By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement PlansPrint This Post
The COVID-19 pandemic and the corresponding economic downturn has caused many employers to make some tough financial decisions in meeting their operational and payroll obligations. As employers continue to look for cost-cutting strategies, many have contemplated the reduction or suspension of employer contributions to their 401(k) or 403(b) plans. The process of suspending or reducing employer contributions to retirement programs can be particularly challenging for employers sponsoring a safe harbor 401(k) or 403(b) plan.
Safe harbor plans have become a popular option for employers, as these programs are exempt from the typical nondiscrimination testing requirements for plans like 401(k)s. As a result, safe harbor plans can permit eligible employees the opportunity to maximize their contributions to these retirement programs – particularly highly-compensated employees and business owners. The trade-off for sponsoring a safe harbor plan is that employers must commit to either a safe harbor matching contribution or a non-elective contribution for all eligible employees. Unfortunately, the financial instability caused by the COVID-19 pandemic has created challenges for many employers in meeting their safe harbor contribution commitments.
On June 29, 2020, the IRS issued Notice 2020-52 providing sponsors of safe harbor 401(k) and 403(b) plans with guidance and relief for mid-year suspensions or reductions to safe harbor contributions. The Notice specifically provides guidance and relief in two instances: 1) for reducing or suspending contributions solely to highly compensated employees (HCEs) without violating the plan’s safe harbor status, and 2) for mid-year reduction or suspension of safe harbor mandatory employer contributions. Although this is welcome guidance and relief for many employers with safe harbor plans, the Notice does have some caveats.
For example, the Notice requires a plan amendment for any adjustments to safe harbor contributions, with certain plan amendments required prior to August 31, 2020. Additionally, employers will need to provide timely and detailed notifications to employees of any changes to safe harbor contributions, and there is still the possibility that a reduction or suspension of safe harbor contributions could subject the retirement plan to the nondiscrimination testing that safe harbor plans are typically exempt from.
The big take-away here is that the IRS has now provided employers sponsoring safe harbor 401(k)/403(b) plans with a blueprint for reducing or suspending contributions, if their economic and financial situations dictate the need to do so. As always, given the complexity of employer sponsored retirement plans, along with the recent enactment of IRS Notice 2020-52, please consult with your legal or tax advisor and retirement plan administrator before making any changes to your retirement program. Consider speaking with your Benjamin F. Edwards financial advisor to discuss our menu of retirement plan services and support available to employers.