As employers look for ways to save expenses and preserve jobs, they may look to reduce or suspend contributions to 401(k) or other defined contribution plans. Before taking such a step, employers should carefully review types of employer contributions under the plan, whether the right to such contributions has already accrued, and whether there are any conditions to reducing or suspending the contributions.
For example, a completely discretionary contribution, which the employer can choose to make or not make after the plan year, offers substantial flexibility. On the other hand, a plan with safe harbor contributions (either non-matching or matching) would be subject to a number of restrictions. The regulations allow an employer to suspend safe harbor contributions in two circumstances: (a) if the safe harbor notice provided to employees for the year of suspension indicated that the employer reserved the right to reduce or suspend matching contributions; or (b) if the employer is operating at an economic loss. In either case, the employer would need to provide a supplemental notice to employees regarding the suspension at least 30 days in advance of its effective date, amend the plan appropriately, and would need to perform appropriate non-discrimination testing for the year of suspension (the amendment causes the plan to lose safe harbor status).
If changes are implemented in a way that results in a partial-year contribution, employers also need to consider if proration of the annual compensation limit is required. For example, if a profit sharing contribution is made for six month period ending June 30, the 2020 annual compensation limit of $285,000 would be applied by limiting the compensation considered for the six month period to no more than $142,500.
Employers should be aware that significant reductions in force could result in a partial termination of their 401(k) plan. If a partial termination has occurred, employees who terminate during the year of the partial termination must be entitled to full vesting of their accounts, regardless of their years of service. There is no definitive number of terminations that causes a partial termination, but IRS guidance provides that a partial termination is presumed to occur when more than 20% of active participants are terminated in a year.
While additional relief for plan loans could be considered by Congress, employers may be able to provide temporary relief to certain participants who have taken loans on their 401(k) accounts. If an employee takes FMLA or some other form of leave without sufficient pay (excluding USERRA), the terms of the plan and/or the plan loan policy may permit the suspension of loan payments during that period of leave. The maximum suspension period for plan loans is one year. The period of suspension does not extend the term of the loan. Importantly, this means that suspension is not available beyond the maximum 5-year loan period. Employers and plan administrators should check their loan policy for additional guidance on re-amortization or balloon payment options.
Employers are considered Affected Taxpayers in IRS Notice 2020-18, which details the IRS’ COVID-19 relief. Therefore, the Employer deadline for filing calendar year 2019 tax returns, as well as for making any payments that would otherwise be due on April 15, 2020, has been delayed to July 15, 2020. As a result, the deadline under IRC 404(a)(6) for making retirement plan contributions that are deductible for the 2019 tax year is similarly extended to July 15, 2020.
As in previous years, if a participant made excess elective deferrals to a workplace retirement plan in 2019, the participant must remove those excess deferrals from the plan. The deadline for doing so is April 15, 2020. Note that this deadline has not been extended as part of the IRS’ COVID-19 relief detailed in IRS Notice 2020-18.
Employers who have employees taking paid leave, whether through the emergency leave program or otherwise, will want to consider the impact of their 401(k) plan on those leave payments. Specifically, employers should review the terms of their plan to confirm whether employee or employer contributions will be based on any such payments.
We are aware that Congress is working on an additional COVID-19 relief bill. Drafts have contained relief for plan loans, and hardship and other distributions. We are monitoring this closely and will provide updates as this moves to the President for signature.
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