What to do if employer suspends 401(k) due to COVID-19

What to do if employer suspends 401(k) due to COVID-19
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The coronavirus pandemic has hit businesses – both small and big – very hard. Despite the stimulus packages, it is becoming very difficult for many businesses to stay afloat. The companies are resorting to cost-cutting to stay afloat, including laying-off workers and freezing or even terminating their 401(k) plans. For employees who are already facing a pay cut, losing the 401(k) contributions could easily disrupt their long-term financial plans. However, it is not the end, and you have several options if your employer suspends the 401(k) plan due to the coronavirus.

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Employer suspending 401(k): not unusual

In an attempt to survive the coronavirus crisis, companies are deciding to suspend making contributions to the 401(k) plans. A few companies are even freezing or terminating their 401(k) plans altogether.

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Different surveys show that the number of companies cutting or suspending their 401(k) plans is low, but it could quickly shoot up in the next few weeks. A report from the American Society of Pension Professionals and Actuaries says that about 42% of small businesses may freeze their 401(k) plans due to the coronavirus outbreak.

Many large companies, including Haverty’s and Amtrak, have already announced freezing their 401(k) contributions as a response to the coronavirus outbreak.

Suspending or freezing 401(k) plans is not an entirely new tactic for employers. Several companies did the same during the 2008 recession as well. A survey by Willis Towers Watson claims that about 20% of the companies with a minimum of 1,000 employees reduced or suspended their contributions to the retirement plan at the time of the 2008 recession.

As per the estimates, about 55 million people had 401(k) accounts as of 2016. According to the Investment Company Institute, the average balance in the accounts of people in their sixties was over $287,000.

If you are wondering whether or not employers have the power to do this or if it is legal to suspend the program, yes, it is perfectly legal. Knowing your employer has suspended the 401(k) match could be very disappointing. However, it is not the end, and you have several options that could help you minimize its impact.

Employer suspends 401(k) plan: what to do

The first thing that you should try to do is leave your retirement fund as it is. Owing to the uncertainty, you may be tempted to withdraw funds from your retirement plan to meet your daily expenses. Even the CARES (Coronavirus Aid, Relief, and Economic Security) Act has made it easier to withdraw money from the retirement accounts. In certain cases, the act has waived the 10% early withdrawal penalty.

However, experts say that using retirement funds could prove a costly mistake. By taking funds out, you could lose on the potential growth and the market gains when there is a recovery in the market.

Another thing that experts say could prove helpful is that the employee should continue to contribute to their 401(k) even if the employer is not making any contributions. Since such accounts offer massive tax advantages, financial experts recommend making contributions to it as long as you can. Also, if an employee can, they should increase their contribution to the 401(k).

Experts also say that the 401(k) generally offers some very good investment options that an employee would not have access to on their own. On the other hand, if the circumstances don’t allow an employee to make the full contribution due to the cash requirement in the near-term, then they should only reduce the amount set aside for the account.

Shift funds to IRA

You can also shift the funds from your retirement account into a traditional IRA or a Roth IRA. Both are good investment options with taxes being the only major difference between the two.

Under a traditional IRA, you are eligible for a tax deduction on the initial contribution, but you need to pay taxes when you withdraw the money. On the other hand, with the Roth IRA, you will have to pay taxes now, but there won’t be any taxes on the distributions.

Of the two, the financial experts recommend investing in a Roth IRA as a better option now. Due to the current economic scenario, there are good chances that the balance in your 401(k) has dropped over the past few months. This means, if you invest in a Roth, your tax bill would be relatively smaller now.

These are the options that will help you minimize the impact, in case your employer suspends the 401(k) plan due to the coronavirus. We understand that it is easier to make these recommendations than to actually apply them in real life. However, you must realize that your 401(k) is key to your retirement.

Knowing that your employer has suspended the 401(k) plan could be devastating, but you just remember that it is likely a short-term phase and the economy will recover eventually. Thus, you should not remove money from your 401(k) until you have exhausted all other options, including unemployment benefits.

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