With businesses struggling during the economic fallout from the COVID-19 pandemic, they need to know their options with respect to retirement plan contributions as they work to manage cash flow. Here is a summary of the top questions we have received and AMG’s perspectives on them.
Can we suspend our company’s discretionary employer contributions to our retirement plan?
Yes. If your employer contributions are entirely discretionary, they may be suspended at any time for any period.
If our retirement plan requires employer contributions, can we modify the eligibility requirements for these contributions?
Plans cannot retroactively take away the right of employees to receive contributions if they have already satisfied the eligibility requirements. However, employers may consider amending eligibility requirements for future contributions. For example, an employer can choose to amend the plan to reduce or eliminate future employer contributions. Before making any change to your company’s contributions, remember to consider any impact the change may have on applicable IRS nondiscrimination testing requirements.
Can we suspend or reduce our retirement plan’s safe harbor contributions in the current year?
If your company sponsors a safe harbor 401(k) plan, there are specific restrictions on suspending or reducing employer contributions. An employer may only suspend or reduce its matching safe harbor contributions if:
- The employer is operating at an economic loss, or
- The employer’s safe harbor notice provided before the start of the current plan year included a statement that the employer may reduce or suspend employer safe harbor matching contributions midyear.
If your company fits into one of the two categories mentioned above, you may consider suspending or reducing the employer safe harbor matching contributions midyear after satisfying the following additional criteria:
- The employer must distribute a supplemental notice to eligible employees at least 30 days before the effective date of the suspension or reduction.
- The employer must provide eligible employees with a reasonable opportunity to change their deferral election before the suspension or reduction occurs.
- The 401(k) plan must pass discrimination testing for the full plan year in which the suspension or reduction occurs.
Plans with safe harbor non-elective contributions must be closely examined since the rules that apply to them are more complex, although the regulatory changes under the 2019 SECURE Act provide additional flexibility in the amendment and notice requirements.
Can employee layoffs as a result of the economic downturn potentially affect our retirement plan?
Yes. Partial plan termination rules may influence whether an employer wishes to move forward with employee layoffs. The general rule is that when plan participation decreases by 20 percent or more, most often by an employer-initiated severance, it is deemed a partial plan termination. Partial plan termination rules require an employer to fully vest all participants affected by the partial plan termination. Keep in mind that a partial plan termination can occur as a result of a single layoff or multiple layoffs across plan years. However, the ultimate determination is based on a facts and circumstances analysis by the IRS.