Views: Mitigating COVID-19’s catastrophic impact on retirement readiness

As the coronavirus has placed many financial worries onto families, it has also placed a sense of worries for those that are planning for their retirement. Read this blog post to learn more.


It’s bad enough that more than 50 million Americans have filed claims for unemployment benefits since the start of the COVID-19 pandemic and lockdown. But in addition to the disruption, financial hardship, and uncertainty that unemployed Americans (and their families) are experiencing right now, this crisis also threatens their financial security during retirement.

As I have written many times before in this column, defined contribution plan participants will seriously diminish their retirement savings if they prematurely cash out all or part of their 401(k) savings account balances. According to our research, a hypothetical 30-year-old who cashes out a 401(k) account with $5,000 today would forfeit up to $52,000 in earnings they would have accrued by age 65, if we assume the account would have grown by 7% per year. In addition, the Employee Benefit Research Institute (EBRI) estimates that the average American worker will change employers 9.9 times over a 45-year period. With at least 33% and as many as 47% of plan participants cashing out their retirement savings following a job change, according to the Savings Preservation Working Group, that means workers switching jobs could cash out as many as four times over a working career, devastating their ability to fund a secure retirement.

Even before COVID-19 and “social distancing” became part of the national lexicon, cash-outs posed a huge problemto Americans’ retirement prospects. At the beginning of this year, EBRI estimated that the U.S. retirement system loses $92 billion in savings annually due to 401(k) cash-outs by plan participants after they change jobs.

These alarming trends were uncovered long prior to the pandemic and lockdown. Since the start of the COVID-19 outbreak, theCoronavirus Aid, Relief, and Economic Security (CARES) Act stimulus has temporarily eased limits, penalties, and taxes on early withdrawals from retirement savings accounts made by December 31, 2020. While the CARES Act measures are clearly well-intentioned, participants who take advantage of these provisions risk creating a long-term problem while resolving short-term liquidity needs.

Heightening the temptation to make 401(k) withdrawals is the recent expiration of another CARES Act provision—the extra $600 weekly payments to Americans who lost their jobs due to the COVID-19 pandemic. These additional federal unemployment benefits expired at the end of July, and as of this writing no deal to extend them has been reached in Congress. For Americans who had been relying on this benefit, or continue to experience financial hardship and stress about paying expenses, it is understandable that 401(k) savings could look like an attractive source of emergency liquidity.

However, given the long-term damage that cash-outs inflict on retirement outcomes, plan sponsors and recordkeepers should take this opportunity, as fiduciaries, to educate their current and terminated participants about the importance of tapping into their 401(k) savings only as an absolute last resort.

Institutionalizing portability can help

The lack of a seamless process for transporting 401(k) assets from job to job causes many participants to view cashing out as the most convenient option. And without an easy way to locate the mailing addresses of lost and missing terminated participants, sponsors and recordkeepers are unable to ensure holders of small accounts receive notifications about the status of their plan benefits.

Fortunately for participants, sponsors, and recordkeepers, technology solutions enabling the institutionalization of plan-to-plan asset portability have been live for three years. These innovations include auto portability, the routine, standardized, and automated movement of a retirement plan participant’s 401(k) savings account from their former employer’s plan to an active account in their current employer’s plan.

Auto portability is powered by “locate” technology and a “match” algorithm, which work together to find lost and missing participants, and initiate the process of moving assets into active accounts in their current-employer plans.

By adopting auto portability, sponsors and recordkeepers can not only discourage participants from cashing out, but also eliminate the need for automatic cash-outs. And these advantages come at a time when the hard-earned savings of tens of millions of Americans are at risk of being removed from the U.S. retirement system.

Before the COVID-19 pandemic, EBRI estimated that if all plan participants had access to auto portability, up to $1.5 trillion in savings, measured in today’s dollars, would be preserved in our country’s retirement system over a 40-year period. Now more than ever, the institutionalization of portability by sponsors and recordkeepers is essential for helping Americans achieve financial security in retirement.

SOURCE: Williams, S. (31 August 2020) "Mitigating COVID-19’s catastrophic impact on retirement readiness" (Web Blog Post). Retrieved from https://www.employeebenefitadviser.com/opinion/how-to-mitigate-covid-19s-potentially-catastrophic-impact-on-retirement-readiness


The little-discussed downsides of retirement

As the discussions of retirement are inevitable, there are questions that do not always get addressed. Continue reading this blog post to learn more about questions regarding retirement that are not always talked about.


The downsides of retirement that nobody talks about

Clients should identify the possible downsides in retirement and plan on how to avoid them, according to this article in Yahoo Finance. One of these snags is taxation on their retirement income, which can hurt their cash flow. To minimize income taxes in retirement, clients should consider creating sources of tax-free income, such as Roth 401(k), Roth IRA and permanent life insurance coverage.

Can clients have a 401(k) and an IRA?

Employees who are contributing to 401(k) plans can also save in traditional IRAs, but their IRA contributions will not be tax deductible if their income exceeds a certain threshold, according to this article in NerdWallet. Participants in 401(k)s can also contribute to Roth IRAs if they earn below the income limits set for Roth accounts. To make the most of these savings vehicles, clients should make enough 401(k) contributions to qualify for their employer's full match and save the rest of their retirement money in traditional IRAs to reduce their taxable income. Those in a lower tax bracket may opt to direct the funds to Roth IRAs to boost their after-tax income in retirement.

A big question in retirement planning: How long will I live?

Although people cannot predict their own lifespan retirement, there are online tools and services that clients can use to have a good estimate of their longevity and plan for retirement, according to this article in The Wall Street Journal. “No one can predict definitively how long someone is going to live,” says an expert. “But we can say, ‘For someone your age and gender, with your level of income and education, your body-mass index and sleep and exercise patterns, this is what science tells us you are likely to experience.’”

Retiring this year? Here's what clients need to do first

There are a few things seniors should do before they retire later this year, according to this article in Forbes. Pre-retirees should maximize their contributions to 401(k)s and other tax-favored retirement accounts, review Social Security numbers and Medicare changes and create estate plans. They should consider converting some of their traditional assets into Roths to boost their after-tax income in retirement.

SOURCE: Schiavo, A. (28 February 2020) "The little-discussed downsides of retirement" (Web Blog Post). Retrieved from https://www.employeebenefitadviser.com/news/the-little-discussed-downsides-of-retirement


Older workers are staying in the job market. Here’s why

According to the Bureau of Labor Statistics, the amount of employees over the age of 65 has risen by 697,000. With over two million jobs being created over the past 12 months with the help of the economy, the older generations are still wanting to be employed. Read this blog post to learn more as to why.


Older workers are sticking around the job market. This is why
The number of workers aged 65 and above increased by 697,000 as the economy created more than 2 million new jobs over the past 12 months, according to data from the Bureau of Labor Statistics in this CNBC article. The spike in the number of older workers represents about 36% of the overall increase, reflecting a trend over the past 10 years. “The norms about working at older ages have changed quite a bit, and I think in a way that really is to the advantage of older workers who want to keep working,” says an expert.

What ‘Rothifying’ 401(k)s would mean for retirees
Clients will not benefit from a switch to a retirement system where contributions would be made on an after-tax basis even if it could result in bigger tax revenue in the near term, experts write in The Wall Street Journal. "Over their lifetimes, workers would accumulate one-third less in their 401(k)s under a Roth system. This is because, with no tax advantage from contributing to a 401(k), workers would save less and those lower contributions would earn less over the years," they write. Moreover, "lifetime tax revenue generated by the average worker under a Roth regime would fall 6% to 10%, compared with the current regime."

Stop 'dollar-cost ravaging' your clients’ portfolio in retirement
Retirees who stick to a 4% withdrawal rule during a market downturn are putting their financial security at risk, as their portfolio would not recover even if the market eventually improves, writes an expert in Kiplinger. Instead, seniors should focus on how much income they can generate from their portfolio, he writes. "[I]t means choosing investments — high dividend-paying stocks, fixed income instruments, annuities, etc. — that will produce the dollar amount you need ($2,000, $3,000, $5,000 or more) month after month and year after year."

Will clients owe state taxes on their Social Security?
Retirees may face federal taxation on a portion of their Social Security benefits — but they could avoid the tax bite at the state level, as 37 states impose no taxes on them, writes a Forbes contributor. "While probably not a big enough issue to warrant moving in retirement, it is something to consider when choosing where you want to spend your retirement," writes the expert. "At the very least, you need to know about Social Security taxation when figuring out how much additional income you will need to have in order to maintain your standard of living during retirement."

8 ways clients can start saving for college now
There are a few savings vehicles that clients can use to prepare for college expenses, but they need to consider the pros and cons, according to this article in Bankrate. For example, clients who save in a 529 savings plan can get tax benefits — such as tax deferral on investment gains and tax-free withdrawal for qualified expenses — but will face penalties for unqualified withdrawals aside from taxes. Parents may also use a Roth IRA to save for their child's college expenses, but these accounts are subject to contribution limits and future distributions will be treated as an income, which can reduce their child's eligibility for scholarships or assistance.

SOURCE: Peralta, P. (18 February 2020) "Older workers are staying in the job market. Here’s why" (Web Blog Post). Retrieved from https://www.employeebenefitadviser.com/news/why-older-workers-are-staying-in-the-job-market


Rising cost of healthcare is hurting HSAs

With HSA's providing a way for users to be able to reduce out-of-pocket costs for healthcare, deductibles still continue to rise. Read this blog post to learn more about why continuously raised healthcare costs are hurting current HSA's and HSA's that could be used for retirement.


Employees are increasingly putting money aside for their HSAs, but they’re using almost the entirety of it to cover basic health needs every year instead of saving the money for future expenses, according to Lively’s 2019 HSA Spend Report.

“People are putting money in and taking money out on a very regular basis, as opposed to trying to create some sort of nest egg for down the road,” says Alex Cyriac, CEO and Co-Founder of Lively.

The San Francisco-based HSA provider says 96% of annual contributions were spent on expected expenses and routine visits as opposed to unexpected health events and retirement care. In 2019, the average HSA account holder spent their savings on doctor visits and services (50%), prescription drug costs (10%), dental care (16%), and vision and eyewear (5%).

The rising cost of healthcare is a factor in these savings trends: Americans spent $11,172 per person on healthcare in 2018, including the rising cost of health insurance, which increased 13.2%, according to National Health Expenditure Accounts. For retirees, the figures are shocking: a healthy 65-year-old couple retiring in 2019 is projected to spend $369,000 in today’s dollars on healthcare over their lifetime, according to consulting firm Milliman.

“Because people can't even afford to save, there's going to be a very low likelihood that most Americans are going to be able to afford their healthcare costs in retirement,” says Shobin Uralil, COO and Co-Founder of Lively.

HSAs were intended to be a way for consumers to save and spend for medical expenses tax-free. Additionally, its biggest benefit comes from being able to use funds saved in an HSA in retirement — when earnings are lowest and healthcare is most expensive. However, just 4% of HSA users had invested assets, according to the Employee Benefit Research Institute.

While HSAs have surged in popularity as a way for more Americans to reduce overall out-of-pocket healthcare spending, more education is required to help account holders understand the benefits of saving and investing their annual contributions for the long-term, the Lively report states.

“As deductibles continue to rise, people just don't seem to have an alternative source for being able to fund those expenses, so they are continuing to dip into their HSA.” Cyriac says. “I think this is just reflective of the broader market trend of healthcare costs continuing to rise, and more and more of those costs being disproportionately passed down to the user.”

SOURCE: Nedlund, E. (29 January 2020) "Rising cost of healthcare is hurting HSAs" (Web Blog Post). Retrieved from https://www.employeebenefitadviser.com/news/rising-cost-of-healthcare-is-hurting-hsas


The Mega Backdoor Roth IRA and Other Ways to Maximize a 401(k)

Did you know: Numerous 401(k) retirement plans allow after-tax contributions. This creates financial planning opportunities that are frequently overlooked. Read this blog post for more information on maximizing your 401(k) plan.


The most popular workplace-sponsored retirement plan is far and away the 401(k) — a plan that can be both simple and complex at the same time. For some of your clients, it functions as a tax-deductible way to save for retirement. Others might see its intricacies as a way to maximize lifetime wealth, boost investments and minimize taxes. One such niche area of 401(k) planning is after-tax contributions, an often misunderstood and underutilized area of planning.

Before we jump into after-tax contributions, we need to cover the limits and the multiple ways your clients can invest money into 401(k) plans.

Employee Salary Deferrals and Roth

The most traditional way you can contribute money to a 401(k) is by tax-deductible salary deferrals. In 2019, employees can defer up to $19,000 a year. If they’re age 50 or older, they can contribute an additional $6,000 into the plan. In 2020, these numbers for “catch-up contributions” rise to $19,500 and $6,500 respectively.

Someone age 50 or over can put up to $25,000 into a 401(k) in 2019 and $26,000 in 2020 through tax-deductible salary deferrals. Additionally, the salary deferral limits could instead be used as a Roth contribution, but with the same limits. The biggest difference is that Roth contributions are after-tax. And as long as certain requirements are met, the distributions, including investment gains, come out income tax-free, whereas tax-deferred money is taxable upon distribution.

Employer Contributions

Employers often make contributions to a 401(k), with many matching contributions. For instance, if an employee contributes 6% of their salary (up to an annual indexed limit on salary of $280,000 in 2019 and $285,000 in 2020), the company might match 50%, 75%, or 100% of the amount. For example, if an employee earns $100,000 a year and puts in $6,000 and their employer matches 100%, they will also put in $6,000, and the employee will end up with $12,000 in their 401(k). Employers can also make non-elective and profit-sharing contributions.

Annual 401(k) Contribution Cap

Regardless of how money goes into the plan, any individual account has an annual cap that includes combined employee and employer contributions. For 2019, this limit is $56,000 (or $62,000 if the $6,000 catch-up contribution is used for those age 50 and over). For 2020, this limit rises to $57,000 ($63,500 if the $6,500 catch-up contribution is used for those age 50 and over).

Inability to Max Out Accounts

If you look at the limits and how people can contribute, you might quickly realize how hard it is to max out a 401(k). If a client takes the maximum salary deferral of $19,000 and an employer matches 100% (which is rare), your client would only contribute $38,000 into the 401(k) out of the maximum of $56,000. Their employer would need to contribute more money in order to max out.

Where After-Tax Contributions Fit In

Not all plans allow employees to make after-tax contributions. If the 401(k) did allow this type of contribution, someone could add more money to the plan in the previous example that otherwise maxed out at $38,000.

After-tax contributions don’t count against the salary deferral limit of $19,000, but they do count toward the annual cap of $56,000. After-tax contributions are what they sound like — it’s money that’s included into the taxable income after taxes are paid, so the money receives all the other benefits of the 401(k) like tax-deferred investment gains and creditor protections.

With after-tax contributions, clients can put their $19,000 salary deferral into the 401(k), get the $19,000 employer match, and then fill in the $18,000 gap to max out the account at $56,000.

Mega-Roth Opportunity

If the plan allows for in-service distributions of after-tax contributions and tracks after-tax contributions and investment gains in separate accounts from salary deferral and Roth money, there’s an opportunity to do annual planning for Roth IRAs.

Clients can convert after-tax contributions from a 401(k) plan into a Roth IRA, without having to pay additional taxes. If a plan allows in-service distributions of after-tax contributions, the money can be rolled over to a Roth IRA each year. However, it’s important to note that any investment gains on the after-tax amount would still be distributed pro rata and considered taxable. Earnings on after-tax money only receive tax-deferred treatment in a 401(k); they aren’t tax free.

Clients can roll over tens of thousands of dollars a year from a 401(k) to a Roth IRA if the plan is properly set up. They can even set up a plan in such a way so the entire $56,000 limit is after-tax money that’s distributed to a Roth IRA each year with minimal tax implications. This strategy is referred to as the Mega Backdoor Roth strategy.

Complexities Upon Distribution of After-Tax Contributions

What happens to after-tax contributions in a 401(k) upon distribution? This is a complex area where you can help clients understand the role of two factors:

  1. After-tax contributions are distributed pro-rata (proportional) between tax-deferred gain and the after-tax amounts.
  2. Pre-tax money is usually considered for rollover into a new 401(k) or IRA first, leaving the after-tax attributed second. The IRS provided guidance on allocation of after-tax amounts to rollovers in Notice 2014-54.

Best Practices for Rollovers

Help your clients navigate the world of rollovers with after-tax contributions by following best practices. If a client does a full distribution from a 401(k) at retirement or separation of service, they can roll the entire pre-tax amount to a new 401(k) or IRA and separate out the after-tax contributions to roll over into a Roth IRA. The IRS Notice 2014-54 previously mentioned also provides guidance for this scenario.

You can help your clients understand after-tax contributions by envisioning after-tax money in a 401(k) as the best of three worlds. These contributions enter after taxes and give your client tax-deferred money on investment growth, allow them to save more money in their 401(k) while also giving them the opportunity to roll it over into a Roth IRA at a later date.

After-tax contributions build numerous planning options and tax diversification into retirement plans. Before your clients allocate money toward after-tax contributions, it’s important they understand what their plan allows and how it fits into their overall retirement and financial planning picture.

SOURCE: Hopkins, J. (17 December 2019) "The Mega Backdoor Roth IRA and Other Ways to Maximize a 401(k)" (Web Blog Post). Retrieved from https://www.thinkadvisor.com/2019/12/17/the-mega-backdoor-roth-ira-and-other-ways-to-maximize-a-401k/


IRA spousal contributions can mitigate the high cost of women’s work breaks in retirement plans

According to a November 2018 study, women who took a year off from work in a 15-year period had 39 percent lower average annual earnings than women who worked continuously through that time. Read this blog post for more on how spousal contributions can mitigate the high cost of work breaks in retirement plans.


Women employees face special retirement savings challenges compared with their male counterparts. On average, they earn less and log fewer years of earned income compared to men. That’s because, in part, because women take multiple breaks from work, turn down work or decline promotions because of family care obligations.

The cost of a career break can be high. A November 2018 study by the Washington-based Institute for Women’s Policy Research found that women who took just one year off from work in a 15-year period had 39% lower average annual earnings than women who worked continuously through that time. The study also showed that the number of women taking at least one year off of work during a 15-year period was nearly twice the rate of men — 43% of women compared to 23% of men.

As a result, women are less likely to set aside money in a savings arrangement or to contribute to an employer-sponsored retirement plan.

Spousal advantage

Married women (and men) who take work breaks may stay on track with their retirement savings goals by making IRA (traditional or Roth) contributions based on their working spouse’s income — if they meet these requirements.

  • The couple must file a joint federal income tax return
  • The working spouse must have enough earned income to make any IRA contributions on behalf of the nonworking spouse, or, if both spouses are contributing, enough income to support both spouses’ contributions
  • Assuming enough earned income, each spouse can contribute up to $6,000 (plus $1,000 if turning age 50) for 2019. This limit applies to traditional and Roth IRA contributions combined
  • The spouse receiving a traditional IRA contribution must be under age 70 ½ for the entire year
  • To be eligible for Roth IRA contributions, the couple must also satisfy income requirements.

Roth IRA income restrictions

The amount that an individual is eligible to contribute to a Roth IRA depends on the amount of the couple’s modified adjusted gross income (MAGI). If the couple’s joint MAGI for a tax year is less than the IRS phase-out range, each spouse can make the maximum Roth IRA contribution allowed for that tax year (assuming enough MAGI to support both spouse’s contributions). If it’s above the phase-out range, neither spouse is eligible to contribute to a Roth IRA. Keep in mind that they could still contribute to a traditional IRA, if under age 70 ½. If the couple’s joint MAGI falls within the phase-out range, their maximum contribution amount is reduced. The MAGI phase-out range is subject to cost-of-living adjustments each year.

Traditional IRA income tax deductions

Note that separate MAGI phase-out ranges apply to traditional IRA contribution deductions — another way for non-working married individuals to potentially benefit when saving for retirement with an IRA. The ability to take a federal income tax deduction for a traditional IRA contribution — if eligible — appeals to many savers. But deduction eligibility depends on whether either spouse is an “active participant” in an employer-sponsored retirement plan. An active participant is generally making or receiving contributions to her retirement plan accounts for the applicable year. Because active participants have access to a workplace retirement plan, the IRS uses its MAGI to determine whether each spouse can take a full deduction, a partial deduction or no deduction at all.

No minimum required

Regardless of which IRA a couple chooses to, the main thing is to contribute — even if it’s a small amount. There is no minimum amount that must be contributed to either type of IRA. Couples can contribute whatever they’re comfortable with, up to the previously described limit. For those concerned about not having enough to set aside in an IRA during a career break, contributing even just $500 or $1,000 for the year will still make a difference.

It certainly beats not saving at all.

SOURCE: Van Zomeren, B. (9 December 2019) "IRA spousal contributions can mitigate the high cost of women’s work breaks in retirement plans" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/ira-spousal-contributions-can-mitigate-cost-of-womens-work-breaks-in-retirement


How to maximize employee participation in HSA plans

According to the Employee Benefit Research Institute (EBRI), 96 percent of HSA account holders do not invest any portion of their contributions. Health Savings Accounts (HSAs) offer account holders the option to invest and investments are not subject to taxation. Read this blog post to learn more about maximizing employee participation in HSA plans.


High-deductible health plans (HDHPs) not only offer employees the opportunity to save on their premium contributions, they also provide access to what are commonly touted as triple-tax-advantaged health savings accounts (HSAs).

HSA users can put away money tax-free, and account distributions for eligible healthcare costs aren’t subject to federal income tax. Plus, these accounts offer users the option to invest and any investment returns aren’t subject to taxation. Not even the storied 401(k) promises this much bang for the proverbial buck. In fact, HSAs offer the best of pre-tax 401(k) and Roth contributions.

But, no matter how sweet a tax deal this is, for most of the over 25 million account holders, investing takes a back seat to current healthcare needs. According to EBRI, 96% of account holders don’t invest any portion of their balance, which leaves just 4% taking advantage of all three tax-advantaged components of the HSA. Instead, HSA users fall into two distinct categories: spenders and savers, with spenders representing over three-quarters of account holders.

In 2017, the average deductible for employee-only coverage was $2,447 and almost a quarter of employees covered under one of these plans had a deductible of $3,000 or more.

Let’s imagine it’s 2017, and our sample employee — let’s call her Emily — has a $2,500 deductible. Emily funded her HSA to the 2017 maximum of $3,400. If Emily had healthcare costs that totally eroded her deductible and she used her HSA dollars to fund them, at the end of the year Emily would have $900 left in her account ($3,400 maximum minus $2,500 to cover her deductible). That assumes no additional cost-sharing or eligible expenses.

However, Emily is in the minority. Only 13% of employees are fully funding their accounts, rendering an investment threshold potentially out of reach for most people, especially when they are using their HSA dollars for out-of-pocket healthcare costs.

With such a small percentage of HSA owners taking advantage of investment opportunities, finding effective ways to support the spending or saving habits of the majority of users seems to be tantamount. So is helping them address their concerns about deductible risk. As employers help people become smarter consumers, they may be able to build their accounts over time and ultimately pull the investment lever.

So, how can employers support these spenders and savers?

Encourage people to contribute, or to contribute moreEBRI found that only half of account holders put anything in their HSA in 2017, and just under 40% of accounts received no contributions — including employer dollars. Employer contributions can help overcome employees’ reluctance to enroll in an HDHP, but the way they are designed matters. Matching contributions act as a strong incentive for employees to save while also protecting the most vulnerable employees from having to shoulder the entire burden of out-of-pocket healthcare costs.

Another technique to help address employees’ anxiety around a high deductible is to pre-fund out-of-pocket costs by allowing employees to borrow from future contributions. If the employee incurs costs but doesn’t have enough HSA dollars to cover them, they can use future contributions as an advance against current out-of-pocket expenses. The employer provides the funds up front and the employee pays back those funds through payroll deductions. This acts as a safety net for new account holders or those without substantive balances.

Drive people toward the maximum contribution. With fewer than 20% of employees fully funding their HSA, there’s certainly room to move the needle. While additional contributions may not be possible for all employees, reinforcing the tax advantages and the portability of the HSA may help people divert more dollars to insulate themselves against healthcare costs.

Highlight ways to save on healthcare costs. When employees are funding their care before meeting a high deductible, help them spend those HSA dollars wisely. Promote telehealth if you offer it and remind employees about the most appropriate places to get care (for example, urgent care versus the emergency room). Reinforce the preventive aspects of your healthcare plan, including physicals, screenings and routine immunizations. If you have a wellness program that includes bloodwork and biometric testing, make sure you tie this into your healthcare consumerism messaging. There’s generally a lot of care employees can get at no cost, and it helps when you remind them.

Don’t lose contributors to an over-emphasis on investing. The tax advantages of investing in an HSA are undeniable, but most people are just not there yet. When we describe HSAs as a long-term retirement savings vehicle, we may inadvertently be messaging to non-participants that these accounts aren’t for them. Speak to the majority with messaging around funding near-term healthcare costs on a tax-advantaged basis and the flexibility to use HSA dollars for a wide variety of expenses beyond just doctor and pharmacy costs. Investing information should be included, but it shouldn’t be the primary focus.

HSAs are gaining in popularity, and the majority of account holders are using them to self-fund their healthcare, which is a good thing. A small but growing number are taking advantage of their plans’ investment options. Employees eventually may become investors as their accounts grow and they better understand the opportunity to grow their assets and save for the longer term. For now, however, the educational and engagement focus for HSA plan sponsors should primarily be around participation, maximizing contributions and spending HSA dollars wisely.

SOURCE: Cosgray, B. (6 December 2019) "How to maximize employee participation in HSA plans" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/how-to-maximize-employee-participation-in-hsa-plans


Why using a 401(k) to pay for emergencies is hurting employers and employees

More and more employees are withdrawing $1,000 or less from their 401(k) retirement accounts to help pay for emergency expenses according to HR leaders. This trend is causing corporate leaders to become concerned about the financial stress that their employees are living with. Read the following blog post to learn more.


More than ever, HR leaders at Fortune 500 companies are reporting that employees are withdrawing $1,000 or less from their hard-earned 401(k) retirement accounts to pay for emergency expenses. These employees — often living at the brink of being financially unstable — are using the funds for unexpected emergency expenses like car repairs, medical bills or even to purchase books for their college-age children.

Corporate leaders are now, more than ever, concerned that many of their employees live under a high degree of financial stress that can affect their productivity, creativity and even their health, resulting in absenteeism and drops in productivity that ultimately impact the bottom line. HR managers are especially feeling the pain as they are called upon to handle the excessive paperwork needed for the 401(k) plan withdrawals, causing extra work that could be spent more productively on other projects that benefit all employees.

The fact that more Americans than ever are dipping into their 401(k) accounts for emergency funds reveals that many are living above their means or working below their needs financially. While it’s important to have an emergency fund, for many people savings is a luxury they simply can’t afford. According to a Federal Reserve survey, nearly 40 percent of Americans said they don’t have enough cash on hand to cover an unexpected $400 expense. The quick fix for many is to use credit cards or ask family or friends for a loan when an emergency arises, but when those are not options, tapping into the 401(k) accounts is becoming increasingly common.

Some companies are partnering with payday loan companies so employees will refrain from tapping into their retirement funds. This is actually a worse idea because they’re setting their employees up to fail by enabling a vicious cycle of debt employees may never be free of.

Financial education could be the key to helping employees gain control of their financial lives. Companies that promote financial literacy courses and attendance at financial seminars or conferences offer the first step toward a better path for future financial stability. Offering or subsidizing the cost of continuing education courses help inspire employees to begin a lifelong journey of education for higher salaries and career advancement. Companies that promote education and career advancement attract, engage and retain employees longer than companies that don’t.

Flexible benefits can help

Companies can help their employees refrain from using their 401(k) retirement accounts as a bank if they offer flexible benefits. Employees get to choose how to use their earned benefits, like utilizing the monetary value of their unused paid time off (PTO) for other priorities such as paying for an emergency expense, paying down student loan debt or funding a vacation, among other things. Companies that offer flexible benefits are giving workers the ability to finally be in the driver’s seat of their careers and lives. When companies empower employees in this way, job satisfaction, productivity and creativity go way up.

Flexible benefits are a no brainer to organizations that want to attract, recruit, engage and retain top talent. Salary isn’t the only factor in determining a good career move, and companies that want to win the talent war will offer some type of flexible benefits. Every employee should have the ability to choose benefits based on their individual needs, avoiding the damaging financial practice of using 401(k) accounts for emergency expenses.

SOURCE: Whalen, R. (25 November 2019) "Why using a 401(k) to pay for emergencies is hurting employers and employees" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/employees-are-using-401k-funds-for-emergencies


IRS increases retirement contributions for 2020

Recently, the Internal Revenue Service (IRS) announced that workers contributing to 401(k), 403(b), 457 and the federal government’s Thrift Savings Plans will be able to add up to $19,500 in 2020. Read this blog post to learn more about this increase in retirement contributions.


The IRS said this week that workers contributing to 401(k), 403(b), 457 and the federal government’s Thrift Savings Plans plans can add $19,500 next year, an increase from $19,000 in 2019.

The move could help workers save more for retirement, but it may be inconvenient for employers who’ve already started open enrollment, experts say. Employees are now able to set aside $500 more for retirement.

“Every penny counts when you’re saving for retirement, and the higher contribution limit is definitely going to help,” says Jacob Mattinson, partner at McDermott, Will & Emery, a Chicago-based law firm. “But since companies are in the midst of open enrollment, employers may have to go back in and change the entries for employees who want to contribute the max.”

There are about 27.1 million 401(k) plan participants using roughly 110,794 employer-sponsored 401(k) plans, the Employee Benefit Research Institute says. Ninety-three percent of employers offer a 401(k) plan, and around 74% of companies match workers’ contributions, according to data from the Society for Human Resource Management.

While the vast majority of employers do offer retirement savings plans, employees may still be struggling to sock away money. Around 70% of workers say debt has negatively impacted their ability to save for retirement, EBRI says.

“Thirty-two percent of workers with a major debt problem are not at all confident about their prospects for a financially secure retirement, compared with 5% of workers without a debt problem,” says Craig Copeland, EBRI senior research associate.

The IRS also upped contribution limits on Savings Incentive Match Plan for Employees plans, or SIMPLE retirement accounts, to $13,500 from $13,000. The agency did not change the contribution limits to IRAs, which remain at $6,000 annually.

SOURCE: Hroncich, C. (7 November 2019) "IRS increases retirement contributions for 2020" (Web Blog Post). Retrieved from https://www.benefitnews.com/news/irs-increases-retirement-contributions-for-2020


A 401(k) plan administrators’ guide to the recent IRS revenue ruling

The IRS recently released a new revenue ruling that provides 401(k) plan administrators with helpful guidance on reporting and withholding from 401(k) plan distributions. Read the blog post below to learn more about this new ruling.


The IRS recently issued revenue ruling 2019-19. The revenue ruling provides 401(k) plan administrators with helpful guidance on how to report and withhold from 401(k) plan distributions when a plan participant actually receives the distribution but for some reason, does not cash the check.

Unfortunately, this new guidance does not provide answers to the complex issues that 401(k) plan administrators face when the plan must make a distribution, but the plan participant is missing.

Let’s hope revenue ruling 2019-19 is just the first in a series of much-needed guidance from the IRS and the Department of Labor about how 401(k) plan administrators should handle the increasingly common administrative issues related to uncashed checks and missing plan participants.

There are many situations in which a 401(k) plan must make a distribution to a plan participant. For example, plans must distribute small benefit cash outs (e.g., account balances that are $1,000 or less) or required minimum distributions to plan participants who reach age 70 and a half. This may come as a surprise, but plan participants fail to actually cash these checks with some regularity.

In the ruling, the IRS confirmed that 401(k) plan administrators should withhold taxes on a 401(k) plan distribution and report the distribution on a Form 1099-R in the year the check is distributed to the participant, even if the participant does not cash the check until a later year.

Similarly, the participant needs to include the plan distribution as taxable income in the year in which the plan makes the distribution even if the participant fails to cash the check until a later year. While this guidance is not surprising, it does provide clarity to 401(k) plan administrators as to how they must withhold and report normal course and required plan distributions. In particular, 401(k) plan administrators should not reverse the tax withholding or reporting of the distribution when the participant receives the distribution and simply does not cash the check until a later year.

Unfortunately, this new IRS guidance has limited use because the ruling uses an example that specifically concedes that the plan participant actually received the plan distribution check, but simply failed to cash it. What should 401(k) plan administrators do when the participant may not have received the distribution check at all (e.g., a check is returned for an invalid address) or the plan itself does not have current contact information for the participant?

Retirement plan administrators have an ERISA fiduciary obligation to implement a diligent and prudent process to find missing plan participants and to take additional steps to make sure participants actually receive plan distributions. Uncashed 401(k) plan distribution checks are still retirement plan assets which means the 401(k) plan administrator is still subject to ERISA fiduciary standards of care, prudence and diligence related to those amounts. As a result, the IRS and DOL have increased their focus on uncashed checks and missing participants in retirement plan audits.

Plan administrators would be well-served by establishing and implementing a consistent process to stay on top of any missing plan participants or uncashed checks and taking steps to locate those participants and properly address uncashed checks. Plan administrators should also carefully document the steps that they take in this regard. The IRS and DOL have currently provided limited guidance on the steps a 401(k) plan administrator can take to locate missing participants, but more guidance is needed — let’s hope revenue ruling 2019-19 is just the beginning.

This article originally appeared on the Foley & Lardner website. The information in this legal alert is for educational purposes only and should not be taken as specific legal advice.

SOURCE: Dreyfus Bardunias, K. (6 September 2019) "A 401(k) plan administrators’ guide to the recent IRS revenue ruling" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/401k-administrators-guide-to-the-irs-revenue-ruling-2019-19