What flexibility exists regarding plan contributions? Can we still make changes to plan features and design?
Employer contributions to retirement plans take one of two forms: non-elective contributions and matching contributions, and they can be discretionary or required. We’ll talk through major types for most popular plans.
SEP IRA – Funding is fully discretionary, may stop at any time; no change to plan document is required
SIMPLE IRA – These plans require a plan sponsor provide either a 2% contribution or a 3% match to eligible participants. While it is possible to reduce the match, the decision to do so must be made 60 days before start of a new plan year. Neither 3% match nor 2% contribution can be suspended or reduced mid-year. The IRS says that employer must make the contributions promised employees in the SIMPLE IRA plan notice. So, no real relief for SIMPLEs, unless the legislators intervene later.
Safe harbor 401(k) plans - Neither the CARES Act nor the IRS has provided any special relief for safe harbor 401(k) plans as of April 13. However, the existing regulations provide rules for mid-year changes to safe Harbor 401(k) contributions. A plan may be amended to eliminate the safe harbor contribution, either non-elective or match.
There are some important caveats:
NOTE: If the employer who usually makes a safe harbor contribution on a payroll basis wants to delay making it for cashflow planning purposes, then it is not necessary to suspend the safe harbor feature. The safe harbor contribution due date for the 2020 plan year is the last day of plan year ending in 2021, so additional time is available. That said, if the plan document states that the safe harbor contribution is to be deposited on a payroll basis, it may be amended prospectively to deposit it annually. There are some additional technical nuances, so it’s important to check with a retirement plan consultant before implementing this option.
401(k) plans with a match – There are two types of matches: fixed, where the formula is written into the plan document, and discretionary, where the employer decides after the close of plan year what and how much they match, if anything.
If a match if is fixed, then a plan amendment is required to stop it. Matching contributions for the portion of the plan year prior to the effective date of the amendment must be made for all participants who already earned the right to that match (that’s why it’s a plan by plan decision). That said, it can be reduced or completely removed on a prospective basis.
When a match is discretionary, employers can start/stop or increase/decrease the match at any time. There is a caveat. If the match is deposited periodically throughout the year (e.g., each pay period) discontinuing that match could result in having to make a special contribution called “a true-up contribution” to ensure that the formula was applied uniformly to all participants.
When discontinuing a match, remember to coordinate with all providers who take part in the process. With a match deposited each pay period, it’s not uncommon to automate this process such that the payroll provider calculates the amount and the investment platform automatically withdraws the total amount from your bank account via ACH. Update the systems and communicate with all parties accordingly.
Profit-sharing contributions – The same is true about profit-sharing contributions, when employer contributions are entirely discretionary (i.e., a specific percentage of pay of flat dollar amount isn’t built into the plan document) it can be suspended at any time without amendment. Similar to a match, when profit-sharing dollars are contributed on a periodic basis, special contribution to ensure uniformity for all participants may be necessary.
Defined benefit and cash balance plans --Defined Benefit and cash balance plan funding isn’t discretionary, but actuarial tools do exist to help manage the impact of market volatility and help businesses manage contribution requirements to meet minimum funding standards. Plans with March 31 or April 30 plan year ends will be the first to include the market losses in their valuation results. A calendar year plan has more time to recover if the COVID-19 economic impact is softened by end of 2020. Relief in the form of longer amortization periods, where losses in assets can be spread over a seven-year period, adjusting the actuarial value of assets where possible, and using contributions made in excess of minimum funding to offset future contributions may help. With respect to cashflow management, while not suggested across the board, new benefit accruals may be frozen.
When done timely, usually by May/June timeframe for calendar year plans, it can substantially reduce contribution requirement. A couple of other important points. The CARES Act delayed minimum contribution requirement for 2019 from 8½ months after plan year end (September 15 for calendar year plans) to January 1, 2021. This delay will help with cashflow planning and alleviate the 10% excise tax on missed minimum funding deadline; however, if a deduction for the 2019 year is desired to help reduce 2019 taxable income, then it will need to be made by the due date of employer’s tax return including extensions. So, contribution timing and deductibility will be an important decision to balance in the coming months.
Cetera Retirement Plan Specialists is a third-party administrator and may not offer tax, legal or investment advice. Plan sponsors should consult their own tax, legal or investment professionals.