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Compliance Alert: Employer Responses to COVID-19—Suspending Safe Harbor Contributions and Other Cost-Saving Measures

The COVID-19 global pandemic has created a multitude of challenges for employers. In addition to addressing organizational issues, employers that sponsor retirement plans and their fiduciaries must continue to manage and make retirement plan decisions during these unprecedented and uncertain times. As a response, small businesses adversely affected by COVID-19 may be considering terminating their 401(k) plans to end their contribution obligations and cut costs. This may be an unnecessary response to what may be short-term problem, and it could have adverse consequences since generally the “successor plan” prohibits covering the same employees in a new plan for twelve months following the termination.

While we hope that employer contributions to retirement plans will continue, we understand that business circumstances may require a plan sponsor to take cost-saving measures that could include suspending contributions or even terminating plans. 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. Employers who sponsor plans with a safe harbor feature may want to keep in mind that the safe harbor contribution can be suspended. The regulations permit contributions to be suspended mid-year if the Employer is operating under an economic loss for the year (see IRC 412(c)(2)(A)); or the safe harbor notice provided to participants before the plan year states that the employer:

  • may reduce or suspend contributions mid-year;
  • will give participants a supplemental notice regarding the reduction or suspension; and
  • will not reduce or suspend employer contributions until at least 30 days after receipt of the supplemental notice.

Here are some procedural notes to bear in mind when considering whether to suspend safe harbor contributions and implement other cost-saving measures:

  1. Consider the broader impact on the plan when deciding to suspend employer contributions. For example, if your plan is subject to top heavy testing and the plan is top heavy for 2020, then the safe harbor contribution may satisfy the top heavy minimum contribution which may need to be funded in any event.
  2. Generally, a plan amendment is required to suspend safe harbor contributions.
  3. Generally, an employee supplemental notice is required to suspend safe harbor contributions.
  4. Safe harbor contributions must be made through the effective date of the suspension and non-discrimination testing must be completed for the entire plan year, and not just the portion of the plan year during which the plan sponsor was not making safe harbor contributions.
  5. Generally, an additional plan amendment would be required to add back the safe harbor feature next year.
  6. Safe harbor suspensions can’t be indefinite. According to IRS guidance, a plan sponsor may suspend contributions for three out of five plan years without the suspension being treated as a permanent discontinuance of contributions. Plan sponsors who may want to have suspensions over more than one plan year need to be aware of this rule.
  7. You could have a partial plan termination. Plan sponsors who continue their plans but are laying off employees should be aware that this may trigger a partial termination of the plan. A partial termination is based on the facts and circumstances, but plan sponsors should look to the IRS rule of thumb that there may be a partial termination if more than 20% of their plan participants are involuntary terminated. In the event of a partial termination, affected participants are required to be 100% vested.

Business circumstances may require a plan sponsor to take cost-saving measures. We hope this information clarifies your options.

Federal tax deadline moved to July.

U.S. tax filing day is moved from April 15 to July 15. "We are moving Tax Day from April 15 to July 15. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties," Treasury Secretary Steven Mnuchin announced in a pair of tweets.

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