Nationwide Employees: Exploring Your Options for In-Service Withdrawals from Your 401(k) Plan

If you have worked at a corporation, you may be familiar with the rules for putting money into a 401(k) plan. But are you familiar with the rules for taking your money out? Federal law limits the withdrawal options that a 401(k) plan can offer. But a 401(k) plan may offer fewer withdrawal options than the law allows, and may even provide that you can't take any money out at all until you leave Nationwide. However, many 401(k) plans are more flexible.

First, consider a plan loan

Many 401(k) plans allow you to borrow money from your own account. A loan may be attractive to our Nationwide clients who don't qualify for a withdrawal, don't want to incur the taxes and penalties that may apply to a withdrawal, or don't want to permanently deplete their retirement assets. (Also, you must take any available loans from all plans potentially maintained by Nationwide before you're even eligible to withdraw your own pretax or Roth contributions from a 401(k) plan because of hardship.)

In general, you can borrow up to one-half of your vested account balance (including your contributions, Nationwide's potential contributions, and earnings), but not more than $50,000.

You can borrow the funds for up to five years (longer if the loan is to purchase your principal residence). In most cases, you repay the loan through payroll deduction, with principal and interest flowing back into your account. But keep in mind that when you borrow, the unpaid principal of your loan is no longer in your 401(k) account working for you.

Withdrawing your own contributions

If you've made after-tax (non-Roth) contributions, your 401(k) plan can let you withdraw those dollars (and any investment earnings on them) for any reason, at any time. You can withdraw your pretax and Roth contributions (that is, your 'elective deferrals'), however, only for one of the following reasons—and again, only if your plan specifically allows the withdrawal:

You attain age 59½
You become disabled
The distribution is a 'qualified reservist distribution'
You incur a hardship (i.e., a 'hardship withdrawal')

Hardship withdrawals are allowed only if you have an immediate and heavy financial need, and only up to the amount necessary to meet that need. In most plans, you must require the money to:

Purchase your principal residence, or repair your principal residence damaged by an unexpected event (e.g., a hurricane)
Prevent eviction or foreclosure
Pay medical bills for yourself, your spouse, children, dependents, or plan beneficiary
Pay certain funeral expenses for your parents, spouse, children, dependents, or plan beneficiary
Pay certain education expenses for yourself, your spouse, children, dependents, or plan beneficiary
Pay income tax and/or penalties due on the hardship withdrawal itself

Investment earnings aren't available for a hardship withdrawal, except for certain pre-1989 grandfathered amounts.

But there are some disadvantages to hardship withdrawals that our clients from Nationwide should keep in mind, in addition to the tax consequences described below. You can't take a hardship withdrawal at all until you've first withdrawn all other funds, and taken all nontaxable plan loans, available to you under all retirement plans potentially maintained by Nationwide. And, in most 401(k) plans, the employer, such as Nationwide, must suspend your participation in the plan for at least six months after the withdrawal, meaning you could lose valuable potential Nationwide-matching contributions. Hardship withdrawals can't be rolled over. So it's important for Nationwide employees to think carefully before making a hardship withdrawal.

Withdrawing employer contributions

Getting employer dollars out of a 401(k) plan can be even more challenging. While some plans won't let you withdraw employer contributions at all before you terminate employment, other plans are more flexible, and let you withdraw at least some vested employer contributions before then. 'Vested' means that you own the contributions and they can't be forfeited for any reason. In general, a 401(k) plan can allow you to withdraw vested company matching and profit-sharing contributions if:

You become disabled
You incur a hardship (your employer has some discretion in how hardship is defined for this purpose)
You attain a specified age (for example, 59½)
You participate in the plan for at least five years, or
The employer contribution has been in the account for a specified period of time (generally at least two years)

Taxation

Your own pretax contributions, company contributions, and investment earnings are subject to income tax when you withdraw them from the plan. If you've made any after-tax contributions, they'll be nontaxable when withdrawn. Each withdrawal you make is deemed to carry out a pro-rata portion of taxable and nontaxable dollars.

Your Roth contributions, and investment earnings on them, are taxed separately: if your distribution is 'qualified,' then your withdrawal will be entirely free from federal income taxes. If your withdrawal is 'nonqualified,' then each withdrawal will be deemed to carry out a pro-rata amount of your nontaxable Roth contributions and taxable investment earnings. A distribution is qualified if you satisfy a five-year holding period, and your distribution is made either after you've reached age 59½, or after you've become disabled. The five-year period begins on the first day of the first calendar year you make your first Roth 401(k) contribution to the plan.

The taxable portion of your distribution may be subject to a 10% premature distribution tax, in addition to any income tax due, unless an exception applies. Exceptions to the penalty include distributions after age 59½, distributions on account of disability, qualified reservist distributions, and distributions to pay medical expenses.

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Rollovers and conversions Rollover of non-Roth funds

If your in-service withdrawal qualifies as an 'eligible rollover distribution,' you can roll over all or part of the withdrawal tax-free to a traditional IRA or to another potential Nationwide plan that accepts rollovers. In general, most in-service withdrawals qualify as eligible rollover distributions except for hardship withdrawals and required minimum distributions after age 70½. If your withdrawal qualifies as an eligible rollover distribution, your plan administrator will give you a notice (a '402(f) notice') explaining the rollover rules, the withholding rules, and other related tax issues. (Your plan administrator will withhold 20% of the taxable portion of your eligible rollover distribution for federal income tax purposes if you don't directly roll the funds over to another plan or IRA.)

You can also roll over ('convert') an eligible rollover distribution of non-Roth funds to a Roth IRA. And some 401(k) plans even allow you to make an 'in-plan conversion'--that is, you can request an in-service withdrawal of non-Roth funds, and have those dollars transferred into a Roth account within the same 401(k) plan. In either case, you'll pay income tax on the amount you convert (less any nontaxable after-tax contributions you've made).

Rollover of Roth funds

If you withdraw funds from your Roth 401(k) account, those dollars can only be rolled over to a Roth IRA, or to another Roth 401(k)/403(b)/457(b) plan that accepts rollovers. (Again, hardship withdrawals can't be rolled over.) But be sure to understand how a rollover will affect the taxation of future distributions from the IRA or plan. For example, if you roll over a nonqualified distribution from a Roth 401(k) account to a Roth IRA, the Roth IRA five-year holding period will apply when determining if any future distributions from the IRA are tax-free qualified distributions. That is, you won't get credit for the time those dollars resided in the 401(k) plan.

Be informed

We recommend that our clients from Nationwide become familiar with the terms of Nationwide's potential 401(k) plan to understand your particular withdrawal rights. A good place to start is the plan's summary plan description (SPD). Nationwide will give you a copy of the SPD within 90 days after you join the plan.

What are the unique benefits provided by the Nationwide Retirement Plan that differentiate it from other retirement plans? How does Nationwide Mutual Insurance Company ensure the plan meets the regulatory requirements while still addressing the needs of its employees?

Unique Benefits of Nationwide Retirement Plan: Nationwide’s Retirement Plan provides both a Final Average Pay (FAP) Benefit and an Account Balance Benefit, which allows flexibility for employees hired at different times. The plan is qualified under Section 401(a) of the Internal Revenue Code, ensuring compliance with federal tax laws. Nationwide ensures regulatory compliance while addressing employee needs through ongoing contributions, actuarial evaluations, and options like lifetime income for retirees and survivors.

How can employee participation in the Nationwide Retirement Plan impact their overall retirement savings strategy? What role does the defined benefit pension plan play in conjunction with Social Security and personal savings for employees of Nationwide Mutual Insurance Company?

Employee Participation Impact: Participation in the Nationwide Retirement Plan enhances employees' overall retirement savings strategy by integrating Social Security, personal savings, and the defined benefit plan. The FAP benefit, based on final average compensation, works alongside Social Security to offer a stable income, while the Account Balance Benefit adds flexibility in retirement income options.

What options do employees of Nationwide Mutual Insurance Company have when they retire before the age of 55, and how do these options compare to those available for employees who retire after reaching that age? What factors influence the choices employees make regarding timing and type of benefit commencement?

Retirement Options Before and After Age 55: Employees retiring before age 55 can start receiving their benefits immediately, but they face early retirement reductions. Those retiring after age 55 may choose from more benefit options like annuities and receive higher, less-reduced payments. The choice to retire before or after age 55 depends on factors like financial need and health, and affects the timing and size of the benefit commencement(Nationwide Mutual Insur…).

In what ways does the structure of the benefit formulasâ€”Final Average Pay (FAP) Benefit and Account Balance Benefitâ€”affect the retirement income of employees at Nationwide Mutual Insurance Company? What are the implications for employees considering different retirement timings?

Effect of Benefit Formulas on Income: The FAP Benefit is based on Final Average Pay and Social Security coordination, offering a larger benefit for those with higher incomes, while the Account Balance Benefit is based on accumulated contributions and interest. The timing of retirement plays a crucial role in determining income, as early retirement results in reduced benefits, while late retirement allows for continued service accrual and potentially higher payouts.

How does the Nationwide Mutual Insurance Company address spousal benefits under the retirement plan, particularly regarding the Qualified Preretirement Survivor Annuity (QPSA)? What are the actions that employees need to take to ensure their spouses receive these benefits?

Spousal Benefits and QPSA: Nationwide offers a Qualified Preretirement Survivor Annuity (QPSA) to ensure that a spouse receives benefits if the participant dies before retirement. Employees must name their spouse as a beneficiary or obtain notarized consent if they wish to designate someone else. To ensure the spouse receives the QPSA, employees must take the appropriate legal steps outlined in the plan.

What steps must employees of Nationwide Mutual Insurance Company take to successfully file a claim for retirement benefits, and what is the timeframe for processing these claims? How does the company ensure that employees understand their rights under the Employee Retirement Income Security Act (ERISA)?

Steps to File a Claim for Retirement Benefits: To file a claim, employees must notify the Nationwide Retirement Center at Fidelity and submit the required paperwork. Claims are typically processed within 60 days, and Nationwide ensures that employees understand their rights under ERISA through detailed communications and support from Fidelity Investments.

What are the situations that might cause delays or loss of benefits for employees retiring from Nationwide Mutual Insurance Company? How can employees proactively manage these risks to ensure they receive their entitled benefits?

Situations Leading to Delays or Loss of Benefits: Delays can occur if employees fail to submit necessary paperwork, keep their contact information updated, or if they are not vested at the time of severance. Employees should proactively manage these risks by completing forms timely and maintaining communication with the Plan Administrator to avoid disruptions in benefits.

Can employees at Nationwide Mutual Insurance Company alter their distribution choices after commencing their retirement benefits? What regulatory frameworks influence their ability to change benefit elections, and under what circumstances might these changes be permitted?

Changing Distribution Choices After Retirement: Once retirement benefits commence, changes to distribution elections are limited. For example, lump-sum payments and annuity selections are typically irrevocable after commencement, and spousal consent is required for certain changes. Federal regulations, such as IRS rules, further restrict post-retirement changes in benefit elections(Nationwide Mutual Insur…).

How does the Nationwide Mutual Insurance Company plan for automatic post-retirement benefit increases, and what factors determine the percentage increase? How do these increases impact the long-term financial security of retirees?

Post-Retirement Benefit Increases: Nationwide offers automatic post-retirement benefit increases for participants with service before 1996, with annual increases between 0% and 3% based on fund performance. These increases help to protect retirees’ long-term financial security by adjusting their pension income for inflation.

How can employees contact NDPERS for more information regarding their retirement options, and what specific resources are available for personalized assistance? Clear communication channels and support services are essential for helping employees navigate their retirement planning effectively with NDPERS.

Contacting the Nationwide Retirement Center: Employees can reach the Nationwide Retirement Center at Fidelity by calling 1-800-238-4015 for inquiries about their retirement plan. Fidelity provides detailed support, including benefit estimates, plan information, and assistance with filing claims and selecting benefit distribution options(Nationwide Mutual Insur…).