Many companies turn 401(k) retirement contributions back on


Many companies turn 401(k) retirement contributions back on

As more Americans shoulder the responsibility of funding their own retirement, many rely increasingly on their 401(k) retirement plans to provide the means to meet their investment goals.

That's because 401(k) plans offer a variety of attractive features that make investing for the future easier and potentially profitable.

Be sure to speak to your employer or plan administrator about the specific features and rules of your plan.

What is a 401(k) plan?

A 401(k) plan is an employee-funded retirement savings plan. It takes its name from the section of the Internal Revenue Code that created these plans.

401(k) plans are also known as “qualified defined contribution” retirement plans: qualified because they meet the tax law requirements for favorable tax treatment (described below); and defined contribution because contributions are defined under the terms of the plan, while benefits will vary depending on plan balances and investment returns.

The tax treatment of 401(k) plans

The 401(k) plan allows savers to contribute up to $19,000 of salary in 2019 to a special account set up by their company.1 Future contribution limits will be adjusted for inflation.

In addition, individuals aged 50 and older who participate in a 401(k) plan can take advantage of “catch up” contributions, which permit an additional $6,000 salary deferral contribution in 2019 in addition to the $19,000 limit discussed earlier.

Since 2006, 401(k) plans have come in two varieties: traditional and Roth-style plans.

A traditional 401(k) plan allows savers to defer taxes on the portion of salary contributed to the plan until the funds are withdrawn in retirement or at age 59½, at which point contributions and earnings are taxed as ordinary income unless rolled over to another qualified plan or IRA. In addition, because the amount of pre-tax contribution is deducted directly from a paycheck, taxable income is reduced, which in turn lowers the saver's tax burden.

The tax treatment of a Roth 401(k) plan is different. Under a Roth plan, contributions are made in after-tax dollars, so there is no immediate tax benefit, however, earnings on plan balances grow tax free; no taxes are levied on qualified distributions.

Both traditional and Roth plans require that distributions be qualified.

In general, this means they must be taken after 59½ (or age 55 for those who separate from service from the employer whose plan the distributions are withdrawn from), although there are exceptions for hardship withdrawals, as defined by the IRS. If a distribution is not qualified, a 10% penalty will apply in addition to ordinary income taxes on all pretax contributions and earnings.

If a plan permits, participants in the plan can make contributions in excess of the 2019 limit of $19,000 ($25,000 if over age 50), as long as the total contribution is not more than 100% of pretax salary, or $55,000, whichever is less.

That means if a person's salary is $100,000, they can contribute up to $55,000 total to a 401(k) plan during that year.

In the case of a traditional 401(k), however, only the first $19,000 ($25,000 if over 50) of contributions can be made pre-tax in 2019; contributions over and above that amount must be made after tax and do not reduce one's salary for tax purposes.

1The maximum salary deferral amount that you can contribute in 2019 to a 401(k) is the lesser of 100% of pay or $19,000. However, some 401(k) plans may limit your contributions to a lesser amount, and in such cases, IRS rules may limit the contribution for highly compensated employees.

Matching contributions

In addition to its favorable tax treatment, one of the biggest advantages of a 401(k) plan is that employers may match part or all of the contributions participants make to a plan.

Typically, an employer will match a portion of employee contributions, for example, 50% of the first 6%.

Under a Roth plan, matching contributions are maintained in a separate tax-deferred account, which, a traditional 401(k) plan, is taxable when withdrawn.

Employer contributions may require a “vesting” period before you have full claim to the money and their investment earnings. But keep in mind that if your company matches your contributions, it's getting extra money on top of your salary.

401(k) advantages

  • Tax-deferred contributions and earnings on traditional plans.
  • Tax-free withdrawals for qualified distributions from Roth-style plans.
  • Choice among different asset classes and investment vehicles.
  • Potential for employer-matching contributions.
  • Ability to borrow from a plan under certain circumstances.

Tax-deferred compounding potential

The benefit of compounding reveals itself in a tax-deferred account such as a 401(k) plan. If a $100 monthly contribution accumulates tax free over 30 years, assuming a hypothetical 8% rate of return, a retirement nest egg could grow to $150,030.

That's a difference of almost $50,000 just because current taxes did not need to be paid up front!2 Of course, taxes will be paid on earnings and elective deferral contributions to a traditional 401(k) when you withdraw the money.

But that may be when in retirement and possibly in a lower tax bracket.

2 This example is hypothetical in nature and is not indicative of future performance, nor does it represent a specific product in your retirement plan. Withdrawals prior to age 59½ may be subject to a 10% penalty tax.

Choosing investments within a plan

Generally, 401(k) plans offer several options in which to invest contributions.

Such options generally include mutual funds that may invest in stocks for growth, bonds for income, or money market investments for protection of principal.

This flexibility may help lower investment risk by diversifying a portfolio amongst different types of classes, manager styles, investment styles, and economic sectors.

Provisions for changing jobs

Most 401(k) plans permit the employee who terminates employment the options of receiving the 401(k) balance in a lump sum (which is subject to tax) or to receive periodic payments (which are subject to tax) or to roll over the proceeds to an IRA or other employer-sponsored retirement plan.

Additionally, some 401(k) plans permit the terminated employee to retain their 401(k) balance in their former employer's plan.

Amounts that are retained in a former employer's 401(k) plan or transferred to another employer's plan or IRA postpone the taxation until amounts are subsequently distributed from the plan or IRA the money was rolled into.

When receiving funds from a 401(k) with the intention to roll the amount to an IRA:

  • The rollover must be completed in 60 days.
  • Employers must withhold 20% of the proceeds as a withholding tax. It is up to the participant to make up this 20%, or it will be treated as a distribution. The money withheld will be used as a credit against any income tax liability.
  • Neither the 60-day rule nor the 20% withholding apply to amounts directly transferred to an IRA or other qualified plan.

Borrowing from a 401(k)

Another potential advantage of some 401(k) plans is the ability to borrow as much as 50% of vested account balance, up to $50,000. In most cases, if the loan is systematically paid back with interest within five years, there are no penalties assessed. However, borrowing from a 401(k) is generally not recommended since it reduces investable assets.

There are some other issues to consider. When leaving the company, the full loan amount may need to be repaid immediately (subject to the plan's loan policy). In addition, loans not repaid to the plan within the stated time-period are considered withdrawals and will be taxed and penalized accordingly.

Working with your financial and tax professionals

A 401(k) plan can become the cornerstone of a personal retirement savings program, providing the foundation for future financial security. Consult your financial and tax professionals to help you determine how your employer's 401(k) and other savings and investment plans could help make your financial future more secure.

Important Note
Equitable believes that education is a key step toward addressing your financial goals, and we've designed this material to serve simply as an informational and educational resource.

  Accordingly, this article does not offer or constitute investment advice and makes no direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option.

  Your needs, goals and circumstances are unique, and they require the individualized attention of your financial professional.  But for now, take some time just to learn more.


What To Do If Your Employer Suspends 401(k) Matching Contributions

Many companies turn 401(k) retirement contributions back on

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Thanks to the COVID-19 crisis, your investment portfolio has most ly taken a hit. But there may be even more retirement related fallout from the coronavirus pandemic: Your employer could freeze their 401(k) matching contributions. 

As companies struggle to cut costs and survive, many are laying off workers and slashing extra expenses. Ari Sonneberg, a partner with the Wagner Law Group, notes that 401(k) matching contributions to employee accounts make an attractive target for cost cutting.

“We certainly saw a decrease in employer contributions during the Great Recession and a significant increase thereafter, and we have, in the last few weeks, been getting many calls from plan sponsors looking for advice on how to properly suspend or reduce employer contributions,” Sonneberg said. “During recessions, employers look to reduce expenses — reducing their retirement plan obligations is no exception.”    

If your company is planning on suspending its 401(k) contributions, take these steps to protect your retirement fund. 

How Employer 401(k) Matching Contributions Work

For employees, 401(k) matching contributions provide a powerful boost to retirement savings; for companies, they are a useful tool for recruiting and retaining employees.

In recent years, a 401(k) match has become an increasingly common part of benefit packages.

According to Vanguard, 95% of the employers who use it to administer their 401(k)s matched retirement plan contributions by their workers. 

With employer-sponsored defined contribution retirement plans 401(k) accounts, employees contribute from their salary, usually on a pre-income tax basis. (According to Vanguard, more than 70% of plans also offer the option of making after-tax Roth contributions.)  

Employer matches vary widely in their generosity, but the most common one among Vanguard plans is a 50% match on the first 6% a worker saves. In other words, if an employee saves 6%, the company kicks in 3%.

Some companies offer tiered matches — a common tiered formula matches the first 3% the employee saves dollar for dollar, and then the next 2% at a 50% rate.

In such a plan, if you save 5% of your salary, your employer will kick in 4%. 

Let’s say your employer is more generous than average and offers a dollar-for-dollar match on your retirement contributions up to 5% of your salary. If you earn $40,000 per year, your employer will match up to $2,000 of your annual contributions. 

Whatever the formula, employer 401(k) matching contributions are essentially “free money,” making them a highly valuable benefit for employees. Taking advantage of an employer’s match could help you dramatically increase your retirement savings. 

Employers Are Suspending 401(k) Matching Contributions — Again

Suspending employer contributions to retirement accounts isn’t a new tactic. According to a survey by Willis Towers Watson, almost 20% of companies with at least 1,000 employees suspended or decreased their retirement plan contributions during the 2008 recession. 

Already, several large employers, including Haverty’s and Amtrak, have announced that they are freezing their 401(k) contributions in response to financial stress stemming from the coronavirus outbreak, including  While 401(k) matching contributions are a key part of a compensation package, your employer can often stop making contributions at will—it’s perfectly legal. 

“Many typical 401(k) plans contain provisions for an employer discretionary contribution to the extent that if an employer has been making these types of discretionary contributions, no notice to participants is required by the plan sponsor to stop making them or to reduce them,” said Sonneberg. 

However, some employers will need to take certain steps before they can suspend contributions, such as giving employees notice. 

If the employer offers a Safe Harbor 401(k), the company is subject to certain notice requirements.

If the employer intends to make midyear changes to the 401(k), such as stopping employer contributions, it must inform employees of the intended change and its effective date at least 30 days in advance.

Non-Safe Harbor 401(k)s generally do not require companies to provide advance notice when freezing matching contributions.

The suspension of 401(k) contributions can be a significant blow to employees. However, Amber Clayton, the knowledge center director with the Society of Human Resources Management, said it’s something companies are only doing as a matter of survival and not as a long-term solution. 

“[…] But employers who do this would ly do so in the short-term as 401(k) plans are important for employees as well as potential job candidates,” Clayton said. “A longer suspension could result in turnover or recruitment challenges.” 

Finding out that your employer has suspended their 401(k) match can be disheartening. But before making any drastic changes to your own 401(k) contributions, follow these tips to minimize the impact of your employer’s decision.

1. Think carefully before withdrawing money from your 401(k) account

With the economy and stock markets in turmoil, you may have considered withdrawing funds from your 401(k) to have cash on hand to cope with financial hardship.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act made it easier than ever to tap into your retirement fund. Previously, withdrawing money from your retirement accounts before you reached retirement age resulted in a 10% early withdrawal penalty, except in certain circumstances.

The CARES Act waives the penalty for certain people experiencing financial adversity due to COVID-19.  (It also gives you up to three years to repay the money to a retirement account and avoid the income taxes that would ordinarily be due on any distribution of pre-tax retirement funds.

However, dipping into your retirement fund can be a costly mistake. Brandon Renfro, a Certified Financial Planner and assistant professor of finance at East Texas Baptist University, recommended that you leave your money where it is.

“Don't give up and withdraw the money that is already in your 401(k),” he said. “That money is still working for you.”

If you take distributions from your 401(k), you’ll lose out on potential growth and market gains when the market recovers. That decision could hurt you later on as you get older. 

Need cash now? Consider these options instead. 

2. Time to review your investment strategy

While you shouldn’t take out money from your 401(k) if you can avoid it, this would be a good time to revisit your investment allocations. 

“The market volatility will have ly thrown your portfolio balance,” Renfro said. “Readjust to get your investment mix back aligned to fit your plan.”

If you don’t have a set investment strategy—or don’t feel comfortable with the current plan you have—it may be worth working with an investment professional or a robo-advisor to choose a new investment mix your goals and risk tolerance. 

“It's also a good time to think about how you reacted to the market drop,” Renfro said. “If you panicked or didn't stay the course, then maybe it's time to re-evaluate how you invest. It may be that you need a new plan going forward.”

3. Maintain your retirement contributions — or increase them

Even though your employer may have suspended matching contributions, you can keep contributing to your 401(k) on your own. If you can afford to, contribute more in order to make up for the temporary loss of your employer’s 401(k) match. For 2020, workers can make up to $19,500 in pre-tax or Roth contributions, plus an extra $6,500 if they will be 50 or older by the end of the year. 

Alternatively, you might consider redirecting a portion of your retirement contributions to a Roth Individual Retirement Account (IRA). Contributions to a Roth IRA are made with funds on which you’ve already paid income tax, the Roth 401(k) contributions mentioned above, and in many cases offer more flexibility when it comes to investment choices and withdrawals.

“If you are able to, the biggest thing you can do is make up for the reduced employer contribution by saving more yourself,” said Renfro. “Of course, that may not be so easy. It may take some budget trimming, but if you can manage it, you'll be much better off in the long run.” 

By staying the course, either in your 401(k) or a Roth IRA, you can continue to grow your nest egg and take advantage of a stock market recovery, when it inevitably arrives. If you can afford to increase your contributions, it will also keep your retirement plans on track.  

Suspensions won’t last forever

The COVID-19 financial crisis is impacting companies and employees in many different ways; suspending employer retirement plan contributions is just the latest step as companies attempt to stave off employee furloughs and layoffs. 

Because of the sudden and unexpected arrival of COVID-19, many employers have been forced to take drastic steps to stay afloat. While finding out that your employer is suspending its contributions can be frustrating, you should know that it’s ly a short-term phase that will last only until the economy recovers. 

“Retirement plan employer contributions are a tool used for retaining existing employee talent and attracting new talent, so as soon as employers are in a position to revisit their contribution suspensions or reductions, history tells us that they will,” said Sonneberg. 

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