|December 2017 Volume 15, Number 12|
Changes to 401(k) Plans Under Consideration
Congress is debating possible changes to the 401(k) retirement plans employers offer their employees. Some of the ideas being discussed by Senators and Representatives would favor employees, some would benefit the federal government.
Retirement plans are a hot topic for two important reasons, both of which involve money.
Some employers automatically enroll their employees into their company’s 401(k) plan. Employees can opt out, but most stay in the plan and don’t miss the money that’s taken out.
Qualified Default Investment Alternatives
Investment choices often overwhelm employees and they would prefer someone else to make the decisions. Many employers automatically enroll employees in Qualified Default Investment Alternatives (QDIA). What makes these plans special is that they mix equity and fixed income investments based on an individual’s age and retirement date. Proponents of these plans want Congress to require QDIAs.
Roth 401(k) Contribution
Unlike a 401(k) contribution, any money deposited in a Roth 401(k) is taxed immediately. The current limits are $5,500, but go up to $6,500 for those who are age 50 and older. If the contribution limits were raised, in the short term there would be increased tax revenue from Roth contributions. However, the Roth 401(k)s would shelter eligible fund withdrawals or capital gains from taxation in the future. There is a push to increase limits to both 401(k) and Roth 401(k) plans. Proposed limits for 401(k) pre-tax contributions are $20,000, plus a maximum of $20,000 in Roth 401(k) contributions, which would be taxed right away, helping to ease federal budget concerns.
Health Savings Accounts
A Health Savings Account (HSA) is set up by an employer and is a great way for individuals to save tax free for health expenses. The higher the contribution limits, the more employees could potentially save for use during retirement. Currently, contribution limits are $3,400 for self-only coverage, and $6,750 for individuals with family coverage. Those who are 50 and older can add an additional $1,000 annually for catch up contributions.
Employees often are tempted to take loans from their 401(k) plans. They have to pay the loans back, but if they leave their job during the loan payback period, they often don’t pay the money back. Many human resource departments spend a lot of time keeping track of loan repayments. There’s a proposal to eliminate the ability for employees to take out loans, except for hardship reasons.
Companies can offer company stock as part of a retirement plan, but employees often put too much money in company stock and don’t understand when they should pull back. Some experts would like to see companies eliminate company stock as an option or restrict its use.