We are all learning together to navigate uncharted waters as COVID-19 travels around the world. 

We must all be vigilant and exercise caution and preventative measures in order to slow the spread of the virus to something manageable.  All of us are dealing with financial unknowns as we begin to adapt to a new environment of social distancing for the short-term future. Understanding 401(k) changes, along with your retirement plan changes, during this pandemic is extremely important.

Many of you have questions regarding the ability to fund contributions in your 401k Plan. 

The funding requirements differ depending on the contribution and additional information on timing requirements can be found here.

Please note that any reference to a tax filing due date below includes extensions, if one is or has been filed.

In anticipation of the funding challenges of the many plan sponsors may be faced with, we want to help explain options available for stopping the safe harbor contribution (but continuing the plan) vs terminating the plan altogether.

Historically speaking, 401k plans can suspend safe harbor contributions with a 30-day notice provided to employees without terminating the 401k plan.  Generally, this would only be allowed mid-year if the following conditions are met.  

If you need to terminate the safe harbor plan, you need to first consider the potential consequences of doing so which are included further below.  If you are unable to fund contributions for a short amount of time, you could have unintended consequences that cannot be undone from terminating the plan, and you may have more time than you realize to fund the required contributions under the current law. 

• (1) The employer is operating at an economic loss

Or

• The safe harbor notice provided to participants before the start of the plan year included a statement that the employer may reduce or suspend contributions mid-year and that the reduction or suspension will not be applicable until at least 30 days after the employees are provided with a supplemental notice of the action being taken

And

(2) A supplemental notice is provided to eligible employees when the reduction or suspension occurs

• The effective date of the suspension or reduction is not earlier than the later of 1) the date the amendment is adopted or 2) 30 days after the supplement notice is provided to employees

• Eligible employees have a reasonable opportunity after receipt of the notice and prior to the reduction or suspension of the employer contributions to change their contribution elections

• The plan is amended to provide that the ADP and/or ACP test as applicable will be satisfied for the entire plan year in which the reduction or suspension occurs, using the current year testing method.

The supplemental notice given to each eligible employee must explain

• The consequences of the amendment suspending or reducing employer contributions

• The procedures for changing their deferral or employee post tax contribution elections

• The effective date of the amendment

What are the consequences of not being a Safe Harbor contribution plan mean?

• Your plan will be subject to ADP testing that may require refunds to certain individuals (generally owners and/or employees earning over $125,000 in 2019).  This testing does not apply for safe harbor plans but is required if the safe harbor contributions are stopped mid year.

• If your plan is considered “top heavy”, then a minimum contribution (no more than 3%) would be required for all non key employees employed on the last day of the plan year.

If the non-discrimination tests are failed can the Plan be a Safe Harbor Plan again?

The SECURE Act which was signed into law in December 2019 allows non-safe harbor plans beginning with the plan year ending December 31, 2020 to become a safe harbor plan retroactively by making a fully vested contribution (no more than 4%) for all eligible employees; therefore, giving non-safe harbor plans another avenue to correct a failing test without having to distribute money to certain individuals.  Decisions on whether to make safe harbor “non-elective” contributions can be delayed until the end of 2020 for 3% contributions and can be further delayed to the tax return deadline as long as a minimum 4% contribution is made. 

These provisions were intended to allow additional time for non safe harbor plans to make additional contributions and avoid refunds to Highly Compensated Employees (“HCEs”).  It is not clear if this additional flexibility will be provided to plans that started out 2020 as a safe harbor plan and then removed the “safe harbor” provisions during 2020 due to impact from the COVID-19 pandemic.  We expect future guidance will help address this important issue prior to the end of the year.

What happens if we terminate the plan for ALL contributions?

If you are considering terminating the plan as a whole, instead of only stopping the safe harbor contributions, there are additional considerations as explained below.

• All participants will become 100% vested as of the plan termination date (whether currently employed or not)

• The plan sponsor will not be able to start a new 401k Plan for at least 12 months after all assets in the plan have been distributed

• Additional contributions for the safe harbor will still be owed through the date of plan termination

LT Trust can provide necessary amendment and notices needed to stop or suspend a safe harbor contribution, if needed.    However, before you decide to stop contributions, please consider that current law provides relief on the timing of safe harbor contributions that may be enough to help ride out this storm.  If the IRS provides additional support, we will provide updates as they become available.

Please use the button below or call (833) 458-4015 to talk with our team.