2 tax law changes that may affect your business’s 401(k) plan

Published: 6/11/2018 1:25:13 PM

2 tax law changes that may affect your business’s 401(k) plan

When you think about recent tax law changes and your business, you’re probably thinking about the new 20% pass-through deduction for qualified business income or the enhancements to depreciation-related breaks. Or you may be contemplating the reduction or elimination of certain business expense deductions. But there are also a couple of recent tax law changes that you need to be aware of if your business sponsors a 401(k) plan.

1. Plan loan repayment extension

The Tax Cuts and Jobs Act (TCJA) gives a break to 401(k) plan participants with outstanding loan balances when they leave their employers. While plan sponsors aren’t required to allow loans, many do.

Before 2018, if an employee with an outstanding plan loan left the company sponsoring the plan, he or she would have to repay the loan (or contribute the outstanding balance to an IRA or his or her new employer’s plan) within 60 days to avoid having the loan balance deemed a taxable distribution (and be subject to a 10% early distribution penalty if the employee was under age 59½).

Under the TCJA, beginning in 2018, former employees in this situation have until their tax return filing due date — including extensions — to repay the loan (or contribute the outstanding balance to an IRA or qualified retirement plan) and avoid taxes and penalties.

2. Hardship withdrawal limit increase

Beginning in 2019, the Bipartisan Budget Act (BBA) eases restrictions on employee 401(k) hardship withdrawals. Most 401(k) plans permit hardship withdrawals, though plan sponsors aren’t required to allow them. Hardship withdrawals are subject to income tax and the 10% early distribution tax penalty.

Currently, hardship withdrawals are limited to the funds employees contributed to the accounts. (Such withdrawals are allowed only if the employee has first taken a loan from the same account.)

Under the BBA, the withdrawal limit will also include accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this modification could add substantially to the amount of funds available for withdrawal.

Nest egg harm

These changes might sound beneficial to employees, but in the long run they could actually hurt those who take advantage of them. Most Americans aren’t saving enough for retirement, and taking longer to pay back a plan loan (and thus missing out on potential tax-deferred growth during that time) or taking larger hardship withdrawals can result in a smaller, perhaps much smaller, nest egg at retirement.

So consider educating your employees on the importance of letting their 401(k) accounts grow undisturbed and the potential negative tax consequences of loans and early withdrawals. Please contact us if you have questions.

All Posts

Donate appreciated stock for twice the tax benefits

11/6/2018 3:07:42 PM

Buy business assets before year end to reduce your 2018 tax liability

11/6/2018 2:12:38 PM

Tax planning for investments gets more complicated

10/9/2018 11:11:03 AM

Tax-free fringe benefits help small businesses and their employees

10/8/2018 6:59:02 PM

Keep it SIMPLE: A tax-advantaged retirement plan solution for small businesses

8/27/2018 12:30:01 PM

Keep an eye out for extenders legislation

8/14/2018 11:01:14 AM

Do you still need to worry about the AMT?

8/7/2018 11:10:23 AM

What you can deduct when volunteering

7/12/2018 7:08:24 PM

Home green home: Save tax by saving energy

7/3/2018 11:24:54 AM

Do you know the ABCs of HSAs, FSAs and HRAs?

6/26/2018 11:16:36 AM

Choosing the best business entity structure post-TCJA

6/25/2018 10:27:26 AM

The tax impact of the TCJA on estate planning

6/20/2018 6:39:54 PM

2 tax law changes that may affect your business’s 401(k) plan

6/11/2018 1:25:13 PM

What businesses need to know about the tax treatment of bitcoin and other virtual currencies

6/5/2018 7:29:21 PM

Putting your child on your business’s payroll for the summer may make more tax sense than ever

5/31/2018 2:13:16 PM

Do you need to adjust your withholding?

5/9/2018 11:00:06 AM

A review of significant TCJA provisions affecting small businesses

5/8/2018 1:47:04 PM

IRS Audit Techniques Guides provide clues to what may come up if your business is audited

5/7/2018 5:44:55 PM

Get started on 2018 tax planning now!

5/2/2018 7:53:18 PM

Can you claim your elderly parent as a dependent on your tax return

4/25/2018 4:01:57 PM