Reducing or Suspending Employer Retirement Plan Contributions Due to COVID-19

The COVID-19 pandemic raises many concerns for employers who sponsor qualified retirement plans, particularly employers who experience economic hardship. Here we address the most common questions asked by employers who want to reduce or suspend retirement plan contributions.

Can We Reduce or Suspend Discretionary Matching and/or Discretionary Non-elective Contributions?

Employers may generally, at any time, reduce or suspend any matching or non-elective contributions that are discretionary. No plan amendment is required. Employers will typically want to provide employees with advance notice of any changes, because these changes can affect employees' decisions regarding whether or not to make, increase or decrease their elective deferrals, but there is no legal obligation to do so.

Can We Reduce or Suspend Fixed Matching and/or Fixed Non-elective Contributions?

Employers may reduce or suspend fixed matching and/or fixed non-elective contributions with a prospective plan amendment. Until the plan is amended, employers (as plan sponsors) remain obligated to make the fixed employer contributions. Once again, employers will want to provide employees with advance notice of any changes, but there is no legal obligation to do so.

Can We Reduce or Suspend the Safe Harbor Contributions in Our 401(k) Plan?

A retirement plan that provides either safe harbor matching contributions ("SHMCs") or safe harbor non-elective contributions ("SHNECs") must follow specific timing and notification rules before making certain changes. An employer may amend its plan to reduce or suspend SHMCs or SHNECs in two circumstances:
 

1. When the plan's annual safe harbor notice contains a statement that the plan may be amended during the plan year to reduce or suspend SHMCs and that the reduction/suspension will not apply until at least 30 days after all eligible employees are provided notice of the reduction/suspension; and
2. When the employer is operating at an economic loss for the plan year (which may be easier to justify in the current environment), as described in Section 412(c)(2)(A) of the Internal Revenue Code ("Code").

There are numerous compliance obligations associated with reducing and suspending safe harbor contributions. These are the most important to consider:

• Supplemental Notice. An employer who intends to reduce or suspend the SHMCs/SHNECs must provide a special, supplemental notice to all of the plan's eligible employees. The notice must explain: (i) the consequences of the amendment that reduces or suspends future employer contributions; (ii) the procedures for a participant to change their cash or deferred elections; and (iii) the effective date of the amendment.

• Effective Date. The reduction or suspension of SHMCs/SHNECs may not be effective earlier than the later of:
  1. The date the amendment is adopted; or
  2. 30 days after eligible employees are provided the supplemental notice described above.
• Reasonable Opportunity for Employees. Eligible employees must be given a reasonable opportunity after receiving the supplemental notice and before the reduction/suspension of SHMCs to change their cash or deferred elections and other employee contributions.
• Amend Plan. An employer reducing/suspending SHMCs must amend the plan to provide that the ADP/ACP test and top-heavy test will be satisfied for the entire plan year in which the reduction/suspension occurs when using the current year testing method.
• Satisfy Safe Harbor Until Amended. The safe harbor plan must continue to satisfy all applicable safe harbor requirements with respect to amounts deferred through the effective date of the amendment.This means that all SHMCs/SHNECs earned prior to the effective date of the amendment must be provided to eligible employees.

How Will Layoffs Affect Our Retirement Plan?
 
Some employers will be forced to lay off employees due to economic hardship caused by COVID-19. For retirement plan purposes, the employers should treat these employees as they would any other laid-off employee, unless the employer is laying off a large group.
 
Large layoffs become important when they could be construed as a partial termination of the retirement plan. Partial terminations require that all impacted participants become 100% vested in their employer contributions. If a plan already provides for immediate vesting or all of the employees have worked for a long enough period to become fully vested, then there is no practical impact here.
 
If the employer's turnover is at least 20 percent of the plan's participating employees, there is a presumption that a partial termination has occurred. If the turnover rate is less than 20 percent, then all facts and circumstances are considered to determine whether a partial termination has occurred. Relevant facts and circumstances include the employer's and industry’s normal turnover rate, the financial health of the plan, whether an employer stands to gain by reducing plan participation, and whether a reversion might occur. 
 
What if My Employees Use FMLA or Paid Emergency Leave for COVID-19?
 
The Families First Coronavirus Response Act created two forms of paid leave for individuals affected by coronavirus. We previously addressed the new leave options in detail here.
 
Compensation paid to employees during both new forms of leave for those affected by coronavirus is generally includible in the absent employee's "compensation" under a retirement plan. Accordingly, employers should continue to make employer contributions and to implement elective deferrals with regard to compensation paid for those employees on leave.
 
 
For more information about how COVID-19 might affect your employee benefit plans, please contact Gary Blachman, Kathleen Sheil Scheidt, Melissa Proffitt, Rob Gauss, Chris Sears, Tara Sciscoe, Audra Ferguson-Allen, or the Ice Miller LLP Employee Benefits attorney with whom you work.
 
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.