401(k) Hardship Withdrawals Can Help Employees Through the Coronavirus Crisis
Dylan Telerski / 7 May 2020 / Business
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 401(k) sponsor. You may not have considered allowing 401(k) hardship withdrawals or 401(k) loans, but there are incentives for doing so.
Employees can take hardship withdrawals from their 401(k) plan accounts to meet “an immediate and heavy financial need” related to the coronavirus crisis. You will need to work with your 401(k) 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 401(k) loans and 401(k) hardship withdrawals under your plan.
Most 401(k) 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 401(k) 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 401(k)s 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 401(k) plan provider in the United States, which provides flat-fee brokerage services and in-depth assistance to small businesses in particular. Switching your 401(k) provider can save you money and hassle at a time when you need it most. Contact us for details.