Maynard Presents Penalizing Precarity Today At Georgetown

Goldburn P. Maynard, Jr. (Indiana-Kelley; Google Scholar) presents Penalizing Precarity, 123 Mich. L. Rev __ (2024) (with Clinton Wallace (South Carolina; Google Scholar)), at Georgetown today as part of its Tax Law and Public Finance Workshop hosted by Emily Satterthwaite and Dayanand Manoli: 

Retirement policy in America is oriented around 401(k) accounts and other employer-sponsored savings plans, which will receive a whopping $1.5 trillion in tax subsidies over the next decade. This Article uncovers a harmful flaw in a common feature of these plans. The problem arises from a gap in the rules governing withdrawals made prior to reaching retirement age. Employees are generally required to seek approval from their plan administrator to receive a “hardship distribution,” which they are granted if they face an “immediate and heavy financial need,” like eviction or an unexpected medical expense. But even with this approval, these distributions are frequently subject to an “early withdrawal penalty,” a separate regime that is not coordinated with the hardship distribution rules.

This Article shows that the gap between the two sets of rules is little known to workers, employers and even policymakers. We document instances of taxpayers surviving financial calamity thanks to a hardship distribution only to learn that they now face a tax penalty—resulting in another cash crunch. 

The workers who fall into this gap are from the most financially precarious households they have have fewer assets, lower incomes, and are more likely to be Black or Hispanic. Recognizing the existence of this gap exposes a fundamental flaw in retirement savings policy: under the existing rules, some workers probably should not set aside funds for later. This Article introduces several reforms to protect against penalizing financial precarity by integrating hardship distributions with the early withdrawal penalty regime, and we explore broader reforms to effectively reduce financial precarity among lower income and lower-asset households.