COVID-19 has touched almost all aspect of our lives; financial markets being one of the significant ones. Pension plan funding has been under massive pressure due to the economic turmoil. However, government initiatives like the Tax Relief Act 2020 and Taxpayer Certainty and Disaster Tax Relief Act of 2020 have been introduced to soften the impact on retirement plans. These plans are created to offer relief to sponsors and participants affected by the pandemic.
Many have lost their jobs and might not have access to plans like 401(k). Further, pay cuts have also decreased employees’ ability to contribute to the pension pot. Therefore, this is the ideal time to work with professionals who are adept at consultation on matters relating to plan administration, investment, payment of benefits and current situations affecting pension, according to experts at E.H. Thomson & Company. This way, companies can financially recover and ensure lower chances of workers’ retirement savings being hurt.
The CARES Act
The CARES Act came into existence in March 2020. It made significant changes to numerous rules associated with retirement accounts. For example, the law allowed employees to take hardship withdrawals of up to $100,000 from their IRA and 401(k) funds. Also, they could take double the amount as 401(k) loan. Further, 10% penalty tax was waivered on withdrawals for “qualified individuals.” These include anyone who has been diagnosed with COVID-19, unable to work due to lack of child services or anyone facing reduction in income.
Loans and Withdrawals
It was found that 4% respondents took the 401(k) loan, 5% took the hardship withdrawal and 5% planned to let go of RMD in 2020, according to a survey conducted by Forbes. This has also brought in a revolutionary change in the idea of retirement. People have been reconsidering the idea of working till 60 and spending the rest of their lives in leisure. Since the pension value has declined, many prefer working extra jobs to compensate for the loss.
Long Term Consequences
Although the temporary relief was much needed, risks still remain regarding how resilient the economy might be, since major retailers have been filing for bankruptcy while employers are announcing layoffs, according to an article by MarketWatch. In fact, many Americans have been expecting loss of employment income even if several of them have begun to return to work.
Defined plan benefits have been mainly affected by COVID-19. Employers and employees can come together to build funds once again to save up for the golden years.