Even with the relief offered by the CARES Act, the Coronavirus is having a significant effect on many business operations. This article discusses some of the additional retirement plan issues related to economic downturns.
Reducing 401(k) and Profit Sharing Contributions for 2019 and 2020
In uncertain financial times, reducing or eliminating retirement plan contributions may be a possibility. It depends on the type of plan.
Many plans have employer contributions that are completely voluntary. These plans can suspend those contributions at any time.
Some plans have required contributions such as Money Purchase Pension plans and plans where the match or profit sharing contributions are mandatory (hard-coded within the plan document). So far, no relief has been provided from the government for these types of contributions. If the plan requires 1000 hours of work or employment on the last day of the plan in order to earn a contribution, then the plan could be amended prior to participants earning that right in order to reduce or eliminate the contribution for 2020.
If a plan is a safe harbor plan, the safe harbor contributions can be suspended if the Plan Sponsor is operating at an economic loss or the plan provided a notice before the beginning of the year notifying employees that the contribution may be suspended. Participants must be given a notice 30 days prior to the suspension of the safe harbor contribution and the plan must pass ADP nondiscrimination testing. Also, top heavy minimum contributions (usually 3% of compensation for the year) would be required for plans that are top heavy. Therefore, a suspension in safe harbor contributions could actually end up increasing the overall contribution to the plan.
Partial Plan Terminations
If the Plan Sponsor has terminated many of its employees, then there may be a partial plan termination. A partial plan termination generally occurs when 20% or more of the plan participants are terminated due to an employer decision (as opposed to those who leave voluntarily). If there is a partial plan termination, those participants who were terminated must become 100% vested in their plan accounts.
Pooled Account Plans
Some plan accounts aren’t valued on a daily basis and instead have valuations on a yearly or quarterly basis. With the market decrease, the latest account balances may be overvalued. Distributions are based on the prior valuation which may be up to a year old. It is recommended that an interim valuation be performed before a distribution occurs, so that the distributed account balance reflects the current values.
Payment from Plan Assets
Most plans are written to allow the payment of administration fees from the assets of the plan. If you are looking to preserve your cash flow during these uncertain times, and are not currently paying your fees in this manner, this may be an option available to you.
We are here to help you with all of your retirement plan needs during this uncertain time. If you have any questions or concerns about any of these issues, or anything else, please contact your plan consultant for more information.