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What is a Benefit Offset?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 September 2016
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A benefit offset is a set of circumstances that result in the complete or partial loss of retirement plan benefits. Often, this loss has to do with the fact that funds were borrowed from some type of retirement account, and were never repaid. Federal regulations allow providers to withhold up to 10% of the face value of the plan, when a beneficiary ends up owing money to a plan. Also, a benefit offset can occur when the beneficiary also has another source of benefits that must be taken into account. Here are some examples of how the benefit offset can occur, and what should be done to prevent the occurrence.

When it comes to retirement plans, many people opt for a 401K plan. One of the advantages about this type of plan is that it is possible to borrow money from the balance and then pay it back at a later date. Unfortunately, beneficiaries don’t always get around to repaying the full amount of the loan. At the point of retirement, the remaining balance is deducted from the benefits that are available. In some instances, penalties for the failure to repay the loan may also apply. The result is a retirement investment that may be significantly less than was anticipated. This loss of benefits can have a profound effect on the standard of living that the retiree will be able to enjoy.

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Benefit offsets can impact employment benefits as well. For example, the amount that employee health insurance will pay may be impacted by the presence of a second health policy that carries the same level and type of coverage. In these cases, the employer provided insurance may not pay anything on a claim until the previous or primary insurance provider has paid as much of the claim as possible. From this perspective, having health policies that more or less provide the same general coverage may be a bad idea.

The general idea behind a benefit offset is not to create financial woes for honest citizens. However, this policy does make it more difficult for people to take advantage of benefit programs that are meant to provide essential financial support when there is a real need. Allowing a benefit offset to limit the amount of support that can be provided when other sources are available helps to prevent abuse of benefit services, and ensure there are resources on hand to cover the needs of beneficiaries who really do need the full support offered by the plans.

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Logicfest
Post 2

@Melonlity -- it is true that caution is advised, but there may be times that you have no choice but to borrow from your retirement plan. Think about this. Let's say your spouse has an expensive surgery and you are left with a huge bill after insurance pays its share. If you need to borrow from your retirement plan to avoid bankruptcy, that's probably the right choice to make for a number of reasons.

Of course, you do need to have a good plan to pay back that money. A lot of people don't have any plan at all and just hope they will be able to repay the money one day. So, go ahead and borrow if you must be come up with a conceivable plan to pay back the money and you will be OK.

Melonlity
Post 1

And this is why financial planners will tell you to never borrow against your retirement plan. Yes, you might intend to pay back the money but you know deep down that you never will. And you will regret the heck out of borrowing that cash when it is time to retire and you find you don't have enough money to enjoy the standard of living you expect.

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