How can financial wellness be ensured with 401(k) elearning?
The employees are struggling with financial wellness, especially due to the pandemic. And companies know that when an employee has financial worries, it leads to adverse consequences. The employees have a lot of needs like constructing a house and paying for their children’s education. But they have to manage other important expenses like taxes, retirement savings, and healthcare. Companies can help employees manage their financial expenditures.
Employees have to manage their financial expenses well. Hence, they have to be taught how to do so. They could be given financial coaches who can prepare their spending and savings plans depending on their health, family members, and age. Employees can also be given software training to get an idea about how much they can spend every month, depending on the possibilities of any health-related contingencies. There are retirement plans available for employees, but they have to consider how many returns they offer.
What is a 401(k) investment plan?
As per this plan, an employee gets a certain amount deducted from his monthly salary subject to a total of 20,500 USD or less in 2022. This plan is taken care of by the sponsor’s employer and remits the employee contribution to the investment custodian responsible for investing such funds and managing them. Employees must know that they can’t contribute more than the 20,500 amount. However, if a larger amount has been deducted, the excess can be distributed to the employee. An employee must also know that he cannot pay any tax on elective deferrals (salary deductions) as per the 401k plan. The amount gets invested in stocks, mutual funds, or bonds, and when an employee turns 59.5 years old, he can withdraw the accumulated amount in the 401(k) account.
An employee must be aware of the elective deferral amounts as per the Internal Revenue Code Section 402(g) limits, and for that, elearning is a prerequisite. If an employer discovers that the elective deferrals for any employee are more than the Internal Revenue Code Section 402(g) limits, the extra amount has to be returned. The aged (older than 50 or more) can contribute more to the 401k plan apart from the 20,500 limits in 2022. They can contribute 6500 dollars more to this plan apart from 20,500 in 2022.
An employee can’t withdraw any amount contributed to the 401(k) account before his age is 59.5 years. But if an emergency requires him to withdraw, he has to incur a penalty of 10% deduction apart from income tax payments on the amount he took out of the 401k account.
Although the 401 (k) is a useful plan for getting a sum after retirement, employees can’t get great returns on the money invested because of restricted investment options. Another drawback is that employees can’t withdraw the money without incurring a 10% deduction(taxes) before they reach 59.5years. However, if an employee is out of a job at 55 because he has opted for retirement, he can still withdraw money without facing a 10% deduction. But, before that, any withdrawal will invite a penalty.
But the advantage is that money is withdrawable without requiring the participant to prove his facing hardship and is in dire need of money.
What are 401(k) hardship withdrawals?
However, he can get rid of the 10% deduction rule to prove that he needs money in certain conditions. All these 401(k) withdrawals are known as hardship withdrawals, and the best part is that you don’t need to repay the amount taken under the following circumstances:
- When he needs to bear medical bills for himself, his spouse, or children
- When he needs to bear the educational costs of his children
- When somebody in the family has died, and funeral charges are to be borne
- When unavoidable home repair is needed due to a natural calamity
- If an employee is facing eviction from his house due to nonpayment of the mortgage.
But apart from the regular income tax rates levied on such an amount, there is another disadvantage. The employee has to stop making any contributions to his 401(k) account for 6 months after a hardship withdrawal, and can resume them after this period.
Hence, financial advice is needed for an employee about when to start withdrawing money to avoid the 10% penalty.
Hence employers can ensure that the employees have proper retirement planning as per the 401(k) rule and don’t suffer from financial worries.
Are 401(k) hardship withdrawals the best option, or should employees opt for 401(k) loans?
Through finance elearning, employees can learn whether withdrawing from the 401(k) account is the most feasible option for them.
They also have the option of taking a 401(k) loan, in which case they can withdraw the amount from this account but will have to repay it, unlike a hardship withdrawal. In the former case, an employee can take such a loan subject to the maximum amount of 50,000 USD or 50% of his vested 401(k)account amount. But an employee has to pay back this amount in 5 years or less.
Another advantage of the 401(K) loan is that the employees don’t incur any 10% penalty. They also don’t have to pay any income taxes, but if they cannot repay the loan on time, they are subjected to both the income tax and the early withdrawal penalty of 10%.
How can 401(k)elearning help employees?
The employers can arrange the meetings with licensed financial educators, who can also monitor which employees attended the elearning based webinar. With elearning at their disposal, the employees can be taught a lot, like whether they would want a new investment alternative for their 401(k) account, making them earn a higher interest. The employees can also ask questions from such educators during the webinar.
The 401(k)elearning module includes videos, calculators, and articles so that employees know where to invest their money deposited into this account. Such sessions are also attended by the 401(k) recordkeepers who can amend the 401(k) account for an employee once he is interested in a change like selling his mutual funds.
The job of a 401(k) recordkeeper is to get rid of mutual funds or buy them as per the employee’s discretion. They also handle other investments made through the 401(k) account. They also keep track of 401(k) loans and whether the employees who took them have paid them or not.