New guidance is out from the Internal Revenue Service and Dept. of Treasury regarding required minimum distributions (RMDs), including 401(k) withdrawals due to emergency expenses.
A recent BenefitsPro article highlighted the final regulations from IRS and Treasury, which reflect changes made under SECURE 2.0. These changes impact retirement plan participants, IRA owners, and their beneficiaries. Under the new rules, employees can now withdraw up to $1,000 from their 401(k)s without penalties if the money is needed for an emergency expense.
According to the IRS, the reasons for an emergency expense include:
- Medical care
- Funeral expenses
- Auto repairs
- Foreclosure
- “Any other necessary emergency personal expenses”
As cited in BenefitsPro, “‘For purposes of determining whether an individual has an unforeseeable or immediate financial need, the administrator may rely on an employee’s written certification that the employee is eligible for an emergency personal expense distribution,’” according to the IRS.
The emergency withdrawal program is optional for employer-sponsored plans. It’s meant primarily for low- and moderate-income workers, giving them a faster and less expensive way to access their retirement savings. It’s also cheaper than a borrowing a conventional loan or using a credit card, for example.
Employees must not leave their 401(k) account balance below $1,000 after the withdrawal, and they have three years from the withdrawal date to repay the funds. Additionally, they can’t take another emergency withdrawal for three years. This change is a result of a provision in SECURE 2.0 that went into effect this year, according to BenefitsPro.
Employers may get questions about the new emergency withdrawal option, and those who offer it will likely receive increasing requests as employees learn about the ability to withdraw from their retirement savings to cover unforeseen financial hardships. A recent survey from Empower found that most Americans can’t afford an unexpected expense above $400, so the emergency withdrawal program may help them meet near-term financial challenges. This may result in lower instances of financial stress, which could translate to more productive, focused, satisfied employees in the workplace.
However, it does have the potential to set employees back when it comes to retirement readiness. While $1,000 withdrawn from a retirement account may not seem like a large amount, when you consider that money will no longer be invested or benefit from compound interest over time, the potential losses could be much greater. Employees may be sacrificing their long-term financial security for a short-term monetary need. Nonetheless, for those who may be faced with an unforeseen financial hardship, emergency withdrawals may be just what they need to meet that challenge and get back on track to build future financial security.
