Retirement Plan Questions During Tough Times

As we are navigating the evolving challenges that come with COVID-19, things are changing very quickly and companies are reacting to news of the public health crisis, changing work strategies including remote work and mandatory closures. Are you asking this question?

 

What can we do about our match and profit sharing if times get tough?

Employers may limit or stop making matching contributions to 401(k) retirement plans during hard times to save cash and sometimes avoid layoffs. Although such a cut is typically temporary, it can derail retirement goals for some employees. It can also create tough decisions for those individuals nearing retirement, such as whether to increase their contributions, reduce goals, or delay retirement.

  1. You must review your plan document to determine if your match is discretionary
  2. Stopping your match mid-year may trigger a true-up match contribution at the end of the year
  3. It requires employee notice
  4. It may create employee morale issues and increase employee uncertainty

 

We have a safe harbor match  or safe harbor non-elective contribution- can we stop this?

Yes, the IRS has changed that so that effective for the 2014 plan year, a mandatory nonelective safe harbor plan or mandatory safe harbor match plan can eliminate the contribution mid-year in two circumstances:

  1. The company is operating at a loss for the year.
  2. The safe harbor notice distributed before the beginning of the plan year indicates that the plan may be amended to remove the safe harbor contribution during the year. If the plan is amended during the year, at least 30 days’ advance notice is required during which time participants must be permitted to change their deferral election, the contribution must be made for compensation paid before the change and the plan must pass ADP/ACP testing for the entire year.

 

We may have to lay off some/many of our employees in light of the mandated changes caused by policies relating to COVID-19- is there anything we should think about with regard to the retirement plan?

Yes, a  plan may trigger a partial termination if more than 20% of your total plan participants were laid off in a particular year.

  1. Partial terminations can occur in connection with a significant corporate event such as a closing of a plant or a division, or as a result of general employee turnover due to adverse economic conditions or other reasons that are not within the employer’s control.
  2. The law requires all “affected employees” to be fully vested in their account balance as of the date of a full or partial plan termination. They must become 100% vested in all employer contributions (including matching contributions) regardless of the plan’s vesting schedule. Employee salary deferrals are always 100% vested.
  3. An affected employee in a partial termination is generally anyone who left employment for any reason during the plan year in which the partial termination occurred and who still has an account balance under the plan. Some plans wait until an employee has 5 consecutive 1-year breaks in service before he forfeits their nonvested account balance. For these plans, employees who left during the plan year of the partial termination and who have not had 5 consecutive 1-year breaks in service are affected employees. See IRC Section 411(d)(3) and Revenue Ruling 2007-43.

If you have specific questions as to what your  plan allows, please call us or your recordkeeper.  As always we are available to talk through any questions or concerns.

 

 

 

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advisory services are offered through Global Retirement Partners, an SEC Registered Investment Advisor. Global Retirement Partners and Strategic Retirement Partners (SRP) are separate entities from LPL Financial.

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.