providing a relatively straight-forward and cost-effective benefit to employees in all stages of their careers.
A sound compliance strategy is also essential. To learn about new compliance obligations, pending legislation and some notoriously tricky aspects of administering a retirement plan, register for our upcoming webinar "Retirement plans: Year end compliance update." For further information about retirement plans or related topics, contact us.
Bret works with HR professionals to ensure they have a clear understanding of the rules governing all aspects of human resources. He works with employers to maintain compliance of health and wellness benefit packages under state and federal guidelines, including rules of taxation and healthcare refo
Bret works with HR professionals to ensure they have a clear understanding of the rules governing all aspects of human resources. He works with employers to maintain compliance of health and wellness benefit packages under state and federal guidelines, including rules of taxation and healthcare reform. Bret holds a bachelor of science in economics from the University of Kentucky and a law degree from the University of Pittsburgh, School of Law.
In our 2015 MarketPulse trend study, we introduce our first annual WellnessPulse benchmarking study, in which we survey our clients about their wellness programs and share key results. We also cover trends in executive compensation and benefits, health plan design, healthcare reform, social engineering and cyber risks, workers' compensation, and retirement benefits.
Download the PDF: MarketPulse 2015
Retirement planning is very different from planning for other benefits because the end goal is many years – even decades – away. It’s impossible to develop a foolproof plan that will guide a 25 year-old to her retirement 40 years later. But the practice of planning, the financial education obtained and the savings habits created along the journey can steer employees closer to reaching their retirement goals.
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