Category: Articles

Subject: The Importance of Cybersecurity for Retirement Plans

Cybersecurity should never be an afterthought, but sometimes it is not taken seriously enough. With the ever-increasing risk of cyber-attacks, it is imperative that every company and every employee take threats extremely serious.  PWC’s 2018 Global State of Information Security survey found that cyber attacks have been growing quickly and will continue to increase. With the prevalence of attacks it is imperative that companies ensure they have Cybersecurity processes in place.

Cybersecurity processes are put in place to protect both the individual user and companies as a whole from hackers, cyber criminals, and hacktivists, among others. Not only does a lack of cybersecurity in an organization affect the individual whose personable identifiable information (PII) may have been compromised; the average cost of a data breach to an organization is $6.5 million.

The law governing cybersecurity is developing and is currently a patchwork of state and federal regulations. There is no comprehensive federal law governing cybersecurity.  However, there are many established state and federal laws that govern the financial industry’s use of financial information, as well as laws regarding personable identifiable information, giving TPA’s ample inspiration for best practices to implement and stay ahead of data breaches. TPA’s should ensure protections such as:

• Technology tools and measures to prevent and detect attacks and data breaches.
• Detailed processes and procedures to follow when sharing benefits plan and personable identifiable information.
• Proper authentication processes to ensure everyone accessing information is verified.

With the growing risk of cyber-attacks, we at EJReynolds take client privacy very seriously. In our efforts to protect the financial information provided by our clients and entrusted to our employees, EJReynolds, Inc. offers a Cybersecurity Commitment to give you the comfort and peace of mind when working with us.

Our Cybersecurity Commitment stems from the core principles of trust, integrity and ethics: We collect only client information that is pertinent to the services provided by our team. Thus, we have implemented security standards and processes including physical, electronic and procedural safeguards to ensure that access to client information is limited only to select employees who may need it to do their jobs.

• Secure file sharing links put in place to provide a safe & secure way to share sensitive information online.
• Advanced Firewall Security system protects computer networks from being attacked online by hackers, worms, viruses, etc.
• Use of Advanced Threat Protection (ATP), an industry leading threat protection network used internally to protect from malicious attacks.
• Two-factor authentication, 2FA, requires the user to have two out of three types of credentials before being able to access an account.

If you have any questions about our services and/or how we protect your information please feel free to contact us.

Hardship Distribution Rules Relaxed

The Bipartisan Budget Act of 2018 liberalized the rules applicable for hardship distributions in 401(k) plans. These changes impact the “safe harbor” hardship distribution rules (the ones most commonly used in plans) and will generally become effective for plan years beginning after December 31, 2018.

To assist plan sponsors with implementing these changes, the IRS issued proposed regulations in November 2018, and it is anticipated those regulations will be finalized in early 2019.

What is changing?

In general, the new rules make it easier for participants to qualify for hardship distributions, expand the sources available for such distributions, and remove the 6-month deferral suspension period following a hardship distribution. They also make it easier on plan sponsors by simplifying the substantiation process.

What qualifies for a hardship distribution under the new rules?

Under the existing rules, hardship distributions may only be made from a participant’s 401(k) and/or Roth account for the following:

1. Unreimbursed, tax-deductible medical expenses (without regard to the deduction limitation);
2. Certain costs associated with the purchase of a participant’s principal residence;
3. Post-secondary educational expenses for a participant, his or her spouse, children or dependents (for the next 12 months);
4. Funeral expenses for a participant’s spouse, parents, children or dependents;
5. Expenses necessary to repair damage to a participant’s principal residence incurred as a result of a casualty (tax-deductible loss); and
6. Amounts necessary to prevent foreclosure or eviction from a participant’s principal residence.

Under the new rules, the conditions under which a participant can obtain a hardship distribution have been expanded to include the following:

1. Expenses incurred as a result of a natural disaster in a federally-declared disaster area; and
2. Medical, post-secondary educational, and funeral expenses for a participant’s primary beneficiary.

Additionally, the proposed regulations clarify that if a participant’s principal residence is damaged as a result of a casualty, such as a fire or windstorm, it is not necessary for the participant’s home to be in a federally-declared disaster area. When the income tax law changed, it impacted the hardship distribution rules since the 401(k) regulations (current) require the casualty loss be tax-deductible.

What contribution types are available for hardship distributions?

Under the existing rules, hardship distributions can only be made from a participant’s 401(k) and/or Roth account, excluding any related earnings. In other words, a participant can only withdraw his or her contributions.

Under the new rules, the amount available for hardship distributions will include related earnings. In addition, participants will be able to take hardship distributions from safe harbor account balances as well as QNEC or QMAC account balances, if provided for under the terms of the plan document.

Note: Some plans permit “hardship” distributions from other sources, such as profit sharing or matching account balances. These contribution sources are not “restricted” from taking in-service distributions prior to attainment of age 59 ½ (like 401(k), Roth, safe harbor, QNEC and QMAC account balances), so it is still permissible to allow for hardship distributions from these accounts, if provided for under the terms of the plan document.

How much can a participant receive as a hardship distribution?

The amount cannot exceed the lesser of (1) a participant’s financial need (grossed up for applicable income taxes), or (2) his or her available account balance. This rule has not changed, although the amount available has been expanded to include related earnings and additional contribution sources.

What substantiation is required for hardship distributions?

The proposed regulations provide new standards for determining whether a hardship distribution is deemed necessary to meet a participant’s financial need.

• The participant must have obtained all other available in-service distributions under any plans maintained by the employer; and
• The participant must represent that he or she does not have enough liquid assets to satisfy the financial need.

Currently, a participant is generally required to take a loan from the plan (if available) prior to receiving a hardship distribution, and the determination of whether a hardship distribution is deemed necessary to meet an “immediate and heavy” financial need is based on all relevant facts and circumstances.

The new standards remove the plan loan requirement and simplify the process for plan sponsors as they can rely on the participant’s representation, absent actual knowledge to the contrary.

How will the new rules for the 6-month deferral suspension apply?

Under existing rules, plans are required to suspend participant deferrals for a period of 6 months following a hardship distribution. Under the new rules, plans will no longer be permitted to suspend participant deferrals.

The proposed regulations provide flexibility in implementing these changes, though. For 2019, plan sponsors have the option of imposing the 6-month suspension period, or they can permit participants to continue to defer immediately following a hardship distribution.

Additionally, for hardship distributions made during the last 6 months of 2018, plan sponsors can either continue the 6-month suspension period or resume deferrals for all participants effective January 1, 2019.

For hardship distributions made on or after January 1, 2020, however, plans will be prohibited from imposing the 6-month suspension period.

When are these changes effective?

Generally, these changes are effective for plan years beginning after December 31, 2018.  There are special rules, however, that apply for certain purposes such as the 6-month suspension period.

Will these changes require a plan amendment?

Yes, these changes will require a plan amendment. It appears that plan sponsors will be able to implement the new rules prior to amending their plan, though. We are hopeful the IRS will issue additional guidance on this important point in the final regulations.

How can I learn more about these requirements?

Please contact us to learn more about how these rules impact your plan and participants!