Products July 17, 2008

Calculator Tool Reveals 401(k) Loan Damage

When a participant suggests taking a 401(k) loan, maybe it’s time to bring out the numbers.
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The National Center for Policy Analysis (NCPA) has developed a calculator that shows 401(k) participants just how expensive taking a plan loan can be.

In an announcement, the NCPA said its 401(k) calculator can help determine how much a loan will cost in terms of lost savings and investment opportunities. NCPA recommends participants access the calculator in order to: make annual comparisons of projected 401(k) balances, with and without a loan, from the year the money is borrowed until the year of retirement, as well as compare monthly income at the time of retirement, with and without a loan, based on a 30-year fixed annuity.

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An NCPA analysis found that a 35-year-old worker who borrows $30,000 over a five-year period, could end up with $192,794 less in savings at retirement (age 67) than if he had not borrowed.

“People don’t realize how much retirement money they’re giving up by raiding their 401(k) accounts,” said Pam Villarreal, NCPA senior policy analyst, in the release. “Even in extreme situations, it’s best for people to seek other sources of capital before tapping into their 401(k) accounts.”

The free calculator can be accessed here.

Compliance July 17, 2008

IRS Proposes Reporting Requirements for Stock Purchase Plans

The Internal Revenue Service issued proposed regulations for corporations that issue statutory stock options.
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The regulations would provide guidance to assist corporations in complying with the return and information statement requirements under Internal Revenue Code section 6039.

In REG-103146-08, the IRS said that with respect to a transfer of stock upon the exercise of an incentive stock option, the information required to be furnished to employees under existing regulations is sufficient to enable the employee to calculate his or her tax obligations upon disposition of the shares. Therefore, the information required in the information return and employee statement by the proposed regulations is generally the same as current requirements.

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However, with respect to an employee’s transfer of stock acquired under an employee stock purchase plan, the information required to be furnished by existing regulations is not sufficient to enable the employee to calculate his or her tax obligations upon disposition of the shares, the agency said. In the proposal, additional information that would be required for the information return and the statement furnished to employees is:

  • the date the option was granted to the transferor;
  • the fair market value of the stock on the date the option was granted;
  • the exercise price per share;
  • the date the option was exercised by the transferor;
  • the fair market value of the stock on the date the option was exercised by the transferor.

According to the IRS, this additional information, along with the information required under the existing regulations, will enable an employee to determine his or her tax obligations upon the disposition of shares.

Returns as well as information statements to employees must be submitted by corporations by January 31 of the year following the calendar year for which the return is made. The proposed regulations would apply to any stock transfer occurring on or after January 1, 2007.

The IRS said it expects to release forms to facilitate the filing of these returns later this year.

The agency is requesting comments on the proposed rules by October 15. Methods for submitting comments are listed in the regulation, which is available here.

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