COLLECTED WISDOM™ on 401k Loans
This archive contains not only the most current material on the topic, but also older items that are still relevant, provide background, perspective or are germane to the topic.
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The retirement industry has long debated the need for and use of 401k loans. Many think that borrowing from a retirement account is sacrificing long-term financial security for a short-term fix. But what if retirement loans are just misunderstood? Research reveals an evolved perspective and approach to retirement loans.
Source: 401kspecialistmag.com, December 2023
Loan and hardship withdrawals taken from workplace retirement plans in the third quarter of 2023 hit their highest levels in more than two years, according to a report from Empower. Among a study of 5.3 million defined contribution workplace savers in Empower accounts, 0.8% took hardship withdrawals in Q3, and 2.6% took out loans from their savings. Those were the highest rates in the past eight quarters.
Source: Planadviser.com, December 2023
The study by EBRI and ICI found that 29% of younger 401k participants had an outstanding loan at some point in the five years analyzed, compared with 18% at year-end 2016. As younger workers age and accumulate larger account balances, their likelihood of taking a loan from their 401k plan grows.
Source: 401kspecialistmag.com, September 2023
This report analyzes 401k plan loan usage for a sample of 2.2 million consistent loan-eligible 401k plan participants, participants who maintained accounts in each year between 2016 and 2020 and were in plans offering loans.
Source: Ebri.org, September 2023
The average price for U.S. houses sold during the second quarter was nearly $500,000. That, coupled with the highest mortgage interest rates in over 20 years, could make a 401k loan appealing for buyers. Whether that's a good idea is another matter. In the best-case scenario, financial advisors say: It's complicated. For most people, their answer tends to be: Don't even think about it.
Source: Investmentnews.com, August 2023
In a measure that substantively affects plan sponsors and alters retirement plan correction practices, SECURE 2.0 significantly expands the availability of self-correction by widening the range of operational failures for which self-correction is available, including plan loan errors.
Source: Spotlightonbenefits.com, February 2023
Newly released data from year-end 2022 shows that the volume and dollar amount of 401k loans and hardship withdrawals decreased, but there were some nuances to the findings. In a new quarterly report that draws on data from more than three million 401k plan participants, Bank of America's 401k Participant Pulse report reveals that fewer participants took hardship withdrawals for immediate financial needs.
Source: Napa-net.org, February 2023
More Americans are tapping their 401ks for financial emergencies, with the percentage of retirement savers pulling money for hardships spiking 24% in the 12 months through Sept. 30, according to new data.
Source: Investmentnews.com, November 2022
Many retirement plans allow participants to take loans from their accounts. But that entails more than simply deciding to allow participants to do so. That is only the beginning. Some procedures must be followed, and important considerations that flow from that initial choice. Here are some questions and matters concerning plan loans.
Source: Asppa.org, November 2022
As interest rates increase, the cost of borrowing money has increased. It's not surprising if more people begin to look at borrowing from their own 401k retirement savings accounts versus borrowing from more traditional sources. Is this a good idea? Indeed, is it not just a good idea, but something that should be encouraged? Or is it the path to retirement ruination and should it not even be allowed?
Source: Fiduciarynews.com, November 2022
Prohibited transaction violations associated with participant loans, which are corrected under the DOL's separate Voluntary Fiduciary Correction Program, are less common than the day-to-day operational failures that can result in taxation to the participant. Therefore, this article focuses on the solutions for correcting participant loan errors through the Employee Plans Compliance Resolution System and its Self-Correction Program.
Source: Newfront.com, August 2022
Of utmost importance is the obligation of plan sponsors to comply with the legal requirements governing participant loans. The failure to comply may lead to a taxable event for the borrowing participant and a prohibited transaction for the plan fiduciaries. Here is a review of the technical and fiduciary considerations involved when participant loans are available through your company 401k plan.
Source: Newfront.com, August 2022
On Sept. 28, the IRS updated the "Issue Snapshot" which discusses the laws and regulations governing plan loans. This article reviews the update.
Source: Asppa.org, October 2021
Participant loans are available in many retirement plans, although plans are not required to offer participant loans. Failures may occur when participant loans exceed the maximum dollar amount, have payment schedules that do not meet the time or payment requirements or go into default when payments are not made. Each of these failures, and other issues, will cause the loan to become a deemed distribution for tax purposes. This updated IRS "Issue Snapshot" will summarize what triggers a deemed distribution and when it can occur.
Source: Irs.gov, September 2021
If your plan's adoption agreement is set up to allow loans, participants can borrow against their account balance. Some participants may find this an attractive option as the interest they pay on the loan is returned to their retirement account as opposed to other loans where the interest is paid to the lender. This is a brief review of retirement plan loans.
Source: Berrydunn.com, September 2021
Though research from Vanguard determined that retirement plan loan and hardship withdrawal activity decreased in 2020, experts say employers should consider enacting procedures to limit retirement plan distributions while still offering help to their participants in emergencies. Plan sponsors should educate their employees about distributions, and they can help their workers set up emergency savings accounts to avoid tapping into retirement funds.
Source: Plansponsor.com, August 2021
At the end of the first quarter, about 14% of 401k participants had outstanding loans. The percentage fell steadily throughout last year after edging up to 16.3% in the year-ago period from 16.1% in the fourth quarter of 2019.
Source: Pionline.com, July 2021
Most DC plans allow participants to take a loan from their plan account. One reason for the popularity of the loan feature is that workers may be more likely to participate in the employer's plan if they know they can access their savings before retirement if a need arises. When a plan loan complies with the tax laws and the plan’s loan policy, it is repaid on schedule and the participant restores their savings, with interest, to their plan account. When something goes awry, such as a missed payment that is not made up, the plan loan is in default. To keep the plan in compliance, plan sponsors that allow plan loans must understand the loan rules and what happens when a loan is in default.
Source: Newportgroup.com, June 2021
During difficult economic times, you may be tempted to tap into your financial future by taking a loan or a hardship withdrawal from your workplace retirement plan. But is it a good idea? Individual circumstances vary, so there is no simple answer to this question. This piece takes a closer look.
Source: Axiaadvisory.com, June 2021
The focus of this article is what happens when someone has borrowed from a 401k plan within the limits, terminates employment, and then defaults on the loan. In particular, changes made by the CARES Act and a 2017 change to the tax law, which are helpful to the large number of people who may find themselves in this situation during the pandemic.
Source: Blankrome.com, December 2020
If you have a 401k, you may have considered tapping into it to get some relief from the current economic uncertainty. The CARES Act of March 2020 doubled the amount of money an employee could borrow from a 401k plan. Depending on your retirement funds' balance, a 401k loan could give you access to a large amount of money. But is it a good idea? Here's what you need to know.
Source: Foxbusiness.com, October 2020
The Tax Cuts and Jobs Act, enacted in December 2017, made significant changes to the plan loan offset rollover eligibility and tax reporting. The changes add a significant amount of complexity to tax reporting for these loans, and as a result, the industry has been slow to implement the changes. In August 2020, the IRS published proposed regulations that provide more detail on the requirements of the new provisions. Under the new regulations, there are now three different terms for a loan that is distributed, and each has rollover rules specific to it.
Source: Ntsa-net.org, October 2020
401k plan loan regulations provide plan sponsors with a great deal of flexibility in this area, including the ability to be overly permissive, quite restrictive, or somewhere in between for their loan policy. What limits do you think are appropriate for the number of outstanding retirement loans? Or should such loans be unlimited?
Source: Cammackretirement.com, October 2020
The expanded 401k loan provisions under the CARES Act have come and gone and few people have likely noticed. The increased loan-size provision was part of a package to provide financial relief to people who have been affected by COVID-19. But very few have taken out loans, especially in the expanded amount allowed by the CARES Act, according to several 401k recordkeepers that track the data.
Source: Investmentnews.com (registration may be required), September 2020
The expanded 401k plan loan provisions included in the CARES Act are quickly coming to an end! The last day to take advantage of the increased 401(k) loan limits is Tuesday, September 22, 2020.
Source: Compliancedashboard.net, September 2020
The retirement industry eagerly received the IRS guidance on applying provisions of the CARES Act with the issuance of Notice 2020-50 on June 19. It has provided important details on compliance with this legislation, which offers financial and tax relief to millions of Americans affected by the coronavirus pandemic.
Source: Ascensus.com, June 2020
IRS Expands Definition of Qualified Individuals for Purposes of CARES Act Plan Distributions and Loans
On June 19, 2020, the Internal Revenue Service released Notice 2020-50 to help retirement plan participants affected by COVID-19 take advantage of the CARES Act provisions providing enhanced access to plan distributions and plan loans. Among other provisions, Notice 2020-50 expands the categories of individuals eligible for CARES Act distributions and loan treatment.
Source: Clarkhill.com, June 2020
This IRS notice provides guidance relating to the application of section 2202 of the CARES Act for qualified individuals and eligible retirement plans. The guidance in this notice is intended to assist employers and plan administrators, trustees and custodians, and qualified individuals in applying section 2202 of the CARES Act, including guidance on how plans may report coronavirus-related distributions.
Source: Irs.gov, June 2020
Retirement plan loans can be both an opportunity and a burden to participants. Loans come with the risk of default and penalties which can have a significant impact on the borrower. However, through a smart retirement plan design, participant education, and knowledge of recent legislation, plan sponsors can help to minimize loan usage and defaults. Here are some tips for designing lower-risk retirement plans.
Source: Pnc.com, June 2020
Borrowing money from a 401k is a common strategy used to get through hard times. If you've weighed your options during the novel coronavirus crisis and decided that a 401k loan is a right choice for you, there are five things you need to know before you borrow, as the rules have changed for 2020.
Source: Fool.com, June 2020
With the passage of the CARES Act, defined contribution plan sponsors face important decisions concerning their plan design, specifically whether or not to adopt the special distribution and loan limit increases for those affected by the coronavirus. It is a good time for plan sponsors to consider additional design changes that could help preserve long-term retirement security, especially ones that address participant challenges related to job loss, given the unprecedented economic fallout from the COVID-19 pandemic.
Source: Plansponsor.com, May 2020
The IRS has issued some initial guidance on the coronavirus-related relief for retirement plans under the CARES Act in the form of Q&As on its website. Most of the Q&As address coronavirus-related distributions, while one Q&A provides some IRS insight relating to the loan relief, referencing an old IRS Notice that answered questions about the loan relief issued after Hurricane Katrina.
Source: Beneficiallyyours.com, May 2020
The CARES Act authorizes employers to make changes to their qualified retirement plans to increase loan limits, delay loan repayments, and make distributions to plan participants experiencing certain COVID-19 related circumstances. Due to a lack of guidance from the IRS, there's confusion among third-party administrators about how to administer these changes, resulting in potential issues with forms used by TPAs to approve these CARES Act loan and distribution changes.
Source: Employeebenefitslawreport.com, April 2020
It turns out that there is a quirk in the CARES Act provisions regarding COVID-19 loans that are giving plan sponsors a reason to pause. This issue is that while the CARES Act allows an increase in the loan limits for borrowers who qualify for a COVID-19 loan ($100,000 or 100% of a participant's vested account balance, if less), it did not extend the repayment terms. Thus, the loan must be repaid over five years, unless used to acquire a primary residence.
Source: Cammackretirement.com, April 2020
It is important to understand that recordkeepers will not be the ones on the hook for any hasty decisions that are made regarding the CARES Act retirement plan distribution and loan provisions. That liability will rest squarely on the shoulders of the plan fiduciaries. And, as with any fiduciary decision, a prudent process should be followed, and that prudent process is probably going to take longer than five days. Should plan sponsors adopt the new loan and/or distribution rules? Here are some things to consider.
Source: Cammackretirement.com, April 2020
The CARES Act appears to make the loan suspension mandatory. But when you look at how the IRS interpreted the same provision that was in the Katrina Emergency act, it's reasonable to conclude that it's optional, not mandatory.
Source: Businessofbenefits.com, April 2020
The structure and the language used by the drafters of the CARES Act in their crafting of the new participant loan repayment suspension rules seem to be both rare and broad: they appear to mandate, as a matter of federal law, that each loan repayment due through December 31, 2020, by COVID qualifying participants be suspended for one year. Interestingly enough, the language does not appear to prevent ongoing loan repayments from being made should the participant choose to do so. The plan may not be able to impose a due date on those payments from COVID participants. The challenge for administrators is how you accommodate the suspension with the desire to permit repayments at the same time?
Source: Businessofbenefits.com, April 2020
The significant economic tremors, including income insecurity and job reductions, stemming from the coronavirus pandemic may lead to increased loan defaults and impact long-term retirement readiness. Plan sponsors have some ability to facilitate repayments and minimize defaults for participants who are unable to make loan repayments.
Source: Callan.com, March 2020
The IRS says in a recent Issue Snapshot that a plan sponsor may, but is not required to, allow a cure period during which a delinquent participant loan may be brought back into compliance without triggering a deemed distribution. If allowed, the cure period must be specifically provided for in the written plan document.
Source: Plansponsor.com, March 2020
A plan administrator may, but is not required to, allow a cure period during which a delinquent participant loan may be brought back into compliance without triggering a deemed distribution. If allowed, the cure period must be specifically provided for in the written plan document. This recently updated article discusses common scenarios involving the cure period.
Source: Irs.gov, March 2020
Negative behaviors such as using the 401k plan as an emergency fund instead of a long-term retirement savings account and taking excessive loans and hardship withdrawals is a symptom of a bigger problem among the employee population. The same is true for impulsive investment decisions that could ultimately delay employees' retirement. A combination of plan design and financial education works well to improve employees' financial wellness by casting a wider net in order to help employees help themselves without feeling pushed.
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