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Some Changes Are Coming for 401(k)s

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Provided by Craig S. Lundquist, MBA on behalf of Wealth Advisors located at Ideal Credit Union*


The federal government offers some major tax breaks for older Americans. Some of these perks deserve more publicity than they receive.

Some notable developments are about to impact 401(k) plans. They follow a major change that became effective in 2018. Thanks to the Tax Cuts & Jobs Act, workers who borrow from 401(k) accounts and leave their jobs now have until October of the following year to repay plan loans.1

The Internal Revenue Service has eased the rules on 401(k) hardship distributions. Plan participants who arranged such withdrawals in 2018 (and years prior) paid an opportunity cost. The Internal Revenue Code barred these employees from making periodic contributions to their 401(k) accounts for six months after the withdrawal, and it also prevented them from exercising any stock options for that length of time.2

In 2019, some flexibility enters the picture. The Bipartisan Budget Act of 2018 (passed in February) allows plan sponsors to remove both of those restrictions in 2019, if they wish.2

Some fine print worth noting: the BBA also permits plan sponsors to give employees more sources for hardship withdrawals. In 2019, plan participants may take hardship distributions from their 401(k) account earnings, qualified non-elective employer contributions (QNECs), and qualified matching contributions (QMACs) in addition to elective deferral contributions, discretionary employer profit-sharing contributions, regular matching contributions, and earnings on contributions made before December 31, 1988.2

In 2018 and years prior, a plan participant could only take a hardship distribution after taking a loan from his or her 401(k) account. Next year, plan sponsors can waive this requirement, if they choose, and let their employees take hardship withdrawals from 401(k)s without a loan first.2

In addition, plan sponsors may let victims of California wildfires make special hardship withdrawals. An individual who suffered economic losses due to the massive fires in the Golden State (and whose principal residence is in a California wildfire disaster area) may take qualified wildfire distributions of up to $100,000 from a 401(k) through December 31, 2018. The money withdrawn is fully taxable, but the withdrawal is not subject to a 10% early withdrawal penalty. The amount withdrawn can also be recontributed to the plan within three years of the distribution. This type of hardship withdrawal may be permitted immediately; the plan sponsor has until the last day of the first plan year, beginning on or after January 1, 2019, to revise the plan documents to denote the new terms.2

What do these rule changes mean for companies sponsoring 401(k) plans? The message is clear. Review your plan documents and hardship withdrawal guidelines before 2019 begins, and decide whether you want to include these provisions.

Lastly, annual contribution limits for 401(k) accounts are rising. An employee can put up to $19,000 into a 401(k) in 2019, up from $18,500 in 2018. The annual limit on “catch-up” contributions, allowed for plan participants aged 50 or older, remains at $6,000.3


Craig S. Lundquist may be reached at 651-773-2757 or This email address is being protected from spambots. You need JavaScript enabled to view it..

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This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

*Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.CUNA Brokerage Services, Inc., is a registered broker /dealer in all fifty states of the United States of America.

Citations.

1 - forbes.com/sites/ashleaebeling/2018/01/16/new-tax-law-liberalizes-401k-loan-repayment-rules/ [1/16/18]
2 - pillsburylaw.com/en/news-and-insights/recent-and-upcoming-changes-to-401k-plans.html [3/8/18]
3 - nytimes.com/2018/11/09/your-money/401k-contribution-limits-raised-irs.html [11/9/18]

 

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