Category: Business

Find easy to understand Business Information relating to 401k plans and from Ubiquity Retirement + Savings. Find easy to understand rules and regulations, along with tips and advice from our team of 401k business experts. Call Ubiquity today for a Free Consultation at 855.466.5825.

Why Now is a Good Time to Start a 401k

Dylan Telerski / 4 Aug 2020 / Business

4 coworkers look at financial paperwork together, wearing PPE to prevent the spread of coronavirus

It may seem counterintuitive to put money into a 401k amid Stock Market volatility, but that’s just what financial advisors are recommending. It’s not just a matter of doing your part to keep the American economy afloat, but historically speaking, it’s a matter of good investment.

Here’s why:

It’s a buyer’s market.

“Buy low, sell high” is the conventional wisdom. The opportunity to buy a greater volume of stocks at rock-bottom prices is now! Beginner 401k investors can put a small, fixed amount – say $1,000 – into their account every month, regardless of how bleak the situation appears. They can invest in undervalued stocks that pay dividends. By contributing to an employer-sponsored 401k plan, retirement savers can choose a diverse portfolio of stocks, bonds, and alternative investments to invest in.

The economy will bounce back.

Here’s the good news: since 1900, the average economic recession has lasted 15 months with an average cumulative loss of 38 percent, while the subsequent expansion has lasted 6.5 years, with returns averaging 339 percent. While you can never guarantee what will occur this time around, history indicates “what goes down must come up.”

There are short-term savings to consider.

If you’re an entrepreneur, the cost of starting a small business 401k is deductible on your taxes. In fact, thanks to the SECURE Act passed last year, you may be eligible to receive a tax credit of up to $5,000 per year for the first three years of the plan.

On top of that, if you sign up your employees using auto-enrollment, you can add an additional $500 tax credit per year for the first three years. PLUS, you are eligible to write off 100% of the matching contributions you make to employee plans AND 25% of whatever your employees put into their own plans as well.

Your employees will be able to deduct up to $19,500 off their income tax burden if they elect to contribute up to the 2020 maximum. Those over 50 who got a late start can throw in an extra $6,500 on top of that. If you are contributing to your own 401k as both business owner and employee, you can put away up to $57,000 in tax-free income this year to reduce your liability to Uncle Sam.

There are long-term benefits, too.

For business owners, a 401k is one of the most competitive benefits you can offer your employees – not to mention, it is less expensive to run than a health care program. Providing workers with financial security boosts the morale of younger workers and enables older workers to leave when they are mentally ready, rather than sticking it out long after their motivation has dwindled because they can’t afford to retire.

For individuals, saving money for the future in a tax-deferred 401k account allows any profit and interest gained to compound over the years. The average return over a decade has been a steady 7 percent, which outpaces inflation and sets you up for a comfortable monthly stipend when you stop working. So, for a younger worker, a $5,000 balance today could be worth $57,900 in 35 years.

It’s best not to try to time the market.

The Stock Market is unpredictable at best. As Heraclitus opined, “The only constant in life is change.” Investments generally tend to boom during bull markets and shrink during bear markets, but there are still safer places to park your money during a slide.

Most investors will look at a middle-ground defensive strategy that involves rebalancing the portfolio with more put into stable, large-cap companies that are less affected by economic downturns or a long-term target-date fund. After all, Americans are still buying toilet paper, food, and other necessities. Shifting money away from less-secure growth companies is equally wise, as many of these upstarts lack the financial security to survive.

If you have any questions, contact Ubiquity, a leading 401k plan provider that small businesses have relied upon for flat-rate service with no hidden fees since 1999.

Due to the economic downturn sparked by the coronavirus pandemic, many employers have suspended 401k match contributions for their employees. Cutting out company matches can have enormous repercussions to diligent savers who counted on this employment perk to help build their financial futures. Here we discuss how the COVID-19 crisis has affected 401k matches so far, how it will likely affect businesses great and small in the coming months, and what you can do if your employer suspends its match.

Very Small Businesses Suspend Employer 401k Matches

Plans with 25 or fewer 401k plan participants stopped matching contributions at 5x the rate of companies with 100+ participants between January and May, according to the latest reports. Drawing on data from over 116,500 retirement plans, researchers found employer contributions decreased overall by 11.4% from March through May. The move was driven by business interruptions and closures. Industries like health care, social assistance, accommodation, food service, and retail were particularly affected.

SMB 401k Providers Stay the Course

As of June 2020, nearly 90 percent of plan sponsors said they made no change to employer contributions, according to a Plan Sponsor Council of America survey. Only 5% of plan sponsors suspended their match, 1% reduced them, and another 2.9% were actively considering some type of change.

PSCA Research Director Hattie Greenan explained, “Employers, doubtless helped by support from the Payroll Protection Program, are responding to current conditions by largely staying the course.”

Corporations with Over 5,000 Employees More Likely to Slash Retirement Matches

On the other hand, large firms employing more than 5,000 workers were more likely to pause 401k matching, with 11.6% doing so. Amtrak, Best Buy, La-Z-Boy, Sabre Corp, Marriott Vacations, Choice Hotels, Lands’ End, Tenet Health, Quest Diagnostics, Macy’s, and Norwegian Cruise Lines have all pulled back on matching contributions in the wake of the coronavirus pandemic.

The Fallout May Continue

Willis Towers Watson surveyed 543 companies in June and found that 15 percent had suspended or reduced their match. Another 10 percent said they are considering action. Further, 7 percent suspended nonelective contributions, and another 7 percent are considering it.

When Will Employer 401k Matches Resume?

We’ve seen employer matches fall by the wayside in the past. The 2008 financial crisis also prompted companies to scale back on their employee benefits. From 2007 to 2009, about 10% of 401k plan sponsors stopped making matching contributions, and another 10% ceased elective profit-sharing or nonmatching employer contributions. Five years after the matches dried up, the Chicago Tribune reported the contributions were “making a comeback.”

Thirty-four percent of employers who cut benefits during the current crisis said they had “no set date” for reinstating benefits, but may “at some point.” Eleven percent weren’t sure what the future would hold. Another four percent indicated the change could be permanent.

Other employers had a more concrete timetable in mind – 16 percent planned to reinstate matching “sometime this year,” 32 percent cited “the first or second quarter of 2021,” and 3 percent cited “the second half of next year.”

Specifically, Hewlett-Packard announced a temporarily suspended match from July 1 through December 31, 2020. Allegheny Technologies suspended their company contributions from June 1 through “no later than December 31, 2021.”

On a positive note, Ascensus found that 7.5 percent of the businesses that cut 401k matches in March had reinstated them by May.

What to Do If Your Employer Match is Suspended or Cut

If you can afford it, ramp up your own contributions temporarily to compensate for the missing matched funds. Financial advisors recommend most people setting aside 12 to 15 percent of their gross income for retirement each year, so you’ll want to bridge the gap if you can. If you’ve gotten off to a late start, you should invest 18 to 20 percent. You can justify the expense, as you won’t be vacationing, eating out, or spending as much during the pandemic. Remember, what you put in this year will reduce your tax burden.

If finances are really rough this year, let yourself off the hook and pledge to ramp up as soon as you can. Ask your 401k plan provider about options like taking out early distributions or borrowing from your 401k if you’ve exhausted other options.

Getting insight into how much companies are matching on 401ks in 2020 will help you know how well your employer stacks up and whether you’re in the right ballpark with your contributions.

Long gone are the days where a full pension or government stipend will guarantee you a secure future. These sources of income typically comprise less than half of what you would need to live comfortably in retirement. A 401k investment account is one of the best strategies to bridge the gap and save enough money for your post-retirement years.

In addition to the contribution deducted from your paycheck, about 51% of employers offering a 401k agree to match a certain amount of employee contributions. This generous bonus is literally FREE MONEY that employers add to your retirement savings that will gain interest and compound over time to help you reach your goals faster. There is, however, one caveat to the employer match – in most cases (with the exception of a Safe Harbor nonelective match), how much you receive depends on how much you put in.

Why Do Employers Match 401k Contributions?

Why would employers match 401k contributions? Perhaps the foremost reason is that employers view the matching contribution as a means of attracting and retaining top talent so that they don’t have to continually hire and retrain a revolving door of workers.

It’s also in their best interest to encourage as many eligible employees to participate in the plan and save as much as they can so the highly-compensated employees and business owners can contribute the maximum amounts to their own plans without failing annual IRS tests for fairness and nondiscrimination.

Favorable tax benefits make it even easier for companies to offer this benefit to their workers. Employers can deduct 100% of their matching contributions on their federal income tax returns, as well as 25% of what all eligible employees contribute.

What Is the Best Possible 401k Employer Match?

Employers rarely match 100% of employee contributions. Even if they do, there is a limit mandated by the IRS. For 2020, employees can contribute up to $19,500 to their 401k accounts. Employers can contribute up to $37,500 to reach a combined employee/employer total of $57,000. Employees over 50 can add $6,500 in “catch-up contributions” as well. So that would represent the best possible match – an extra $37,500 put toward your retirement.

How Much Do Companies Typically Match?

More commonly, companies follow a formula to determine their matching contribution. A “50% match” means that for every dollar an employee puts in, the employer adds 50 cents. A “100% match” means the employer puts in a dollar for every dollar the employee contributes. On average, companies donate an extra 4.3% of a person’s pay into their retirement accounts as a bonus.

A 2019 Vanguard study identified the most common 401k match scenarios:

  • About 71% of companies choose: 50% match, up to 6% of the employee’s pay
  • Another 21% of companies prefer: 100% match on the first 3%, 50% match on the next 2% (Safe Harbor)
  • 6% of companies selected: A single or multi-tiered formula, capped at a certain amount (like $2,000)
  • 2% of companies opted for: A variable formula based on age, tenure, and other variables.

The Bottom Line:

Financial advisors recommend contributing enough to receive the maximum employer match, though you can always contribute more as long as you don’t exceed your $19,500 limit. Turning down free money doesn’t make sense unless your 401k performance is so poor it’s not generating returns. Consulting with the 401k plan provider can help you ensure you’re on track to reaching your savings goal. Just be sure you’re signed up with a fee-only small business 401k provider like Ubiquity who doesn’t erode your savings by charging for Assets Under Management or Per-Participant fees.

If your company has been forced to lay off employees during the coronavirus pandemic, you can expect closer scrutiny from your 401k plan auditors this year.

Be prepared to provide more financial documentation than usual, including information on vesting, benefit disbursement, and investments.

The auditor will look to make sure the plan is operating in accordance with the plan-related documents, the Department of Labor requirements, and Internal Revenue Service regulations. Most plans are subject to passing annual IRS nondiscrimination tests to prove that the 401k plan is not merely a tax haven for Highly Compensated Employees, but rather, serves as a benefit to all. Form 5500 will be assessed to ensure all financial information has been reported accurately and completely.

If your 401k plan has 120 or more eligible participants on the first day of the plan year, an audit is required. Once you’ve been audited, you will be subject to the same procedure every year unless the eligible participant number dips below 100.

How Layoffs Can Impact a 401k Plan Audit

If you’ve laid off workers this year, you can expect 401k plan auditors to:

  • Pull bigger samples – When employees are laid off, the number of distributions and the distribution amounts tend to increase, attracting the attention of auditors. Auditors base the samples they audit on the number of transactions and total dollar amounts, so they may pull larger samples for testing purposes.
  • Request additional disclosures – One of the key reasons for a 401k plan audit is to protect employee benefit plans from fraud, such as misappropriation of assets or fraudulent financial reporting. Additional financial documents may be required to provide context about the plan’s vesting, eligibility requirements, benefit disbursements, and valuation of investments.
  • Vesting may be scrutinized – If 20 percent or more of your employees were laid off, it is considered a “partial termination” and the IRS requires that affected employees become immediately fully vested.
  • Ask more questions – Any new procedures of controls added to the plan amid the pandemic will go under a microscope. Auditors may ask what market fluctuations and concerns prompted changes to the 401k plan. They will be checking to see that all the old methods were followed by the letter up until the time the formally requested change kicked in.

How to Prepare for the 401k Audit after Layoffs

Large plans have until July 31, 2020, to complete their audits. If an extension is filed, they can have until October 31 to have the plan assessed.

Auditors will need access to HR, Payroll, and Financial information for each employee in the plan. You’ll need to provide:

  • Executed plan documents and amendments
  • The current year census
  • Last year’s Form 5500
  • Distribution forms
  • IRS determination letter
  • Participant statement and trust reports
  • Plan sponsor financial statements
  • W2s and annual payroll registers
  • Loan documents
  • Certification reports for the plan custodian
  • Discrimination tests
  • SAS 70 report
  • Form 1099 for distributions

In addition to assembling all of the above documents, here’s how employers can prepare:

  • Put a person in charge of process review: It’s imperative that a point person who understands all plan processes is on hand to answer any questions the auditor may have. Maybe this person is someone in HR, or maybe it’s your 401k plan provider. Have that responsibility clearly delegated. Now is also a good time to remove access to plan website for laid-off employees (if you haven’t already) and review security measures designed to prevent fraud.
  • Contact your auditor as soon as possible: Auditors are likely under compressed schedules due to the COVID-19 crisis and may even be working remotely from home. It’s wise to reach out with any questions about the auditing process as soon as possible to ensure everything runs smoothly.
  • Contact your 401k plan provider: Now that you have fewer employees, the contributions from Highly Compensated Employees may start looking a bit top-heavy. Your plan provider can help you perform projections through the end of the plan year to determine whether failure is imminent and even add a Safe Harbor provision to help you avoid testing altogether.

Do you have additional questions about 401k plans, layoffs, and furloughs? Contact Ubiquity for assistance.

Since day one, our mission has been to help under-served populations of the workforce like small businesses save for their future. The gig economy is no exception. Especially during this trying time, we want to thank those contract workers who are keeping our economy moving, including food and package delivery drivers.

Historically speaking, one of the greatest perks of gig work is the flexibility, yet contract workers still lack flexible and well-rounded benefits. The discussion of portable benefits has picked up steam recently with millions of independent contractors putting their health in jeopardy to bring home a paycheck due to COVID-19.

From a retirement savings perspective, portable benefits would be an absolute game-changer.

Right now, there are some solutions that contract workers can pursue themselves, like signing up for a solo 401(k) or saving through an IRA. But with a more cohesive plan for portable retirement benefits, gig workers would have even greater accessibility to tax-advantaged accounts with higher contribution limits.

We’ve been in the benefits space for over 20 years and haven’t seen an innovation quite as thought-provoking as portable benefits. If you employ independent contractors, here are some things to keep in mind as this news develops:

Portable benefits provide transparency

Transparency is a virtue. Take a second to ask: What is it like working for me? The environment you’re creating should include a level of confidence and care for your employees. If you’re providing some type of benefits for those contract workers, let your prospective employees and customers know.

In this case, one size does fit all

If portable benefits are under serious consideration, make sure what you are providing is inclusive. Any benefits you implement, whether retirement savings or other, must be something everyone can use. Don’t offer perks for one sector of the population that won’t work for the other.

Look to the future

There will be turnover. It’s part of the gig world, and demand in certain areas will fluctuate over time. The hiring of food delivery drivers might be at an all-time high right now, but what will happen when it’s safe for everyone to eat in restaurants again? Your benefits offerings should be structured to weather these changes.

As the gig economy continues to grow, benefits offerings need to grow with it. Right now, the vast majority of gig employers are not offering retirement benefits at all, but we expect things to change with the rise of portable benefits.

At Ubiquity Retirement + Savings, we are here as your savings advocates. We’ve adapted our offerings through our 20-year history and we aren’t stopping now. We will continue to monitor for updates on portable benefits-related legislation and implementation to help you save for your future the most effective way possible.

You have another opportunity to apply for a Paycheck Protection Program (PPP) loan. The initial $350 billion of funding ran out within a matter of weeks. The program reopened Monday, April 27, but the additional money appropriated will not last long either, given the backlog of applications and continued interest in the program.

What makes PPP loans the most attractive option on the market is the fact that you can take out a hefty sum (2.5x your monthly payroll up to $10 million). In addition, you do not have to repay this money, as long as you use the funds for salary, wages, commissions, tips, vacation pay, family leave, and state/local taxes. Continue reading to find out how you can apply.

Choose where to apply for a PPP loan

If you have an existing relationship with a lender, such as a federally-insured bank or credit union, that’s the best place to start. Many national institutions, from Live Oak Bank and JP Morgan Chase to Bank of America and Regents Bank, are only accepting applications from existing customers.

If you do not have an existing relationship with a regional bank or credit union, you may be able to apply through:

  • BlueVine
  • Centerstone SBA Lending
  • Fountainhead
  • Fundera
  • Funding Circle
  • Harvest Small Business Finance
  • Intuit/Quickbooks Capital
  • Kabbage
  • Lendistry
  • OnDeck
  • PayPal
  • Ready Capital
  • Square Capital
  • The Loan Source
  • Velocity SBA

To avoid scams, be sure you’re working through an approved lender. The Small Business Administration’s lender search tool can tell you whether they are one of the 1,800 participating lenders authorized to administer the program. The application deadline is June 30, 2020, if funding does not run out in the meantime.

Fill out a PPP application

You can get the application at your lender’s office or apply online in some cases. The Small Business Administration also lets you download and fill out a PPP form on their website.

The processing time

The program requires lenders to disburse the funds within 10 days of approval, but most small businesses report a one to five-day loan processing time. While you are waiting, you may consider other options like Economic Injury Disaster Loans (EIDL) or 401k loans.

Know the rules for PPP forgiveness

If you are spending your PPP loan on approved expenses, the loan debt will be forgiven.

  • Use all (or at least 75%) of the funds on wages, benefits, tips, commissions, paid leave, and local taxes.
  • Convert 1099 workers to W2 workers for the next eight weeks.
  • Do not pay any one employee (including yourself) over $3,846.15 in a two-week period.
  • Start payments the day you receive the money.
  • Do not lay off workers during the next eight weeks.

Keep in mind any borrowed money that is not forgiven will be converted into a very low-interest loan. Forgiveness will be approved at the end of the eight-week period following receipt of your loan, after you have requested this from your lender in writing. Your request must contain documentation of the number of full-time employees, pay rates, mortgage, or lease payments, as well as utility payments. Your lender has 60 days to reply to your request.

Contact Ubiquity if you have any questions about how the coronavirus crisis affects your 401k retirement savings.

The U.S. Small Business Administration is offering Economic Injury Disaster Loans (EIDL) worth up to $2 million. The goal is to support small businesses in overcoming temporary loss of revenue.

Keep in mind the loans, cash advances, and grants are only available as federal appropriations are made. Once the funding runs out, applications will no longer be accepted. Since multiple bills have passed already, the situation is extremely fluid, with more money likely to be doled out in the future.

Economic Injury Disaster Loans

What It Is: EIDLs provide working capital to meet necessary financial obligations during the disaster period.

How Much Can You Get?: You can take out up to $2 million in disaster assistance.

What Can You Use It For?: EIDLs can be used for essentially any business purpose – payroll, benefits, buying materials, rent, utility payments, and vendor payments. The funds should not be used for expansions, employee bonuses, long-term debt refinancing, or physical property repairs and renovations.

Do You Need To Repay It?: Yes, you will need to repay the EIDL, though you may also qualify to receive $10,000 in grant money while you wait for your loan, which you do not have to repay.

What Is The Term?: Terms last up to 30 years, depending on your ability to repay the loan.

What Is The Interest Rate?: Small businesses are subject to a 3.75% interest rate, while nonprofits receive a 2.75% interest rate.

Economic Injury Disaster Advance Grants

What It Is: Small businesses can receive a cash advance within days of a successful application.

How Much Can You Get?: You can receive up to $10,000 in emergency assistance.

What Can You Use It For?: The funds are meant to recover loss of revenue due to the economic pause.

Do You Need To Repay It?: No! This loan advance does not need to be repaid.

What Is the Term?: There is no term. It’s free money if you are approved!

What Is The Interest Rate?: There is no interest. The $10,000 is yours to keep.

Where to Apply: Apply for the Economic Injury Disaster advance here.

Unable to Get An SBA Disaster Relief Loan?

Getting an SBA disaster relief grant or loan is a great opportunity for small businesses, but it’s not the only option. There are also Paycheck Protection Program loans offering 2.5x monthly payroll expenses, capped at $10 million, that can be completely forgiven as long as employers use the money to keep their workers on the payroll for at least eight weeks. Yet, as you may expect, these funds, available through the U.S. Department of Treasury, are even more in short supply.

The good news is that you may be able to tap into your own savings short-term, thanks to a provision in the CARES Act that lets you borrow up to 100% of your 401k savings. Usually, you are only able to borrow 50%, so this is a good opportunity if you cannot access funds by any other means. You will be able to put the money back in, with no cap on the annual amount added, over the next five years.

The repayment term can be delayed for up to a year. If you can’t repay the loan, your outstanding balance will be taxed like a withdrawal, and you’ll need to pay a 10% early withdrawal penalty, so you want to make sure you don’t take out more than you can handle over a five-year period.

Contact Ubiquity if you have questions about a 401k loan, setting up a new 401k program, or keeping your retirement on-track during the coronavirus crisis.

While supermarkets, pharmacies, and streaming services are thriving, the reality on Main Street is very different. Small business owners are used to operating under tight margins–as long as they are allowed to remain open and bring in revenue.

The federal government understands that small businesses are the lifeblood of America, which is why both Democrats and Republicans worked together to pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Federal and state aid have lowered barriers to obtaining funding to ensure that more businesses have the opportunity to survive the crisis. They may apply for a PPP loan, EIDL loan, and EIDL grant under the program. The EIDL may be rolled over into a PPP if approved, allowing you the ability to potentially forgive some of the debt and decrease the interest rate to 1%.

Keep reading to learn how to apply for small business relief.

How to get a small business coronavirus loan or grant

Find out if you qualify for a Paycheck Protection Program loan through the U.S. Treasury Department.

  • Your business should have 500 or fewer employees, though there may be a few exceptions.
  • Sole proprietorships, independent contractors, and self-employed individuals may apply.
  • You need not try to get funding elsewhere before applying to the program.
  • Businesses in food or hospitality industries may be eligible, depending on their location.
  • Your business must have been established as of February 15, 2020.
  • To have your loan forgiven, you must use the PPP loan for payroll expenses, rent, and utilities.

Find out if you qualify for an Economic Injury Disaster Loan or grant through the U.S. SBA.

  • Your small, cooperative, private nonprofit, agricultural, or tribal business has under 500 employees.
  • Sole proprietorships, independent contractors, and the self-employed may qualify.
  • Your business must have been established by January 31, 2020.
  • Your business was directly affected by coronavirus in some way.
  • Applicants are judged based on their credit history and ability to repay.
  • A personal credit check is required for owners with a 20% or greater stake in the company.

Collect your required documents.

  • For PPP loans, businesses will need to submit: A front/back color copy of a valid driver’s license for each owner; 941 quarterly tax filings (2019, 2020 Q1), 944 annual tax filings (2019), payroll register for the past 12 months, and 12 months of most recent bank statements. Contractors or self-employed individuals need: IRS 1040 Schedule C, 1099s (2019), income and expense reports (2019), and any other document proving payroll expenses.
  • For EIDL, all business owners with a 20% or more stake in the company must submit: loan applications, tax information authorization (IRS Form 4506-T), federal income tax returns, personal financial statement (SBA Form 413), and a schedule of liabilities listing all fixed debts.

Submit your paperwork.

Time frame

  • You will receive PPP loan funding within 10 days of approval. You can check the status via Lendio.
  • It can take 21 days or more for EIDL approval, but you may get your $10K cash advance in 3 days.

How to get money for your small business when loan and grant money runs out

The process of trying to get a small business coronavirus loan or grant is not easy. Even though the lending requirements and documentation have been considerably reduced, thousands of businesses are also applying for that finite pool of money.

If you are worried about how your small business might survive the COVID-19 crisis, consider speaking to a financial advisor. Together you can strategize about how your current resources can be most effectively used during this downtime.

The government’s coronavirus economic support package also includes business interruption insurance, paid sick leave, a tax deadline extension, and favorable 401k loan terms as other options to make your money stretch.

Contact Ubiquity if you have questions about your small business 401k and how making changes to your company’s retirement plan can free up capital.

Employers who take care of their workers throughout the coronavirus crisis will be poised to pick up right where they left off. You have a number of options to provide assistance as a 401k sponsor. You may not have considered allowing 401k hardship withdrawals or 401k loans, but there are incentives for doing so.

Employees can take hardship withdrawals from their 401k plan accounts to meet “an immediate and heavy financial need” related to the coronavirus crisis. You will need to work with your 401k vendor to administer the withdrawals. Of course, a flood of plan participant requests can become a major headache, so it’s best to know the following:

Multiple options to choose from

You do not have to allow both 401k loans and 401k hardship withdrawals under your plan.

Most 401k plans have incorporated CARES Act changes. For instance, loans can now be made up to $100,000 (or 100% of the account balance) – double the usual limit. Participants can extend repayment terms on existing 401k loans for an extra year, with no payments due in 2020. Up to $100,000 can be taken out of a retirement account before age 59.5 – without the 10% early withdrawal penalty – if the plan participant has been directly affected by the COVID-19 pandemic.

Loans must generally be repaid within five years at a varying interest rate; if the loan is not repaid in full, participants must take the remainder as a rollover distribution and pay the 10% early withdrawal penalty, if applicable.

Almost 165,000 Americans took hardship withdrawals out of their 401ks in the month of April. Normally, there are about 220,000 withdrawals in a quarter. Most people take out $5,500, but 3,200 people took out the $100,000 maximum now allowed under the CARES Act that passed on March 27. Hardship withdrawals do not need to be repaid, but the amount taken is subject to income tax and a 10% penalty if the plan participant is under 59.5 years old.

Be sure to communicate exactly what the plan offers, including the terms for taking out a loan or hardship withdrawal.

The criteria for hardship is broadening, but you need to be audit-ready.

Hardship criteria include expenses for medical care, the cost of purchasing a principal residence, payment to avoid eviction or foreclosure, payment of college tuition, burial/funeral expenses, emergency home repair costs, or “expenses and losses caused by federally declared disaster.”

Let plan participants know which documents they might submit to ensure the approval of their hardship withdrawal. For instance, submitting a letter from the landlord threatening eviction is helpful to have on file. The IRS may ask to see documentation of the hardship request, review process, approval, and Form 1099-R distribution.

Consider tools that give employees more control.

A survey conducted by the National Association of Plan Advisors found that plan participants were most frustrated in wondering, “It’s my money – why can’t I have it?” Plan sponsors with high rates of participant loan and withdrawal activity can benefit from offering employees educational resources and financial wellness tools. Training employees to budget wisely and save more for their retirements will reduce the administrative burden considerably, while also showing employees you care.

Ubiquity Retirement and Savings is a 401k plan provider in the United States, which provides flat-fee brokerage services and in-depth assistance to small businesses in particular. Switching your 401k provider can save you money and hassle at a time when you need it most. Contact us for details.

President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. Part of the bipartisan spending bill throws a lifeline to small businesses looking to remain afloat during the economic freefall caused by the COVID-19 pandemic.

Expanded Unemployment Insurance

Federal unemployment insurance adds $600 a week of benefits on top of whatever states are giving furloughed employees. These benefits last up to four months if necessary. Independent contractors, gig economy workers, freelancers, the self-employed, and those with limited work history are able to apply. So, as a small business owner, you can potentially qualify for unemployment insurance benefits if you pay yourself a salary or wages in addition to receiving dividends. Once workers run out of state benefits, the federal government will fund an additional 13 weeks of unemployment benefits through December 31, 2020.

Payroll Protection

Paycheck Protection Program loans, also called “PPP loans,” are meant to help businesses with fewer than 500 employees retain their workers and cover overhead expenses from February 15 through June 30. Small businesses can take out 2.5x the monthly payroll (up to $10 million) to cover any employees making up to $100,000 per year. Loans may be forgiven if the company retains at least 75 percent of its workforce, and uses the loan for payroll, mortgage interest, rent, utilities, and regional taxes.

Taxpayer Rebates

The CARES Act gives taxpayers up to $1,200 (plus $500 for each child under 17). Taxpayer refunds may not directly impact small businesses, but feasibly some of the money could end up cycling back for purchases. For instance, a quarter of Americans planned to spend their money on food and groceries, so CPG brands, meal kit providers, and restaurants stand to benefit. Nearly a third of Americans are saving their stimulus money – feasibly to spend it once the economy reopens.

Student Loan Debt Tax Deductions

Employer payments on behalf of employee student loans are excluded from taxable income. Employers can contribute up to $5,250 annually toward student loans, with payments excluded from employer and employee taxable income.

Business Tax Provisions

Employers enjoy a number of new tax provisions allowed under the CARES Act this year, including:

  • A 50 percent refundable tax credit on wages paid up to $10,000.
  • Social security payroll tax payments delayed until December 31, 2021, and December 31, 2022.
  • Carrying back net operating losses earned in 2018, 2019, or 2020 five years to offset taxable income.
  • Deducting 50 percent of Earnings Before Interest, Tax, Depreciation, and Amortization (up from 30%).

Stabilization Funds

The U.S. Treasury’s Exchange Stabilization Fund provides $454 billion in emergency lending to businesses, cities, and states. Companies taking out loans must avoid stock buybacks for the entire term of the loan and a year after, and must retain at least 90 percent of its workforce.

Retirement Account Changes

The CARES Act also waives the 10 percent early withdrawal penalty on 401k and IRA distributions. Plan participants looking to take out a 401k loan can take out up to 100% of what they put in and repay themselves over the next five years. Required Minimum Distributions are waived for the rest of 2020, allowing retirees the ability to hold onto funds rather than sell at a discount.

Ubiquity is a low-cost provider of 401k plans. We are committed to helping Americans maximize their retirement accounts in light of the circumstances. Contact us to discuss the CARES Act and more.


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© 2020 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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