Reduce Cost Of Retirement Plan Benefits (COVID-19 Alert)
May 1, 2020
The relief provisions of the CARES Act generally benefit coronavirus-impacted participants with accelerated retirement plan benefit payments and participant loan extensions. But what actions can employers take to relieve financial stress by reducing the cost of retirement plan benefits?
Although the CARES Act does permit employers who sponsor defined benefit pension plans to postpone contributions due during 2020 until January 1, 2021, there are other steps under prior law that employers may want to consider:
(1) FIXED FORMULA PLANS
Plans with fixed formulas for employer contributions, including matching contributions, can reduce those contributions for the balance of the year (and beyond, if necessary) by amending the plan and providing advance notice to participants. This can be done before those fixed benefits have been earned, typically when participants are credited with at least 1,000 hours of service for the year.
(2) SUSPENSION OF SAFE HARBOR CONTRIBUTIONS
Safe harbor contributions to 401(k) plans (these are additional employer contributions that allow plans to avoid annual numeric testing to assure that contributions are properly allocated to non-highly compensated participants) also can be suspended if either: (a) the employer is operating at an "economic loss," or (b) participants have been advised in advance of the plan year that the employer has the right under the plan to suspend safe harbor contributions and may exercise this right at its discretion by serving a supplemental notice of such suspension.
Note that such a suspension of safe harbor contributions will reinstate numeric testing (and a possible reduction in benefits allocated to highly compensated participants) and could require "top-heavy" contributions as well.
(3) PLAN TERMINATION OR FREEZE
Retirement plans can be terminated, which may terminate an employer's future funding liabilities for 401(k) and other defined contribution plans (termination of under-funded defined benefit plans accelerates the employer's funding obligation). However, plan termination (and partial termination triggered by an employer's action which causes a reduction in the number of plan participants by at least 20 percent) will fully vest all affected participants.
A plan "freeze" will not trigger such vesting but will halt benefit accruals by current participants (and associated employer costs) and prohibit new employees from becoming participants. Like any reduction in future retirement plan benefit accruals, a freeze needs to be implemented before benefits have been earned in order to be effective. A freeze also can be undone to restore plan benefits in the future when employer finances stabilize in the wake of the coronavirus lockdown.
PROCEED CAREFULLY & CONSULT A PROFESSIONAL
The above measures are each plan specific. They require careful consideration of not only the applicable technical requirements but also the ultimate financial advantage to the employer. Proceed with caution—and check with your retirement plan professional before taking action.
We are happy to help. Do not hesitate to reach out to the employee benefits lawyers at Golan Christie Taglia with any questions or concerns that you may have. To discuss your particular situation, please feel free to contact: