Employer Contributions During Cash Flow Loss Mar 26

401(k) Plans and COVID-19: Frequently Asked Questions About

Employer Contributions

Many businesses are facing economic uncertainty because of COVID-19.  These uncertain times may be causing furloughs of employees or even terminations. If your business is facing a loss of cash flow you may feel the need to reduce or eliminate the contributions you are making to your plan.

We are receiving many questions about this.  Here are some of the most common ones.

• If I have a discretionary nonelective (profit sharing) contribution in my plan may I reduce or eliminate it? Yes, you may do this without amending your plan.  You should communicate the change to plan participants.
• If I have a discretionary matching contribution in my plan may I reduce or eliminate it? Yes, you may do this without amending your plan.  You should communicate the change to plan participants.
• If I have a safe harbor contribution (either matching or nonelective) may I reduce or suspend that? Only if you meet one of these exceptions:
  • You, the employer are operating at an “economic loss”
  • You give thirty (30) days notice to the employees of the reduction or suspension.

The plan document will need to be amended.  It will require nondiscrimination testing.

• If I have a mandatory matching contribution may I reduce or suspend it? Yes, you many reduce or suspend the contribution, but you must first amend the plan. Contributions will be due until the date of the plan amendment.
• Do I have any issues if I eliminate my safe harbor contribution? If you plan is top heavy you may still have to make that contribution at the end of the year.  Your plan administrator can help you determine if this is an issue for you.

Is There Any Relief Available?

The American Retirement Association, on behalf of its nearly 28,000 individual members who provide consulting and administrative services to sponsors of retirement plans, has asked the IRS for help. Specifically, they have asked the IRS to allow until December 31, 2020:

• That a safe harbor plan may stop the safe harbor contribution upon the employer memorializing the intent. This would mean no thirty (30) day notice requirement.
• That a safe harbor plan passes the top heavy test as long as the highly compensated employees stop deferrals for the remainder of the plan year.

We will let you know when information about this relief is available.