As employers face the current state of the economy with the coronavirus (COVID-19), many are wanting to reduce or temporarily suspend employer contributions. Below is a brief overview of the options available to employers. Plan sponsors should review their plan documents and discuss the reduction or suspension with their retirement plan service providers and/or ERISA attorneys.
Discretionary Match Contributions
If matching contributions are made per pay period but the retirement plan document states that the match is fully discretionary, an employer may reduce or stop the matching contributions, but they should first inform employees that the match will be reduced or suspended prospectively. Employers should consider making the match change effective as of the beginning of the payroll period following the notification to affected employees. An amendment to the plan will not be necessary if the plan does not contain any match formula.
If the matching contribution is fully discretionary and is funded annually, and employers informed participants the match was discretionary, employers should satisfy the plan’s requirements if they do not fund the annual match. Often employers communicate the matching contribution formula to employees before the beginning of each plan year. If a plan sponsor gave employees a match formula and did not indicate it was discretionary, then even if the matching contribution is fully discretionary under the plan document and funded annually, the employer should consider making the matching contribution promised to employees.
Even if a plan document indicates a matching contribution is fully discretionary and funded annually, if the Employer communicated a commitment to fund the match and/or otherwise took steps to approve the match (e.g., board resolutions), caution should be exercised before eliminating the match as it may not truly be “discretionary” depending upon the facts and circumstances, despite being labeled as such in the plan document. In these circumstances, guidance from retirement plan service providers and/or ERISA attorneys should be sought prior to eliminating the match.
Fixed Match Contributions
If matching contributions are being made per pay period or annually and the match formula is written into the plan document, an amendment to change the match provisions must be prepared. Also, employees should be notified before the effective date of the amendment. When a plan document is amended, a Summary of Material Modifications (SMM) to the SPD is prepared and employers may use the SMM for the employee notification, but should also provide employees with a brief explanatory cover letter or other similar short message in addition to the SMM.
Safe Harbor 401(k) Plans
The type of safe harbor contribution (i.e. safe harbor match versus safe harbor nonelective) determines whether the contribution can be reduced or suspended during the plan year.
Safe harbor (SH) matching contributions – employers may reduce or suspend the safe harbor matching contribution during the plan year if the safe harbor notice to employees included information about the employer’s right to reduce or suspend the contribution during the plan year, or the employer is operating at an economic loss. Many SH notices include the necessary information. The safe harbor notices for the current plan year should have been distributed to employees 30 – 90 days before the beginning of the current plan year. If the plan year is a calendar year, the 2020 notice should have been provided no later than December 2, 2019. If the right to reduce or suspend language was not included in the safe harbor notice, employers may also suspend contributions if they are operating at an economic loss within the meaning of Internal Revenue Code Section 412(c)(2)(A).
Provided the employer is eligible to reduce or suspend the SH matching contribution, the plan must be amended to reflect the change. The SH matching contribution must continue for at least 30 days following a notification to employees informing them of the contribution reduction or suspension, and employees must have a reasonable opportunity to change their deferral elections before the reduction or suspension occurs. Once the contribution has been reduced or suspended, the plan will be subject to ADP/ACP nondiscrimination testing for the entire plan year in which the reduction or suspension occurs.
Safe harbor matching contributions based on per pay period earnings are required to be funded at least quarterly so if a plan sponsor reduces or suspends the contribution, the plan sponsor should fund the remaining safe harbor match based on the required contribution funding date in the plan document.
Safe harbor nonelective contributions (SHNE)– the SECURE Act, enacted December 20, 2019, altered available options for employers reducing or suspending this type of safe harbor contribution. Starting for plan years beginning in 2020, most plans that provide the safe harbor nonelective contributions are no longer required to provide an advance notice (30-90 days prior to the effective date of elimination of the SHNE contribution) to their employees. Based on the new law, employers who sponsor plans without the SHNE contribution can wait to make the decision to amend their plan in order to allow for a SHNE contribution until any time prior to the 30th day before the end of the plan year (for a 3% SHNE contribution), or even up the last day of the following plan year for a 4% SHNE contribution. Because the law was passed so late in 2019, safe harbor notices had already been sent to employees for calendar year plans that included information about the SHNE contributions.
Below are options we believe employers have during the 2020 plan year for reducing or suspending the SHNE contribution, however there is currently no SECURE Act guidance and any future guidance may contradict (and supersede) the information below. If the plan is not safe harbor, ADP/ACP nondiscrimination testing must be performed for the entire plan year. Plan sponsors should seek an individualized opinion or guidance from their ERISA attorney specific to their facts and circumstances before taking any action with respect to a SHNE contribution plan.
Safe harbor nonelective contribution plans where employers did not commit to the contribution for 2020 – some plans provide flexibility to plan sponsors on whether they need to make the SHNE contribution for a plan year. These plans are commonly referred to as safe harbor “maybe” plans. For these plans, employers notify their employees before the beginning of the plan year and indicate they may make the SHNE contribution for the next plan year. Thirty days before the end of the applicable plan year, the employer must notify their employees whether they will make the SHNE contribution or not. For 2020, employers with a safe harbor “maybe” plan still have the flexibility of not making the SHNE contribution and have longer to make the decision to make the contribution. If the plan is amended to add the SHNE contribution on or before December 2, 2020, employers must make at least a 3% of pay SHNE contribution to the plan. These employers can wait to amend for 2020 until after December 2, 2020, but the SHNE contribution will increase to 4% of pay.
Safe harbor nonelective contribution plans where employers notified employees of their intent to make a SHNE contribution for 2020 – because the SECURE Act provides employers with additional time to decide whether to amend their plan to provide for a SHNE contribution, reducing or suspending the SHNE contribution is based on the frequency of the contributions made by the employer.
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- If an employer is already making per pay period SNHE contributions, reducing or suspending the SHNE can only be done prospectively. Because there is no IRS guidance yet, the most conservative approach is to provide a supplemental safe harbor reduction or suspension notice at least 30 days in advance of the contribution change.
- If the employer makes the SHNE contribution annually, then, for a calendar year plan, notwithstanding the prior notification of intent to make a SHNE contribution for 2020, the SECURE Act allows the employer to wait until the last day of the plan year following the 2020 plan year to decide whether to make a SHNE contribution for the 2020 plan year. The timing of the necessary amendment determines the amount of the SHNE contribution. If the plan is amended at least 30 days before the end of the current plan year, the SHNE contribution must be at least 3% of pay. If the plan is amended after this time but no later than the end of the following plan year, the SHNE contribution must be at least 4% of pay. However, due to fact that the plan already contains the SHNE and the prior notification of intent to provide a SHNE contribution to employees for the 2020 plan year, in this circumstance we recommend the employer wait for the IRS to publish guidance or consult with its ERISA attorneys prior to making a decision to reduce or suspend the contribution.
- If the employer does not currently have a SHNE provision in the plan document, then the employer can amend the plan as late as the end of the following plan year to add the SHNE contribution. The timing of the amendment determines the amount of the SHNE contribution. If the plan is amended at least 30 days before the end of the current plan year, the SHNE contribution must be at least 3% of pay. If the plan is amended after this time but no later than the end of the following plan year, the SHNE contribution must be at least 4% of pay.
In all of the above situations, the plan may need to be amended to provide the flexibility to make the SHNE contribution and participants notified with a Summary Plan Description Material Modification (SMM). IRS guidance should provide answers for plans which provide the SHNE contribution.
Profit Sharing Contributions
If per pay period profit sharing contributions are being made, employers must review their plan document to determine the impact of reducing or stopping these contributions during the plan year. These types of contributions are usually discretionary, but some documents may contain a specific formula in the plan document. If employers reduce or suspend the contributions mid-year, an amendment may be necessary and the change may cause additional nondiscrimination testing at the end of the plan year if the annual formula does not meet safe harbor allocation requirements.
Defined Benefit Plan Contributions
With the stock market volatility, minimum funding requirements to defined benefit plans may be significantly impacted based on the valuation date of the plan. If the market value of the assets is reduced, contributions to the plan may be increased significantly. Additional impacts due to mandated closure relating to the COVID-19 pandemic may also significantly impact the employer’s ability to fund minimum required contributions. In an effort to contain costs, employers may freeze benefits during the current plan year but must do so before participants earn an entitlement to those benefits.
Typically, benefits are earned once an employee works 1,000 hours during the plan year but could be fewer hours or different requirements based on the provisions of the plan document. Additionally, employees must be notified before any reduction of benefits during the current plan year. The notice timing is based on the size of the plan. If the plan has less than 100 participants, employees must be notified 15 days before the reduction in benefits. If the plan has 100 or more participants, the timing is increased to 45 days. Employers should discuss these issues with their actuaries as soon as possible.
NOTE: The CARES Act was recently passed (on March 27, 2020) which will provide employer-sponsors of single-employer defined benefit plans relief with an extension of time through January 1, 2021 to fund minimum required contributions due in 2020. Also, a plans’ funded status for determining the application of the IRC Section 436 restrictions for the 2020 plan year will be based on the plan’s funded status for the 2019 plan year.
Automatic Extension of 2019 Business Tax Returns Contribution Deadlines
We recently posted a blog about the IRS extending the due date of 2019 business tax returns due on April 15, 2020 to July 15, 2020. Employers with tax returns due now on July 15, 2020 also have additional time to extend the funding of their 2019 contributions where applicable. This extension does not apply to businesses whose tax return due date is a date other than April 15, 2020.
Conclusion
Employers should review their plan documents and discuss these options with their service providers and/or ERISA attorneys. There may be additional COVID-19 relief for employer contributions in the future and TRI-AD will provide information if additional legislation passes that impacts retirement plans.
Please contact your TRI-AD Client Service Manager if you have additional questions or email us.
TRI-AD and our Associates’ suggestions or recommendations shall not constitute legal advice. No content on our website can be construed as tax or legal advice and TRI-AD may not be considered your legal counsel or tax advisor. Clients are encouraged to consult with their tax advisor and/or attorney to determine their legal rights, responsibilities, and liabilities. This includes the interpretation of any statute or regulation, federal, state or local; and/or its application to the clients’ business activities.