Administration July 26, 2018

Distributions Basics Confuse Sponsors and Participants

The rules set around all the different types of qualified retirement plan distributions are quite complex, but plan sponsors have a lot of places to turn for support when learning about this pressing topic.
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As puzzling as plan distributions are for participants, the matter isn’t any simpler for plan sponsors.

There are distinct requirements for different plan types, and changes to tax rules borne out of the Tax Cuts and Jobs Act make this subject even trickier today. An article by Michael Webb, vice president at Cammack Retirement, titled “Distribution Confusion: The Difference Between Plan Types,” spells out some helpful general guidance for plan fiduciaries.

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As Webb explains, there are different forms of distributions that plan sponsors can offer, including loans, hardship withdrawals and elective deferrals. Loans are allowed on all defined contribution (DC) plans, including 401(k), 403(b), 457(b) and 401(a). Previously, if a participant took out a loan prior to leaving their employer, the participant was responsible for paying back the loan in full, plus the additional 10% federal income tax, as this was seen as a distribution prior to age 59 1/2, or 70 1/2 for 457(b) plans.

Prior to the new tax law, the only exception to the additional tax was applying a 60-day rollover of the amount that was offset. Therefore, if a participant could counterbalance the outstanding balance with a rollover, then the tax could be avoided. Given the new tax law, participants will have until the due date, with extensions, to pay the loan back.

While plan sponsors, advisers, third-party administrators (TPAs) and recordkeepers remain apprehensive towards offering participant loans, Joan Neri, counsel at Drinker Biddle & Reath, notes the benefits the new tax law provides for distressed participants looking to fill short-term needs.

“This gives the participant more time to gather the money needed for a rollover, and avoid that income tax,” she says.

Hardship withdrawal changes specific to plan types

In the new tax law, provisions concerning hardship withdrawals saw three notable changes when it comes to defined contribution plan accounts. A hardship withdrawal is only available to help employees meet heavy emergency costs, from funeral expenses, uninsured medical bills, or disaster damage costs. In previous years, when a participant took out a hardship withdrawal, they were faced with a mandatory six-month suspension of contributions, disallowing them from contributing to either their 401(k), 403(b), or 401(a) accounts. However, the new law authorizes participants to make elective deferred contributions to their plans immediately after taking a hardship distribution. 457(b) plans were not affected, as these plans utilize unforeseeable emergency distributions with specified requirements, rather than hardship withdrawals.

Additionally, prior to taking a hardship withdrawal, participants were previously required to utilize a plan loan. The new tax law, Neri notes, relinquishes this mandate, allowing participants to solely use hardship withdrawals.

“They really gave participants a great opportunity to take out hardship distributions if needed, without some of the more onerous rules that used to exist,” she says.

In the past, participants could take out a hardship withdrawal for personal casualty loss, under the Internal Revenue Code (IRC). In the Tax Cuts and Jobs Act, however, this section of the IRC was amended and is now only specific to “losses attributable to a federally declared disaster area,” according to Neri.

“For those 401(k) and 403(b) plans that were using these, that particular hardship event is narrower,” she says. “So that actually had a more opposite effect in comparison to the other changes.”

While hardship withdrawals are potential solutions for participants searching to remedy short-term financial woes, Webb explains why these distributions lack popularity for most plan sponsors, especially in 401(k) and 403(b) plans. Most plan sponsors, he says, view employer money in a practical manner, wherein they don’t want participants withdrawing employer funds until terminating employment. This is why, in numerous 401(k) plan designs, dollars available for hardship withdrawals are limited to elective deferrals.

For 403(b) plans, Webb mentions there are differing rules with respect to distinctive types of money. If an employer contribution has always been invested in an annuity contract, plan sponsors may want to implement a hardship distribution restriction, or other types of restrictions.

“Because it would be so confusing to explain that to participants, most employers simply don’t allow for hardships,” he says.

Rollovers catered to plan types 

While rollovers can make a lot of sense for participants with numerous accounts at past employers, not all plans accept rollovers, Neri warns. For example, she says, a rollover can legally be made from an individual retirement account (IRA) into a 401(a), 403(b), or 457(b) governmental plan. However, the caveat is these plans must accept the rollover—much easier said than done, says Webb.

“You would think that you can just go online, click a button and your money is moved—rollovers aren’t like that,” he says. “Rollovers use very antiquated technology, and require a lot of complexity that most plans don’t want to deal with it.”

While private 457(b) plans are not subject to ERISA, governmental 457(b) plans must comply with states and governmental fiduciary rules, similar to those of ERISA. 457(b) deferred compensation plans are eligible for rollovers to 401(k), 403(b) 457(b) governmental plans and traditional IRAs, yet rollovers are not allowed for private 457 plans.

Should a participant want to rollover a retirement account, Neri suggests speaking to human resources (HR) to discuss whether plans accept rollover contributions. Further, she advises participants double-check if combining accounts is sensible or not.

“For a 401(a) plan or a 403(b) plan that’s subject to ERISA [Employee Retirement Income Security Act], you have to think about the ERISA fiduciary rules there,” she says. “If it is that the employer is supposed to be selecting an array of investment options for participants, which is what happens in a 401(k) or 403(b), then the employer is going to want to make sure that those choices will allow the employees to select investments so they can really build a good asset allocation themselves and a portfolio of investments that meets their needs.”

Benefits July 23, 2018

The Importance of Helping Caregivers

One out of every six workers assists with caregiving, and this can derail their retirement savings; employers have a role to play in helping this sizable work force population achieve financial wellness.
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According to Voya, one out of every five people in the U.S., or 56.7 million people, has a disability, and one out of every six workers, or 105 million people, assist with caregiving, be it for a family member with a disability or an aging parent.

As a result, “caregivers deprioritize their retirement savings,” says Tom Conlon, head of client relations at Betterment for Business in New York. “This is why it is important for retirement plans to start with the best known practices: automatic enrollment, on-demand digital advice, managed accounts and financial wellness programs,” Conlon says.

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Employers are in a unique position to help caregivers, agrees Heather Lavallee, president of the tax-exempt market for Voya and head of Voya Cares, a program the company launched specifically to help caregivers. Caregivers spend an average of 24 hours a week caring for their loved ones, but only 56% of caregivers report their responsibility to their employers, she notes.

“To help a caregiver save for retirement, advisers and employers should recommend health savings accounts (HSAs) that the caregiver can use to cover out-of-pocket expenses not covered by their medical plan,” Lavallee says.

In addition to optimizing use of benefits such as life insurance, health insurance and retirement plans, employers may encourage caregivers to examine whether their dependents qualify for government benefits, which can be either means-tested, i.e. available to those whose income falls below a certain level, or structure as entitlements, Lavallee says.

People with disabilities or special needs who have less than $2,000 in personal assets qualify for Supplemental Security Income (SSI). “When a child turns 18, they are means tested on their ability to earn an income, and this benefit could be as much as $500 to $800 a month,” Lavallee says. “Receiving this benefit could free up the caregiver to divert more of their own money towards retirement savings.”

Medicaid is another means-tested benefit that provides health coverage for people with disabilities, as well as others. A third means-tested program is the Supplemental Nutrition Assistance Program, otherwise known as food stamps. All of these may be factors in an employee’s decisions about diverting assets to the retirement plan.

Two entitlement programs are Social Security Disability Insurance, available to those with disabilities or special needs, and Medicare, which provides medical care to certain persons, including those with a disability.

“There is also the ability for people to take advantage of 529 Able Plans, state-run savings programs for individuals with disabilities,” Lavallee adds. “They allow you to save $15,000 a year up to a total of $100,000, and the money money can be withdrawn tax-free when the funds are used to pay for qualified disability expenses.

Employers can also give caregivers access to licensed clinicians and seek out health insurance that includes caregiving support, she says.

Specialist providers can play support role

Wellthy is a program specifically designed to help people care for aging parents. It launched in 2014, originally focused on the consumer market, but the firm shifted its solution in 2016 to become an employer-linked benefit. Today, it works with 385 employer clients.

“Wellthy pairs a caregiver with a dedicated care coordinator who helps them find the right home aid, schedules appointments, negotiates insurance bills and helps them find the right health insurance option,” says Lindsay Jurist-Rosner, chief executive officer of Wellthy, based in New York. Jurist-Rosner says this service is greatly needed, as one in five workers are taking care of an aging or chronically ill parent.

Jurist-Rosner says it is critically important for these workers not to quit their jobs, because reentering the workforce is very challenging. Instead, they should hire a home aid, and if they cannot afford that on their own, Medicaid might cover it.

“There are also community day care programs in many areas, sometimes run by religious groups, and many are free,” she says. “There are a number of various non-profits and community organizations that provide resources, and there is no shortage of support programs for individuals who have aging parents or children with special needs.”

She also cautions people against taking out loans from their 401(k)s to cover medical bills for disabled dependents. In one instance, a worker was saddled with $500,000 in medical bills after his wife passed away.

“We worked with the hospital and within six months, we negotiated that down to $300,” Jurist-Rosner says. “We very often successfully help people negotiate insurance bills. We often find they are paying too much or were billed erroneously.”

While Wellthy is most commonly available through employers, an individual can work with the company directly, for $300 a month, or $200 a month if they commit to six months. “While that may seem cost prohibitive, we do save them a great deal of money,” Jurist-Rosner says.

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