GOA Issues Report on Qualified Plan,Which Includes Solo 401k, Early Distributions and Participant Loans

On Mach 9, 2019 The United States Government Accountability Office (GAO) released a report titled Retirement Savings: Additional Data and Analysis Could Provide Insight into Early Withdrawals. The purpose of the report is to bring to the forefront events that cause qualified plan including solo 401k participants to make early distributions from their retirement plans.  An early distribution from a qualified plan is a distribution taken before the plan participant reaches age 59 1/2 which results in having to pay a 10% early distribution penalty.

The findings by the GAO were drawn from data provided by the IRS, U.S. Census Bureau, and Department of Labor in addition to discussions held with qualified plan providers and tax payers.

The GOA discovered the following reasons for early withdrawals:

  • Flexibilities in plan rules.
  • Individuals   ’pressing financial needs,” such as out-of-pocket medical costs.
  • Certain  plan rules, such as setting high minimum loan thresholds, may cause individuals to take out more of their savings than they need.
  • Several elements of the job separation process affecting early withdrawals, such as difficulties transferring account balances to a new plan and plans requiring the immediate repayment of outstanding loans, as relevant factors.

Feedback Provided to Reduce Early Distributions

  • Allow continued repayment of outstanding plan loans after separation from employment (beyond the extended time period created by the Tax Cuts and Jobs Act of 2017, which lengthened the eligible rollover period to an individual’s tax return due date for the year of loan offset, including tax filing extensions).
  • Restricting participant access to plan sponsor contributions.
  • Allowing partial distributions at job separation.
  •  Building emergency savings features into plan designs, could help preserve retirement savings.

However, they noted, each strategy involves trade offs, and the strategies’ broader implications require further study.

GAO Recommendation Regarding  401k Plan Participant Loans Including Solo 401k Participant Loans

Lastly, GAO recommends that, as part of revising the Form 5500, DOL and IRS require plan sponsors to report the incidence and amount of all 401(k) plan loans that are not repaid. DOL and IRS neither agreed nor disagreed with our recommendation.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>