Broker Check

Prime Rate Increases...Again!

Linda R. Visconti, QKA 

The fed once again raised the prime interest rate from 5% to 5.25% on 9/27/18. The last time the prime rate was this high was in March 2008. Indications are that they may consider additional hikes in the rate, depending on how the economy reacts, as well as a multitude of other factors.

The interest rate hike is a way to slow or cool the economy, making it less attractive to add another credit card to your wallet, or take a new loan. Another sector of the market that is usually affected by a rate hike is the housing market; it makes borrowing for a mortgage more expensive for buyers.

In theory, the interest we receive on our savings accounts at the bank, as well as interest offered on CDs, should increase too. A bit of encouragement for consumers to save for the expenses they might otherwise just borrow for.

A note to the plan sponsors and participants in the plans we administer: For those who have plan loans, that interest rate is fixed for the life of the loan. The payment you have today is fixed as well, and the amortization schedule you received with your application does not change.

Need more information? Contact our team at Tycor!

Hardship Rules to Change

Linda R. Visconti, QKA 

Effective with the plan year beginning January 1, 2019 (for calendar year plans), there will be several changes to the safe harbor hardship withdrawal rules for retirement plans because of ‘The Tax Cuts and Jobs Act of 2017’, the Bipartisan Budget Act of 2018 and other recent legislation.

One of the most requested is the elimination of the required six-month suspension of deferral and employee contributions following the receipt of a hardship. While it may have been easy enough to ‘turn off’ a deferral when a hardship was issued, I am sure no one was happy about tracking the time lapse before the deferrals could be turned back on.

Another change is to amend whether participants would have to take all available plan loans prior to receiving a hardship. Many participants would think that this added to, rather than lessened, their hardship circumstances.

The final change has to do with the sources of money that are available for hardship withdrawals, such as qualified non-elective, qualified matching, and earnings on these as well as employee deferrals. While the first two changes apply to the ‘safe harbor’ rules on hardships, this last change is an option available, but not part of the safe harbor definition.

The safe harbor reasons for taking a withdrawal have not changed. They include costs or expenses for the following:

  • Medical care
  • Purchase of a principal residence
  • Post-secondary education
  • Prevent eviction or foreclosure of a principal residence
  • Burial and funeral expenses
  • Repairs to a principal residence due to a casualty loss which would otherwise be tax-deductible under Section 165 of the Internal Revenue Code

As you can see, this list is very narrow, but it removes the burden on a plan sponsor to collect ‘facts and circumstances’ to grant a hardship withdrawal. For this reason, most, if not all, of our plan sponsors who elect to have hardship provisions in their plan, elect the safe harbor rules as well.

We are awaiting further guidance on the above to clarify the intent of Congress and hope to receive technical corrections. For now, as of 1/1/19, you can remove the 6-month suspension, and you do not need to require a participant take a loan prior to requesting a hardship if your plan uses the ‘safe harbor’ definition in the plan document.

Got questions? Contact our team at Tycor!