The government’s response to COVID-19 has left many facing forced closure or seismic changes to sales and expense forecasts. This new reality has left business owners looking for ways to bolster working capital while reducing fixed and other costs. Many business leaders are evaluating their retirement plan to determine if any cost savings opportunities can be uncovered. Our Retirement Plan Services Team has received several inquiries covering a similar theme recently on coping with COVID-19 changes. To help clients, prospects and others, we have provided the responses to the common questions below.
Stopping Safe Harbor Contributions
Can I temporarily discontinue the safe harbor contribution to allow us to redirect those resources (keeping employees on the payroll or covering the temporary business downturn)?
The short answer is “Generally, yes”. The IRS does require a few action items to happen first. The most important is the distribution of timely, clearly written notice to participants. Below are the steps that will need to be taken and other items to consider:
- All eligible employees are provided with a supplemental notice, which explains the consequences of the plan amendment that suspends the safe harbor contribution, the procedures for changing 401(k) withholding elections and the effective date of the amendment. As your third-party administrator will we draft this notice for you. The draft will be ready to add specific messages and procedures you may want to include before distributing.
- The suspension of the safe harbor contribution can be effective no earlier than the later of 30 days after providing the supplemental notice and the date the Plan document is amended to suspend the safe harbor contribution.
- Eligible employees must be given a reasonable opportunity prior to the suspension of safe harbor contribution to change their 401(k)-withholding election.
- The plan must be amended to provide that the nondiscrimination tests for 401(k) and matching contributions will be satisfied for the entire plan year in which the suspension occurs using the current year testing method.
Factors to consider:
- The plan sponsor is still required to make the safe harbor contribution through the effective date of the plan amendment.
- If the plan is top-heavy and the safe harbor provisions are stopped, the plan is no longer exempt from top-heavy status for the plan year. Top-heavy minimum contributions may be required for non-key employees.
- Nondiscrimination testing could limit contributions for highly compensated employees.
- Time is needed to distribute the notice and update plan documents. Realistically plan to continue safe harbor contributions for a month to 45 days.
Partial Plan Termination Due to Layoffs
Certain businesses that are unable to sustain a temporary downturn without taking more drastic steps may be forced to consider layoffs. If the layoffs are more than temporary furloughs, a partial plan termination could occur. Generally, if the workforce reduction is less than 20% it is not considered a partial termination. However, the determination is based on the facts and circumstances versus a bright-line reduction in the workforce. If the Plan is considered to have a partial termination the affected participants become 100% vested. If vesting applies to your plan and you are considering a workforce reduction, make sure to consider if a partial termination has occurred before applying vesting to distributions. If you would like to discuss facts and circumstances in your business, give us a call.
The CARES Act is currently in the Senate and being negotiated. Currently, the bill is proposing changes that will make hardship distributions less restrictive and increase the amount available for plan loans, in addition to deferring loan repayments. We will send out additional guidance if the bill becomes enacted.
With the market volatility and the rapidly changing government regulations and guidelines, there are a variety of questions regarding the Plan that you may have. We want you to know your PBMares Retirement Plan Services Team is here to assist you.