While most of the time businesses are strategically aligned for the long term, economic volatility can force employers to reevaluate their benefit programs and look for options to reduce expenses and make difficult decisions. There are several implications and choices to be made with regard to retirement plans. The ability to reduce or remove employer contributions as well as the impact of having to furlough or terminate employees are both important to understand.
As an employer, here are some things to think about when your objectives change and need to be realigned with your new path.
• If employer contributions are discretionary, either non-elective profit sharing or matching contributions, they can be changed very easily. Typically, no plan amendment is required unless you’ve stated a fixed amount in the Plan’s Adoption Agreement. It is best practice to notify employees and you may need to stop the employer contribution calculation in payroll systems.
• If the employer's contributions are Safe Harbor, there are stricter requirements. The plan must be amended and participants must receive notice 30 days prior to the removal of Safe Harbor. Contributions are still due to employees through the end of the 30-day notice. The plan will also lose Safe Harbor status, meaning non-discrimination testing and Top-Heavy testing will be required. Careful consideration should be applied to removing Safe Harbor as ADP/ACP failures and Top-Heavy will have consequences. If Top-Heavy, there could be a required contribution to employees that should be weighed against any current Safe Harbor contributions.
• Lastly, for temporary relief, you have the option to delay funding a Safe Harbor match until the end of the following quarter. For example, you can delay Q2 Safe Harbor contributions until the end of September. This doesn’t change the amount owed to employees but allows you to delay the contribution for short term cash flow relief.
• Ask your Advisor for recommendations and possible outcomes before making the decision.
• If the employer's contributions are single-employer defined benefit plans or cash balance plans, the CARES Act has provided some relief. Funding obligations can be delayed (with interest accrued) up until January 1, 2021. This includes 2019 contributions due in 2020 as well as 2020 contributions if funded quarterly.
• Alternatively, these plans can have their benefits frozen if future funding is questionable.
• Contact your administrator as soon as possible if you are looking at these options.
The impacts of terminating employees and furloughing employees also should be given consideration. They aren’t necessarily treated equally based on the rights employees have to access their retirement accounts.
A furlough for employees will have the following results:
• Employees maintain the same distributions options of an active employee, including loans, in-service distributions, and hardship distributions.
• Employee loan repayments may be deferred for up to one year.
• If the furlough lasts for more than one year they will be considered terminated employees.
Terminating employees will allow them full access to withdraw their account however if over 20% of the workforce is terminated it will cause a partial plan termination. The partial plan termination will make any affected employee 100% vested in all employer contributions.
For specific impacts to your retirement plan consult with your plan advisor, plan administrator or contact the ABG team for information.