March 26, 2020
Authored by: Steve Evans and Sarah Bhagwandin
U.S. employers looking to reduce operating costs in the short term in response to the disruption caused by the COVID-19 pandemic may seek to reduce or suspend their matching or nonelective contributions in their 401(k) plan. The following summarizes the key issues facing employers in making the determination to suspend or reduce safe-harbor contributions.
Suspending or Reducing Employer Contributions in Non-Safe-harbor Plans
Discretionary employer matching and nonelective contributions generally may be immediately suspended or reduced through appropriate corporation action. Employers should consider the following in connection with a suspension or reduction of employer contributions:
- Does the Plan have Discretionary Employer Contributions?
If the plan does not include provisions setting out a formula or specific amount of employer contributions, the board simply needs to take action to change the amount of the employer matching contribution, which could include suspending the contribution until the board takes further action.
- Does The Plan have a Set Formula for Determining Matching or Nonelective Contributions?
If the retirement plan or related documents set out a formula for determining the employer contributions (that is, the amount of the contributions are “hard-wired” into the plan), the plan will need to be amended to change the formula. Companies may also consider removing specific formulas entirely and replacing them with provisions stating that the amount of the employer nonelective or matching contributions is discretionary and will be determining by the board from time to time.
- When may the Reduction or