COVID-19 and Mid-Year Suspension of Employer Retirement Plan Contributions

Many companies facing financial pressure from the COVID-19 pandemic are examining opportunities to curtail operating costs, including the reduction or suspension of matching or nonelective contributions to 401(k) plans.  Here are some considerations to help guide your decision-making when determining whether to reduce or suspend safe-harbor contributions:

Reduction or Suspension of Employer Contributions to Non-Safe-Harbor Plans

Discretionary contribution plans. If the company’s plan includes discretionary employer contributions rather than a specific formula or defined contribution amount, the company’s board can elect to change the matching contribution amount — including suspending it altogether until further action is taken by the board.  An amendment to the contribution amount may be effective for contributions not yet made.

Set contribution plans. If the company’s plan does set forth a set formula for employer contributions, it will be necessary to amend the plan in order to modify the formula.  Because of the uncertainty surrounding the short- and long-term effects of the pandemic, companies may want to consider eliminating formulas entirely and replace them with discretionary provisions that allow the board to determine the amount of employer matching or nonelective contributions at its discretion.

Amendments to set contribution plans must comply with the anti-cutback provisions of Section 411(d)(6) of the Internal Revenue Code, which means that any change to the matching contribution amount needs to apply to future pay dates as well as elective deferrals contributed following the amendment date.

Implementation of changes.  Payroll vendors and plan administrators should be notified immediately of any change to employer contributions since there may be some lead-time involved in implementing the change.  Employees should also receive advance notice of any plan revisions so they can change their elective deferrals if they so choose.

Reduction or Suspension of Employer Contributions to Safe-Harbor Plans

There are limitations to a company’s ability to reduce or suspend employer matching or nonelective contributions to a safe-harbor plan.  To implement a change, employers must meet one of the following conditions:

Safe-harbor notice includes a provision for reducing or suspending safe-harbor contributions.  If the safe-harbor notice provides the plan sponsor with the right to reduce or suspend contributions during the plan year, the plan sponsor can amend the plan mid-year to change the safe-harbor contributions as long as the sponsor meets these requirements:

  • The effective date of the change cannot take effect before either (1) the date of the plan amendment, or (2) 30 days after a supplemental notice is given to all eligible employees, whichever is later.
  • Eligible employees must receive a supplemental notice that (1) explains the result of a reduction or suspension of the future safe-harbor contribution, (2) provides employees with the procedure to change their deferral election, and (3) provides the effective date of the amendment.
  • Eligible employees must be given a reasonable period in which to make changes to their deferral election.

For plan years beginning after December 31, 2019, employers are no longer required to provide an annual safe-harbor notice for plans with safe-harbor nonelective contributions under the  Setting Every Community Up for Retirement EnhancementAct (SECURE Act).

Employer is operating at an “economic loss.”  Under Internal Revenue Code Section 412(c)(2)(A), employers operating at an “economic loss” may amend a plan mid-year to reduce or suspend safe-harbor employer contributions.  In making a mid-year amendment to a safe-harbor plan, employers should take the following into consideration:

  • Safe-harbor plans that are amended mid-year to reduce or suspend employer contributions lose their safe-harbor status for the plan year. Therefore, a plan amendment must subject the plan to nondiscrimination testing for the plan year and include applicable testing provisions.
  • By losing safe-harbor status for the plan year, plans that rely on an exemption from top-heavy rules for safe-harbor plans will also lose this exemption.
  • Under Internal Revenue Code Section 401(a)(17), the plan will be required to prorate the compensation limit.
  • The amended plan must continue to meet safe-harbor requirements for safe-harbor compensation paid or elective deferrals made through the amendment’s effective date.

Our attorneys work with clients around the country to set up and monitor benefits plans, make changes as necessary based on business realities and changing laws, and help handle problems when they occur. Reach out today to learn more by calling 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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