A 401(k) plan is how the majority of Americans save for retirement. Whether you’re an employee or an employer, a 401(k) is not just a great way to prepare for retirement, but also a useful source of tax benefits. Employees can build retirement funds tax-free, while employers can enjoy tax credits, write-offs, lower employee churn, and more rewarded workforces.
This year, however, several new 401(k) changes have been introduced. With those in mind, here are a few things you can do to make sure you still get the most out of your 401(k) in 2020.
Increased contribution limits
The IRS has increased the contribution limit guidelines for employees from $19,000 to $19,500 this year, so you’ll be able to contribute more in 2020 than in 2019. The catch-up contribution limit for employees aged 50 and over who participate in 401(k) plans has also increased from $6,000 to $6,500.
Extended deadlines approaching
For 2020, several delayed deadlines were announced as a result of COVID-19. To fully maximize the benefits of your 401(k) program, it will be critical to track (and keep) for any changed contribution or filing deadlines.
Extra day, extra pay
Employers and employees should be aware of an unusual feature of 2020 that might cause issues in payroll systems that could impact your 401(k) planning.
2020 is a leap year, with 366 days and 53 weeks instead of 365 days and 52 weeks. Depending on when and how you are paid, that extra day could be a headache for payroll providers, who calculate payroll based on a standard 52-week year.
The extra pay could also affect benefit contributions to 401(k) plans. For employees planning to fund their plans to the maximum level, any extra pay period will change how much they need to contribute per paycheck to reach their limit at year’s end.
Understanding the CARES Act
The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020 to help Americans cope with the financial impact of COVID-19.
Among its provisions, the CARES Act makes it easier to withdraw funds from your 401(k) plan, removing tax penalties on some early withdrawals and relaxing rules on loans from certain types of accounts.
However, not everyone can take advantage of the CARES Act. The legislation is restricted to qualified participants with valid COVID-19 related reasons for early access to retirement funds.
You’ll qualify if you’re diagnosed with COVID-19, have a spouse or dependent diagnosed with COVID-19, are experiencing a furlough, reduction in hours, or an inability to work due to COVID-19, or are suffering from a lack of childcare because of COVID-19.
Take a closer look at the 401(k) provisions in the CARES Act at irs.gov.
Signed into law in December 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act is designed to make it easier for smaller businesses to offer their employees 401(k) plans by providing tax credits and protections on collective multiple employer plans.
The Secure Act has many moving parts. Some provisions are aimed at individual savers, while others are more focused on employers.
Long-awaited IRS guidance was also released in September 2020, answering questions about how employers should implement key components of the law, such as eased withdrawals from retirement plans for birth or adoption expenses, and required retirement plan eligibility for part-time employees.
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