As if the economic uncertainty isn’t bad enough, there may be even more bad news for you if you managed to stay employed amid the seemingly endless coronavirus crisis.
It is very possible your employer just might pauses its contributions to your 401(k) plan during the U.S. economic downturn.
“As the coronavirus pandemic wallops the economy, and businesses deal with dropping revenue and limited cash flow, employers are exploring how to trim their obligations to those plans without violating federal regulations. Companies commonly give to worker’s accounts either through a match (up to a certain amount) or other contribution,” CNBC explained.
Plan sponsors “have been calling regarding how they might legally reduce their contributions to plans to preserve their cash positions,” said Marcia Wagner, founder of The Wagner Law Group, which has heard from both privately held and publicly traded companies.
“Employers need to know their options to try to navigate through this crisis,” Wagner said.
The average amount employers contribute to their workers’ 401(k) accounts is 4.3% of a participant’s salary.
95% of plans offer either a company match or other type of contribution, according to Vanguard.
Some experts say the share of companies that temporarily stop contributions may exceed those that did so during the financial crisis of 2008-2009.
Meanwhile, the CARES Act doubles to $100,000 the current limit on loans from 401(k) and similar tax-deferred retirement plans for participants diagnosed with the novel coronavirus or who are affected by related economic losses. Participants with existing loans can delay any repayments due in 2020 for one year, Reuters said.
Under existing law, the plan sponsor (your employer) has discretion to approve these loans, notes Ed Slott, an expert and author on retirement saving. "Anyone can take a loan, but the amounts are at the discretion of the sponsor."
This is a reasonable way to provide liquidity to households during the crisis, but it is not risk-free. Loans are tax-free unless you fail to repay - any remaining balance is taxed as ordinary income, and a 10% penalty is due for those under age 59-1/2 for taking an early distribution. Since you are borrowing from yourself, no harm, no foul - we hope.
The bill also permits people affected by the virus or related economic circumstances to make withdrawals from workplace plans and IRAs up to $100,000 this year without the usual 10% penalty due for people under age 59-1/2. Income taxes are still due on the withdrawn amounts, but the law allows you to spread out this liability over three years. You also have the option to redeposit the withdrawn sums during that period.
This should be viewed as a last-resort "Hail Mary" move. From a policy standpoint, it sends a signal that draining a 401(k) is on par with many of these other moves, when it stands to hurt people in the long run.
Many low- and middle-income households do not have these accounts in the first place, and even if they do, their balances usually are far lower than $100,000.
“It’s more likely to serve as a tax-planning tool for wealthy individuals than a lifeline for the middle class,” said Shai Akabas, director of economic policy for the Bipartisan Policy Center. “This is an emergency situation, but we already have an underlying retirement security problem, so sending the signal that it’s OK to make yourself less financially secure to gain more security today is not ideal public policy."
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