The unsteady business climate resulting from COVID-19 has created uncertainty for employers and employees. Navigating these challenges while administering retirement plans has been stressful and often confusing for plan sponsors.
Advisers play an important role in helping plan sponsors understand the options available to them, as well as the impact of making certain plan changes. Under normal circumstances, changes would be carefully considered and implemented pragmatically. In the current environment, swift action may be called for, but this doesn’t alleviate the need to remain legally compliant.
Some employers may determine their companies are no longer able to fund employee retirement plan matches or other contributions due to business disruption or losses caused by the COVID-19 pandemic. These decisions are not easily made, and employers must follow specific IRS requirements to suspend or reduce contributions properly.
Plan advisers play a critical role in providing valuable insights to help their clients make decisions about their plans. Knowledge of Department of Labor (DOL) and IRS regulations is critical to help keep plans compliant and to guide administrators in making sound decisions for the plan and its participants. Furthermore, such knowledge provides wider insights on best practices for maintaining a healthy plan.
With all this in mind, the following are four important items to consider regarding changes to plans and contributions.
- Understand the Safe Harbor Contribution Rules. There are serious consequences for failing to make a safe harbor contribution or a promised matching contribution. In addition to jeopardizing the plan’s tax qualification, a plan sponsor could also be found to have engaged in a prohibited transaction or fiduciary breach.
- Notify Plan Participants Appropriately and Timely. Generally, reducing or eliminating 401(k) discretionary nonelective and discretionary matching contributions is a straightforward process that requires notifying plan participants, according to IRS guidelines. This type of change does not require a plan amendment.
- Make Sure You Meet Qualifying Conditions. Qualifying safe harbor plans may make a mid-year reduction or suspend employee contributions, though at least one of the following conditions must apply:
- The employer is operating at an economic loss, or the safe harbor notice provided before the start of the plan year included a statement the employer may reduce or suspend contributions mid-year;
- Eligible employees must be notified at least 30 days prior to the effective date of any change, and they must be allowed a reasonable period of time to change their deferral election prior to plan sponsors enacting the change; or
- The plan will also be required to complete actual deferral percentage (ADP)/actual contribution percentage (ACP) testing for the full plan year in which the reduction or suspension occurs.
- Match Contributions Prior to the Amendment Effective Date. For non-safe harbor mandatory matching contributions to be reduced or suspended, the matching contributions that are described in the plan document—such as a match of a percentage of an employee’s elective contributions—would require a plan amendment. Participant notification requirements apply, and the employer must match all participant contributions for the portion of the plan year prior to the amendment effective date.
Plans of all sizes are experiencing unprecedented changes as a result of the COVID-19 pandemic. Now, more than ever, plan advisers play a critical role in helping to reduce the uncertainty of plan administration by providing valuable foresight and planning assistance for their clients. Understanding the nuanced rules related to plan administration during the COVID-19 era is not a one-time task. The regulations and client demands will be evolving well into 2021 and beyond.
Kristin Andreski is senior vice president and general manager of ADP Retirement Services.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.