Military tax benefits bill signed into law

Military reservists are now able to cash out health care flexible spending accounts and may withdraw funds from 401(k) or other contribution plans without penalty.

On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax Act of 2008 (H.R. 6081), permitting active duty reservists to make penalty-free withdrawals from retirement plans, when called to serve at least six months. It also allows any differential military pay to be included in the calculation of wages for retirement plan purposes and allows employers to report the differential military pay on the W-2.

The law also modifies the Uniformed Services Employment and Reemployment Rights Act (USERRA) for the purposes of triggering the payment of qualified plan benefits, and allows recipients of military death benefit gratuities to roll over the amounts received, tax-free, to a Roth IRA or a Coverdell education savings account.

The modifications also allow reservists called to active duty for at least 180 days to withdraw any remaining balances in their health care flexible spending accounts. Before this law, most employees called to duty would forfeit any remaining money in their health care accounts.

Military tax benefits bill signed into law

The incredible shrinking employee 401(k)

401(k)s are performing worse than they have in more than five years.

In a recent Workforce article, the Mercer consulting firm reported losses in every equity category posting during the first quarter.

The median large-cap growth fund tracked by Mercer fell 11.6 percent during the first quarter. Large-cap core and large-cap value funds dropped by more than 9 percent.

The good news is that the second quarter is off to a stronger start. The S&P 500 posted a 4.9 percent gain for the month of April, ending a streak of five consecutive negative months.

Not only are employee 401(k)s shrinking, but one in four employees will withdraw funds from their retirement account early, according to a May SHRM article.

The experts advise that employees only borrow against their 401(k)s when it is their absolute last resort. HR managers should educate employees on the impact borrowing against retirement funds will have on the long-term growth of their money, and also on the penalties employees may face if loans are not paid back.

A 2008 Wall Street Journal Online with Harris Interactive Personal Finance poll found that:

• About 25% of American adults have withdrawn retirement funds early, citing the most common reason as a family member losing a job and the cost of a down payment on a home.
• Almost 33% of those who have withdrawn funds early from retirement accounts cannot pay them back
• People between 45 and 54 are more likely to be unable to payback retirement withdrawals.

Read the full SHRM article for more detailed information on the poll.

Laurie Ruettimann, former HR professional and outspoken blogger, shared a story yesterday about a company she once worked for who allowed employees to take loans against their retirement investments during a period of reconstruction. During the reconstruction, many employees lost their jobs and were forced to pay back their 401(k) loans in full within the 90 day period after termination date, or the loan would be treated like a cash withdrawal.

Ruettimann’s advice:
1. Don’t take a loan against your 401(k).
2. Don’t do it.
3. Just don’t.

The incredible shrinking employee 401(k)

Employee 401(k) loans on the rise

Increasingly more employees are damaging their financial futures by borrowing against their 401(k) plans. Retirement plan participants are taking out loans on their investments at an accelerated rate, as reported in Workforce Management.

Researchers from Boston College expect that the trend will continue and companies should expect to see more employee 401(k) loans this year.

With our country’s credit crisis and poor housing market, if they need the money, why shouldn’t employees take out a loan on their 401(k)?

The author of the Retirement Plan Blog explains why it’s a bad idea:

• They’re losing the earnings on their accounts since there’s less money to invest.
• The tax shelter advantage is lost since the loan is paid back with after-tax dollars.
• The interest paid on the loan is not deductible since it’s considered regular consumer debt.
• If the participant terminates employment prior to paying off the loan, the loan has to be repaid or it’s considered a taxable distribution with a 10% penalty tax if the participant is under age 59 1/2.

Some employees don’t even have the benefit of taking out a loan against their 401(k). Less than 50 percent of the workforce, ages 25 to 64, has any kind of defined benefit or defined contribution plan, according to the director of the Boston College Center for Retirement Research.

According to the research, of those eligible to participate in defined contribution plans:

• 89% do not contribute the maximum
• 20% to 25% do not contribute at all
• 45% do not rollover their investment when changing jobs

In companies that have automatic 401(k) enrollment, 86 percent of employees participate.

Automatic enrollment may not always be enough. Participants generally fail to increase the amount of their default contributions over time. According to the research, 61 percent do not increase their contributions above the default.

Educate your employees on why they should contribute to the company's 401(k) plan and coach them on how to effectively manage their money.

Employee 401(k) loans on the rise