There is grim news for employees of some companies that offer 401(k) tax-deferred savings plans.
There is good news for other employees with such plans.There is no news for still other such employees.
And there is a shock in store for a number of partnerships with flexible retirement plans - beginning now, you've got a 401(k) even though you may have thought otherwise.
These are the messages from a new set of regulations covering 401(k) plans issued earlier this month by the Internal Revenue Service. The rules are final and replace a temporary set that companies have been operating under since 1981.
The most important provision of the new regulations deals with so-called hardship withdrawals - situations where an employee, having squirreled away part of his pay for retirement, now finds he or she needs it for some pressing current expense.
The previous rules were not entirely clear on this issue, many experts agree, and a number of companies had interpreted them quite loosely, encouraging employees to sign up by telling them that in a pinch there would be no problem getting their money out.
In the past, "many employers had been marketing 401(k) plans as the equivalent of savings accounts and providing hardship withdrawals to people quite explicitly," said Dallas Salisbury of the Employee Benefit Research Institute here. Some employers have even told employees that they could use a 401(k) to save for a home purchase or for their children's tuition.
The new rules, he said, "reinforce what the IRS and Congress had been saying, that 401(k) plans should be viewed principally as retirement plans and that the money, with minor exceptions, should be there when a person retires."
Thus, employees at companies with very liberal rules will find that access to their K-plan savings will be much more limited than in the past.
At some companies, however, where officials had taken an extremely restrictive view already, the new rules clarify what is acceptable practice and may result in easing of restrictions on these withdrawals.
And at still other companies, which had begun following the new rules when they came out in proposed form, there will be little change.
The issue of access is important for two reasons.
First and most obviously, much of the money in an employee's 401(k) account comes from the employee. Under these plans, which are named after the section of the tax code that permits them, employers take money off the top of the employee's pay - before the taxes are taken out - and invest it on the employee's behalf. Many employers also make a matching contribution, which is also invested for the employee.
Since this money is not taxed until withdrawn, presumably at retirement, it is one of the most effective savings vehicles around. And if the employer chips in a matching amount, the deal is even better.
But the employee's contribution means a smaller paycheck. For lower-paid workers this can make life more difficult, particularly if the missing money cannot be reached in the event of unexpected need.
Thus any tightening of the rules may discourage workers, especially on the lower end of the scale, from participating.
The second reason that access is important is that any decline in participation at the low end has an impact on the upper end. The amount of money that upper-income employees may put into a K-plan is subject not only to an absolute ceiling ($7,313 this year) but to a limiting formula that takes into account participation by lower-income workers. If a firm's lower-paid employees don't participate, higher-paid workers' contributions will be cut.
Because of the antidiscrimination rules, "you really want to encourage participation by low- and middle-level employees," said Eric Raps of the accounting firm of Arthur Andersen here. As a result, he said, firms that have not in the past matched employees' contributions may have to begin doing so to make participation more attractive.
Under the new rules, pre-retirement withdrawals will be permitted only when there is an immediate and heavy need and no other resources with which to meet it. The rules specifically cite certain expenses as meeting the test: purchase of a principal residence, college tuition, major medical bills, and payments to avoid eviction or foreclosure on one's home.
But the employee can make the withdrawal only if he or she has no other way to pay the expense. This means that if you have other assets and it would not be "financially disadvantageous" to sell them, an employee would have to do so before taking a hardship withdrawal, said Michael Carter of Hay-Huggins Co., a benefits consulting firm.
"This does not mean you have to sell your house, but if you have stock and could sell it without taking a beating you would have to," he said.
Carter also noted that other resources include borrowing, either from an outside lender or from one's K-plan account.
That result could result in a "curious situation" in the case of a home purchase, since mortgage companies are likely to frown upon the idea of additional debt.
In general, though, the rules "are going to make employers' lives a lot easier" by clarifying the standards that must be met, said Elaine Church of Price Waterhouse & Co.
For many partnerships, however, the regulations contain a real jolt.
A common practice among partnerships is to set up retirement plans that allow different partners to make different contributions. "You set up a separate pension plan for every partner, so you can fund them differently and each partner makes separate contributions," said Carter.
But under the new regulations such an arrangement would be regarded as a 401(k) plan and subjected to both the contribution ceiling and the antidiscrimination test. "It's a double attack" on these plans, he said.