Coronavirus Retirement Plan Review
By Craig Erickson
With the continual uncertainty we are facing each day, it is important to keep in mind that changes in legislation may impact your current design of your employee benefit plan. Following are some topics Plan sponsors and fiduciaries of employee benefit plans may overlook.
401(k) and Profit-Sharing Plans:
Employer Contributions – Plan sponsors and fiduciaries may want to consider reducing or halting employer contributions. For non-safe harbor plans (match or non-elective contributions), this may be an easy adjustment. For safe harbor plans, the ability to stop or reduce employer contributions may be restricted and special rules apply. Safe harbor plans can reduce or suspend employer contributions if the safe harbor notice previously distributed indicated that such contributions could be reduced or suspended, or if the employer is operating at an economic loss for the plan year. Keep in mind, reducing or stopping employer contributions will require a 30-day notice period, during which time employer contributions must continue. Lastly, and most important to keep in mind, plans that reduce or stop safe harbor contributions must satisfy applicable nondiscrimination testing for the plan year. Plan sponsors should discuss with counsel or their advisor about the methods and consequences of stopping contributions that apply to their plan.
Definition of Compensation – With the potential addition of taxable fringe benefits, sponsors and fiduciaries should consider reviewing the definition of compensation in their 401(k) plans. Generally, plans allow deferrals on W-2 compensation which would include taxable fringe benefits. This could result in additional employee and employer contributions being remitted to the plan.
Participant Withdrawals – The majority of 401(k) plans limit the ability of participants to get in-service distributions other than hardships distributions. Plan sponsors and fiduciaries should review their plan documents to understand what is available. Plan sponsors may also consider adding other permitted in-service withdrawals to provide more flexibility to participants.
Plan loans – Given the fact that work schedules are changing in response to COVID-19, Plan sponsors and fiduciaries will want to review their plan loan policies with regards to loan payments during leaves of absence with or without pay. Additionally, if loan policies limit the number of loans a participant can have outstanding at a time, Plan sponsors and fiduciaries may want to consider amendments to loosen these limits.
Vesting – As this is typically based on years of service, Plan sponsors will want to understand how their plan will calculate vesting for participants who are on leaves of absence and what effects that would have to the participant in the future.
Partial Termination – For those businesses that are experiencing severe economic hits with the COVID-19 outbreak, and are forced to terminate large quantities of their employees, the Plan sponsor will need to keep in mind that such an event could trigger a partial plan termination. A major attribute to a partial plan termination involves the vesting of employer contributions where the effected employees would automatically become fully vested in their contributions, despite actual years of service.
Investment fees – Many plans have been mindful of plan fees and have chosen investment lineups offering low-cost funds to Plan participants. One thing to keep in mind with some fund classes is the requirement of a minimum level of total Plan assets being invested within those funds. Two examples of such funds include collective investment trusts and separately managed accounts. Plan sponsors and fiduciaries should consider reviewing the fund agreements to understand if the drop in the market may trigger movement to a higher fee share class or a failure to meet a minimum asset level. Some agreements may include exceptions from the minimum asset levels for extraordinary circumstances for limited periods of time which Plan sponsors and fiduciaries may want to explore.
In addition to some of the above points, including fees, pension plans also have some areas to consider for Plan Sponsors
Earlier Distribution Options – Plan sponsors and fiduciaries could amend their plan to allow active participants who are 59 ½ years of age to begin receiving pension benefits (passed with the SECURE Act). For terminated vested participants, Plan sponsors and fiduciaries could allow benefits to begin at ages earlier than the plan’s normal retirement age rules.
Freezing Plan Benefits – The plan must provide advance notice to participants before a freeze or reduced future benefit accruals can take place. That time frame is typically 45 days.
With the uncertainty surrounding day to day life and changes to the economy and workforce occurring hourly, the above may serve as a lifeline for both Plan sponsors and Plan participants as we all navigate through these uncharted territories. Please be sure to consult plan counsel before any changes to the Plan operations are made.
Questions or concerns? Reach out to a Wiss team member for more information or assistance.
401k, compensation, Coronavirus, COVID, COVID-19, Craig Erickson, EBP, employee benefit plan, Employee Benefit Plans, safe harbor, SECURE Act