Congress has implemented numerous alterations to workplace retirement plans, marking a trend that began a couple of years ago and is expected to continue over the next few years.
The latest adjustments, set to take effect in 2024, bring an ironic twist to the landscape as they center around saving for college and establishing emergency savings, a departure from the conventional emphasis on retirement planning.
The genesis of these modifications can be traced back to the Secure 2.0 Act, a retirement-focused legislation enacted in late 2022. Notably, most of these changes are optional, providing employers with the discretion to either adopt or bypass them.
A prominent theme underlying these amendments is flexibility. Many workers will now have easier access to a portion of their retirement funds before reaching the standard retirement age.
While the ideal scenario involves letting an account balance grow untouched over decades, these provisions act as a safety net for individuals who may be uneasy about locking up their funds for an extended period. Advocates argue that these changes are crucial to enticing those who might otherwise refrain from embarking on the path of retirement planning.
Kirsten Hunter Peterson, Vice President of Workplace Thought Leadership at Fidelity Investments, highlighted the broader impact, stating, “While this is retirement legislation, Congress has removed a number of barriers to saving for long-term goals.”
One notable rule change allows employees facing immediate financial needs to sidestep the typical 10% penalty on withdrawals from workplace 401(k)-type accounts, subject to their employer’s approval.
Workers are now permitted to make penalty-free withdrawals of up to $1,000 annually for unforeseen personal or family emergencies, with the requirement of self-certification.
Although these withdrawals remain taxable, the 10% penalty is waived. Additionally, employees have the option to repay the withdrawn amount into their accounts within three years.
In 2024, employers will have the ability to provide emergency savings accounts that are connected to 401(k)-style programs, which is a known change.
Employers Automate Emergency Savings Deductions
Employers have the option to enroll workers in a program where some of their pay, up to 3% or $2,500 per year, can be automatically deducted for emergency savings. These deductions are treated as after-tax contributions to prevent taxes from being triggered upon withdrawal.
This provision, however, is not available to highly compensated workers as defined by the Internal Revenue Service.
Recognizing the challenge many Americans face in building emergency savings, this provision aims to alleviate concerns. The first four withdrawals in a year from these accounts are tax and penalty-free, and employers may even offer matching contributions.
In an effort to address broader societal issues, a new provision permits penalty-free early withdrawals for victims of domestic abuse, allowing up to $10,000 or 50% of a worker’s vested account balance, whichever is less.
The self-certification process for abuse victims is outlined by Fidelity, and the withdrawn funds can be repaid within three years if chosen by the account holder.
Furthermore, employers now have the option to assist employees burdened by student loan payments by matching funds into retirement accounts on their behalf.
This innovative approach recognizes the financial challenges faced by many workers and seeks to ensure that retirement planning remains a viable option even during periods of student loan repayment difficulties.
As these provisions come into effect, their impact on retirement planning and financial well-being will be closely monitored. The optional nature of many of these changes allows employers to tailor their offerings to best suit the needs of their workforce.