As the dynamic ripples of the COVID-19 pandemic continue to sculpt the current marketplace, it is vital for plan sponsors to augment their establishment’s retirement plans for what may lie ahead. Warranting the efficiency of employee’s plans and financial welfare is a critical slice of a company’s perennial blueprint for financial security. Hence, to help you expertly handle the mounting demands currently resting on the shoulders of plan sponsors everywhere, we’ve addressed the most prominent COVID-19 retirement plan management concerns and the recommended course of action for each.
1. Can a 401(k) plan be revised to omit employer contribution? If so, how?
Yes, a plan can be revised to omit employer contributions, depending on if said contributions are mandatory or discretionary. Mandatory contributions can be subtracted mid-year on a prospective basis by modifying the plan itself. Conversely, discretionary non-elective or matching contributions can be condensed or completely removed at any point since the employer has the ability to do so.
Course of Action: Look over the most up-to-date copy of the plan together with a financial expert to better comprehend the kind of employer contribution being generated and the appropriate modus operandi for plan amendments.
2. Can a 401(k) safe harbor plan be revised to suspend or eradicate the safe harbor contribution?
Per the last Treasury regulations and under controlled settings, a sponsor of a 401(k) safe harbor plan may modify the plan during the current year to diminish or shelve the firm’s safe harbor contribution—either the non-elective or matching. Nonetheless, the plan becomes subject to the actual referral percentage and/or actual contribution percentage test.
Course of Action: Examine the annual safe harbor notice for the plan with a financial expert to figure out if the ”maybe” language exists. Subsequently, perform the appropriate revision and additional notice measures. For a reduction by reason of economic loss, record the details of the business’ financial hardship and keep an eye out for any added guidance from the IRS.
3. When does a partial plan termination occur? What are the consequences of the termination?
When a large portion workers participating in a company’s qualified plan are let go and/or no longer qualified to join the plan, a “partial termination” may have transpired from the IRS’ perspective.
Nonetheless, the IRS offers direction to help plan sponsors figure out if a partial plan termination has occurred:
- The turnover rate is found by dividing all workers qualified to participate terminated from employment, vested or unvested, by all workers qualified to join during the “applicable period”.
- The applicable period is habitually the plan year, but can be longer based on circumstances and facts.
- Severance from employment not included in concluding the 20% are those out of the employer’s power, like disability, retirement or death.
- Partial plan termination can also transpire when a plan is amended to omit a group of workers formerly protected by the plan or vesting is adversely affected.
- In a defined benefit plan, partial plan termination happens when future benefits are diminished or sacked.
Course of Action: Remember, a partial termination is not a single occurrence, but assessed across a plan year or possibly for a longer period of time. If an employer has a sequence of layoffs during a plan year, in totality, the layoffs could total 20% and may spark concern.
4. Can a plan sponsor alter the plan’s matching contribution funding frequency from per payroll to year end?
Yes, plan sponsors are allowed to adjust the fund frequency mid-year of both standard and safe harbor 401(k) company plans. For a standard plan, a plan sponsor should confirm if a change is required to the plan record. Some plans permit fund flexibility and would not require a novel amendment. Equally, plan documents have certain language focusing on the funding timing that may need to be revised. Regarding safe harbor plans, said plan can transform from per-pay period funding to year-end funding with a retroactive plan modification and notification to workers no later than three months prior to the end of a year.
Course of Action: Be sure to analyze your company’s plan document with a financial expert to explore what type of plan amendment may be necessary. What’s more, confirm plan participants notice requirements are fulfilled where desirable.
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