Employers are facing difficult decisions as a result of the economic impact of the coronavirus outbreak, including decisions about their retirement plans.
Loreen Gilbert, president of WealthWise Financial in Irvine, California, has already fielded many calls from retirement plan sponsors, as well as participants. For example, some plan sponsors already have decided to suspend their 401(k) matching contributions.
Gilbert explains that if a plan’s document says the match is discretionary, plan sponsors can decide whether or not to contribute a match and that makes the decision to suspend the match simpler. In this case, plan sponsors can suspend their match right away.
However, with safe harbor 401(k) or 403(b) plans, plan sponsors must give a 30-day notice to plan participants that the match will be suspended, and the plan sponsor cannot start to suspend the match until after the 30 days.
In an Insights article from Cammack Retirement, Michael A. Webb, a vice president based in New York City, explains that safe harbor plans generally can suspend or reduce employer contributions if the safe harbor notice specifically stated that this action could be taken, or if the employer is operating at an economic loss in the current plan year. Safe harbor plans require a certain match formula to be used or a qualified nonelective contribution to be made in order for plan sponsors to avoid nondiscrimination testing. If these contributions are reduced or suspended, plan sponsors will be subject to this testing.
Gilbert says whether the plan is a safe harbor plan or not, participants must be notified of any change to matching contributions. She also notes that whether the plan document has to be amended depends on the language in the plan document; if there is a specific match formula in the plan document, it will have to be amended by the end of the plan year.
Gilbert says she has not yet received any calls from plan sponsors who are considering terminating their defined contribution (DC) plans; however, one client that was preparing to adopt a safe harbor plan is reconsidering. “They don’t know if they want to commit to a safe harbor plan, and that was only plan type that made sense for them so the owners could contribute,” she says.
Though no client has called about terminating its retirement plan altogether, Gilbert notes that one small business client had 35 employees but had to lay off 15—43% of the workforce. Even though the client plans to rehire the employees back when the economy recovers and is encouraging employees not to touch their retirement plan assets, this could trigger a partial plan termination.
Attorneys with Morgan, Lewis & Bockius LLP explain in a blog post that, according to IRS guidance, a partial termination is presumed to occur when more than 20% of plan participants are terminated in a particular year. Once a partial termination is triggered, affected participants must be 100% vested in benefits accrued as of the partial termination date. This is true for partial terminations of DC as well as defined benefit (DB) plans.
The blog post also notes that, for DB plans, when a plan sponsor maintaining a single employer DB plan closes a facility and as a result incurs a workforce reduction of 15% or more of its employees who are eligible to participate in a qualified retirement plan, including a 401(k) plan, it triggers what is called a “substantial cessation of operations.” The employer may be subject to withdrawal liability and notice rules that otherwise only apply to multiple employer plans.
Gilbert describes how another business owner client had just bought a business building but was still paying his lease on the old building, so he is making double payments. Now, his entertainment business is faltering because of the coronavirus pandemic. She explains that he is trying to reduce his overhead to make it through the year and now doesn’t have the cash flow he needs to make a contribution to his DB plan for employees.
DB plan sponsors must make an annual required contribution (ARC) based on actuarial figures regarding projected liabilities. Some plan sponsors may have to get creative in determining how they will fund this. Gilbert’s client has been making contributions above the ARC each year based on projections to reach plan goals—and to get a tax deduction. He may not be able to do so this year.
Gilbert says clients are considering freezing their DB plans because it is currently the time frame in 2020 in which they can make this decision. Others are considering a change to the formula for benefit accruals. Both decisions will require plan amendments and notices sent to plan participants.
In the normal course of both DC and DB plan administration, required notices must be sent to participants. During this time when employees may be working remotely or many have been terminated, laid off or furloughed, getting those notices to participants may be more difficult. Plan sponsors can work with their plan providers to make sure notices are being delivered.
Finally, Gilbert says, “We are getting more phone calls from participants than I’ve seen since 2008.” She suggests the market drop related to the coronavirus pandemic should spur plan sponsors to take another look at the investment options they make available to participants. For example, how have asset allocation vehicles, such as target-date funds (TDFs) fared?
“A year ago, we looked at all TDFs to see which were best positioned for the next downturn. The Department of Labor [DOL] considers that an important consideration,” she says. “We looked at TDF strategies and their pros and cons, so we were in a good position with TDFs.”
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