COVID-19 Resources

How Does the COVID-19 Pandemic Affect How Companies Should be Contributing to Their Retirement Plans?

Written by Kyle Bonds, ERPA, QPA, QKA on March 31, 2020

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Just a few weeks ago, the economy was booming, and most business owners weren’t worried about making the required contributions to their retirement plan.

How quickly things have changed.  Now, business owners have many concerns: the health and safety of your employees, the wellbeing of your customers and, more than likely, cash flow.

As a retirement plan sponsor, you may have a required contribution to make to your retirement plan.  Plans such as Safe Harbor 401(k) plans and cash balance plans have mandated minimum contributions. But, there’s no need to panic. There are options to reduce or suspend the amount you’re required to contribute.

Below, I’ve detailed what this looks like for 401(k) safe harbor plans and cash balance plans.

401(k) Safe Harbor Plans

Safe harbor plans have a required contribution each year, which can be in the form of an elective or nonelective contribution. Elective contributions are made depending on the employee deferrals.  Nonelective contributions are made regardless of an employee’s deferral.

Regardless of which safe harbor option you have, you may suspend the contribution during the year as long as you take the following steps:

  • The annual safe harbor you provided prior to the beginning of the year contained language that disclosed the possibility that contributions might be suspended mid-year. If you didn’t provide this language it may still be possible to suspend due to business hardships.
  • Provide eligible employees with a supplementary notice that contributions will be suspended as of a certain date, the consequences of the suspension and the procedures for changing their deferral rate. (This notice must be given at least 30 days prior to the date contributions are suspended.)
  • Amend the plan to provide for the suspension.

These actions will suspend all required contributions through the date you suspend.  You will be required to fund the contribution through the date you suspend.

Prior to making the decision to suspend, it’s important to know the status of two tests that could be affected by suspending.

  • Top-Heavy Status – If your plan is top heavy (meaning 60% or greater of the account balances in the plan are in key employees’ accounts) and one of these key employees has deferred into the plan, you more than likely will be required to make a 3% top-heavy contribution into your plan.
  • ADP Testing – If you do elect to suspend the contribution, you will be required to pass the ADP test for the current year. The ADP test limits the amount that highly compensated employees (HCEs) can contribute as 401(k) deferrals when compared to the non-HCEs. This test limits the HCE group (when averaged) to 2% points above the average of the non-HCE group.  If the non-HCEs’ deferral rate averaged 4%, then the most the HCEs could defer is 6% when averaged.

Cash Balance Plans

Because of the flexibility in determining the required contribution, it’s possible that if your plan has been well-funded in the past, the minimum contribution may be zero in the current year. After the crisis we are facing now is over and cash flow is not a concern, you may be able to increase contributions over and above your contribution liability.

Freezing a cash balance plan is a little more complicated, but it can still occur. Freezing a pension plan essentially stops all future benefits from accruing. Contributions made after freezing benefits are used to restore plan losses or to reduce future contributions. You can then unfreeze your plan at any time.

Plan sponsors are required to provide a notice to participants and make an amendment to the plan. Many plans require 1,000 hours to accrue a benefit. It’s possible participants have not yet accrued a benefit in this calendar year.  If the amendment to freeze is provided prior to participants working 1,000 hours, you won’t be required to fund benefits for this plan year.

Remember to Discuss with Your Provider

Regardless of which retirement plan you currently sponsor, if you are facing these decisions it’s important to reach out to your provider and discuss the situation. These decisions can have other implications even beyond the few described above.

For other questions concerning how global events may be impacting your retirement plan, please reach out to your Warren Averett advisor or ask a member of our team to reach out to you.

This article reflects our views at the time this article was written and should be used as reference only. We recommend that you talk to your Warren Averett advisor, or another business advisor, for the most current information or for guidance specific to your organization.

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