As the coronavirus pandemic results in steep business losses, employers in hard-hit industries may need to drastically cut costs. Reducing or even temporarily eliminating 401(k) matching or profit-sharing contributions can help distressed businesses preserve more of their capital—but it can also lower employee morale and make it harder for workers to regrow retirement accounts that have been hard hit in the stock market sell-off.
In March 2009, during the Great Recession, 8 percent of U.S. employers said they had either decreased or were considering decreasing their 401(k) match, and 3 percent reported eliminating the match.
During the current pandemic, employers again "may feel the need to reduce or eliminate the contributions that they make to their 401(k) plans," wrote Dennis L. Morgan, a partner in the Washington, D.C., office of law firm Blank Rome LLP.
Michael Gerstman, CEO of the Dallas-based financial planning firm Gerstman Financial Group, put it starkly in an interview with FiduciaryNews.com: "Until this crisis passes, small and medium-size businesses will not be contributing, as survival of the company will be the singular objective."
With the exception of safe harbor plan contributions, cutting matching contributions "is generally a relatively simple matter, inasmuch as there is no need to amend the plan," Morgan noted. "The primary concern is adequately communicating the changes to plan participants."
For example, employers should explain what reductions to employer contributions are being made, why they are necessary (for instance, to avoid layoffs), and when full matching contributions may resume.
Amending the plan document if it includes a matching formula may be prudent, suggested Carol Buckmann, a co-founding partner of law firm Cohen & Buckmann in New York City. She advised that for plans that do not satisfy safe harbor requirements and which include a fixed or nondiscretionary employer match, "the plan sponsor should pass a resolution to suspend or reduce contributions, notify the participants and adopt an amendment changing the contribution formula. If the change is to a discretionary contribution, contributions can be resumed in the future without re-amending the plan."
She added, "While we hope that employer contributions to 401(k) plans will continue, a plan sponsor considering the suspension and termination options should make an informed decision based on an understanding of the technical rules that must be followed."
Gregg Levinson, senior director for retirement at consultancy Willis Towers Watson, told FiduciaryNews.com that if employees have been furloughed, an "option could be to hold the amount set aside for the current match and pay it … when employees return" and the business is up and running.
Suspending Safe Harbor Matching
With safe harbor 401(k) plans, a minimum level of matching contributions allows employers to forgo annual nondiscrimination testing intended to prevent plans from favoring highly compensated or key employees.
"Generally, an employer may not suspend or reduce safe harbor contributions midyear," Morgan, the partner at Blank Rome, explained, unless the following applies to the employer:
- It is operating at an economic loss for the year.
- It included a statement in the safe harbor notice given to participants before the start of the plan year that the employer may reduce or suspend contributions midyear.
Employers must give participants a 30-day notice before reducing or suspending contributions, Morgan said. That gives participants a reasonable opportunity to change their elective contributions, knowing they may not receive a previously expected employer match. [Update: IRS Notice 2020-52, issued June 29, includes relief from the 30-day advance supplemental notice requirement for suspension of safe harbor nonelective contributions (but not for suspension of safe harbor matching contributions) provided the supplemental notice is provided no later than Aug. 31, 2020.]
If the plan forfeits its safe harbor status, it "must be amended to require the nondiscrimination testing that the safe harbor contributions would have enabled the employer to avoid," Morgan explained.
Without matching contributions, plans risk failing annual nondiscrimination tests, which would require returning some of the contributions made to the accounts of highly compensated employees.
Jon Schultze, a partner at The Wagner Law Group in Washington, D.C., noted that after a plan loses safe harbor status, "if the employer wishes to reinstate the safe harbor provision, another plan amendment and an annual notice may be required" before the start of the plan year in which safe harbor status is reclaimed.
[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]
Delaying Profit Sharing
Some 401(k) plans make profit-sharing contributions to participants, most commonly as a one-time, end-of-year payment. These contributions are nonelective, meaning employees do not need to make 401(k) deferrals themselves to receive them.
For employers in industries heavily impacted by the pandemic, the downturn "probably means cutting back on discretionary profit-sharing contributions," said Timothy Ellis, CPA, with wealth management firm Waddell & Associates in Memphis, Tenn.
Employers who choose to delay a profit-sharing contribution should keep in mind that they can make the contribution and claim it as a tax deduction in 2020 up until the due date–including extensions—of their 2020 corporate federal tax return. Corporate tax returns are generally due April 15, but businesses may request a six-month extension to Oct. 15.
For businesses taxed as partnerships or S corporations, the extended deadline is Sept. 15. For businesses taxed as sole proprietorships, single-member limited liability companies, or C corporations, the extended deadline is Oct. 15. "Those extended deadlines could provide additional time for employers to recover and build up cash from the current slowdown," Ellis said.
Explain Matters to Participants
"The company needs to continue, otherwise there's no revenues, no salaries, no employees, and, ultimately, no 401(k) ," wrote Chris Carosa, chief contributing editor at FiduciaryNews.com. "Employees will continue to have questions about their 401(k) plan, perhaps now more than ever. And because of that, now more than ever it's paramount that companies answer those questions," he noted, "maybe with an old-fashioned conference call. Maybe with… 'Zoom' or 'GoToMeeting' apps."
Related SHRM Articles:
Suspending Safe Harbor 401(k) Contributions: A Primer for Employers, SHRM Online, June 2020
Employers Advised to Ponder Worst-Case Scenarios, SHRM Online, March 2020
Help Panicking 401(k) Participants Stay the Course, SHRM Online, March 2020
Suspend the 401(k) Match? Issues to Weigh, Pitfalls to Avoid, SHRM Online, April 2009