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hello everyone and welcome to the direct advisors retirement plan podcast where we direct advisors help you the plan sponsor make sense of the myriad of rules and options surrounding your retirement plan my name is stacy gregory i'm a certified financial planner certified planned fiduciary advisor and accredited investment fiduciary with direct advisors and today's podcast will focus on the options you have available for employees to access dollars within their retirement plan i've spoken with thousands of participants regarding retirement planning and while most of that time is spent planning how to get dollars into the retirement plan for example how much to save or how to invest it is equally as important that you and your participants understand how that money will come back out we're all saving for a reason and that's to eventually use this money so what sort of options do you have to offer your employees while an employee is still working for your company they're considered an active employee and it's worth noting that you're not required to offer active employees access to their retirement dollars after all this money supposed to be for their retirement but that being said you do have a vested interest in hiring and retaining a quality workforce and offering at least limited access may be valuable to your employees you have four main options to offer active employees access to these retirement dollars option one is what's called an in-service distribution typically with this option you'll set an age restriction most often we see age 59 and a half or sometimes a normal retirement age of say 65 and when an active employee attains this age they can then withdraw dollars no questions asked this might be helpful for someone who needs ads to the dollars in order to prepare for their transition to retirement while there is no penalty for those withdrawing dollars after age 59 and a half the pre-tax dollars will still incur federal and state taxes but what if an employee is under the age requirement for an in-service distribution well that brings us to option two which is the hardship distribution a hardship distribution is available to active employees regardless of their age but due to the fact that dollars can be withdrawn prior to age 59 and a half they can incur a 10 penalty on top of the usual federal and state taxes in this case the restriction is placed not on the age of the employee but instead on the reasoning behind the need for the funds the irs has a very specific list of reasons that qualify an employee for a hardship distribution and the employee must substantiate their reason with backup documentation i'll cover the six reasons now first our medical expenses for the employee the employee spouse their dependents or beneficiary typically this is something like a medical bill that can be used to substantiate the expense second our costs directly related to the purchase of an employee's principal residence now this excludes things like mortgage payments but it does include things like the down payment on the home a closing agreement which states the amount needed at closing can be used to substantiate this tuition educational fees and room and board expenses are third you can cover expenses for the next 12 months of post-secondary education so college again this is for the employee or the employee's spouse children dependents or beneficiary fourth are payments necessary to prevent the eviction of the employee from their principal residence or foreclosure on the mortgage on that residence often times they'll be provided a notice indicating how much money is needed to prevent eviction or foreclosure fifth is funeral expenses for the employee the employee's spouse children dependents or beneficiary and lastly are certain expenses to repair damage to the employee's principal residence now this can't be something like the hot water heater broke but instead must qualify under the irs's description of a casualty loss this usually means the damage was sudden unexpected or unusual but what if an employee doesn't meet the age requirement for an in-service distribution and they don't meet the reasoning requirement for a hardship distribution that brings us to the loan provision option three is for employees to be able to borrow from themselves loans from the retirement plan can be a bit tricky for plan sponsors you're responsible for administering the repayment of the loan by withholding dollars from the employee's paycheck and remitting those dollars to the plan's record keeper each pay period you're provided with a loan amortization schedule to help track how long loan payments should be withheld but this can get a bit confusing if the employee's ever laid off in which case they're still required to make loan payments but don't necessarily always follow through offering a loan option within your retirement plan does expand access for employees but it's important that you have a very structured process in place for how these will be administered from start to finish typically loans can be repaid over a period of up to five years however you have the option of offering a longer repayment term if the dollars are being used as a down payment on a principal residence and the interest rate will vary depending on what interest rates are at the time the loan is initiated while borrowing from a retirement plan can have a negative impact since dollars are not being invested while they're being used the one positive is that the interest that is repaid is put back into the employee's retirement plan most often plans will limit employees to one or two outstanding loans at any given time and there are restrictions around how much can be borrowed for example the irs restricts loans to half of the vested account balance or 50 000 minus the highest outstanding loan balance over the past 12 months whichever one is less since this can all get a bit tricky we encourage you and your employees to contact direct advisors to learn more about how much each employee can borrow now historically these were the three main options for active employees to access retirement dollars but recently with covid19 causing quite a bit of financial distress for many people throughout the country the cares act was introduced as a way to expand access to these dollars the cares act provisions give employees the ability to withdraw up to one hundred thousand dollars penalty free in twenty twenty and extends loan amounts and repayment options now just like with the first three options your plan is not required to adopt these new provisions but if it's something you're interested in offering i encourage you to reach out to the team at direct advisors so we can discuss it further so everything we've discussed up until this point has applied to active employees but what about once an employee separates from the company once an employee terminates from the company whether it's through retirement or working for another employer they're no longer restricted by the options we just covered you as the planned sponsor may implement a waiting period of say a few months or a year but once that time has elapsed the employees may withdraw the dollars to be used as they see fit roll over the dollars to another retirement plan or ira or simply leave the dollars in the plan to continue to be invested and grow what they cannot do at that time is add any more money to the plan and in some instances if the employee has a small account balance say below five thousand dollars they may automatically have those funds dispersed or moved to an ira outside the company to recap you may but are not required to offer active employees access to retirement dollars through in-service distributions hardship withdrawals loans or the cares act and terminated employees may have a waiting period in automatic force out provisions each company and each plan is different so it's important to discuss how these options will or will not work for your organization to learn more about what makes sense for your company and how these changes can be implemented just reach out to direct advisors at 518-362-2119 or by email at info directadvisors.com