Devine Millimet | NH Law Firm

Retirement Plan Considerations

Patricia M. McGrath, Esq.

April 1, 2020

Employers are scrambling to make serious decisions in very short timeframes – how to keep the business running, how to manage employees, and how to reduce expenses as soon as possible, in order to keep the business afloat in the longer term.

At the same time, the federal government is providing assistance at a rapid clip.  The CARES Act is in effect as you read this.  Since then, relative to retirement plans, the federal government has provided even further relief.

Here are considerations for employers that sponsor retirement plans.  Some of this guidance has always been available.  This piece will italicize new information from the CARES Act and further guidance since then:

Can an employer reduce or suspend its contributions to its qualified plan?  It depends on the plan’s terms.

Defined contribution plans, like a 401(k) plan or a profit sharing plan, are governed by an “Adoption Agreement.”  The Adoption Agreement dictates who is eligible under the plan, when they become eligible, the benefits to which they are entitled, and the triggers for receiving those benefits. 

Employers have the option of making a matching contribution, to match some or all of the employees’ own deferral amount.  Some employers also make a separate contribution – a profit sharing contribution – driven by eligibility terms stated in the Adoption Agreement.

The Adoption Agreement can state a fixed percentage or formula for the employer contributions.  On the other hand, it may state that the employer may make “discretionary” contributions.  If the Adoption Agreement contains a fixed amount, then the employer may be limited in stopping or suspending contributions as fast as it would like, even when the economic world has turned upside down.  If, however, the employer’s Adoption Agreement provides for a “discretionary” contribution, then the employer has leeway about whether to make a contribution or not, and the amount of that contribution, if any.

The bottom line is that employers must examine the plan’s Adoption Agreement to review the ground rules that govern employer contributions.  If a change can be made to revise employer contributions, the next step is to determine how to communicate that with employees.

To date, there has been no federal guidance issued that generally suspends an employer’s obligation to fund defined contribution plans.  Already, however, there is discussion about a fourth bill to provide further relief, which may touch on this issue. 

Can participants take a loan, a hardship distribution, or an in-service distribution on account of COVID-19?  Again, the plan’s own terms will dictate the answer.  Defined contribution plans can elect to offer any of these kinds of distributions.  But it is not mandatory.  Employers will want to dust off their Adoption Agreement and become familiar with its terms, to assist employees with their questions and requests.

The CARES Act has increased the amount of a loan that a participant can take.  A participant may now borrow the greater of an amount up to $100,000, or up to 100% of their account value, within the 180-day window starting April 1.  This new amount doubles the previous loan amount limits, which allowed a participant to borrow the greater of an amount up to $50,000 or 50% of their account value.  In addition, participants with outstanding loans may be allowed to delay repayment of their loans into 2021.  Like any loan provisions, this is an option for employers to consider, not a mandate of the CARES Act.

The CARES Act has introduced a new form of distribution, a “coronavirus-related distribution.”  This new distribution is available to a “qualified individual.”  A “qualified individual” is a participant who certifies to the plan that they or a spouse or dependent has been diagnosed with COVID-19, or that they experience “adverse financial consequences” on account of COVID-19, such as being laid off.  This is also optional for plans to consider, and not mandated.  We will write more about this benefit separately in another alert.

We laid off a portion of our employees; does that affect our plan’s compliance?  Possibly.  Regulations that govern qualified plans monitor plans on the participants’ behalf.  For example, if an employer completely terminates its qualified plan, then everyone in the plan becomes 100% vested, even if they were not fully vested before the plan’s termination.  This is also true if the plan experiences a “partial plan termination.”  A partial plan termination occurs when a significant number of participants are terminated within a plan year, regardless of the reason for the terminations.  A good rule of thumb for a partial plan termination is the termination of 20% or more of the total number of participants in the plan within that plan year.  If the plan experiences a partial plan termination, then affected participants become 100% vested in their plan accounts, regardless of the plan’s vesting schedule.

The 20% turnover level is a guide, not an absolute.  Industries with routine turnover in this range may not have a partial plan termination, for example.  Employers whose plans may or will have a partial plan termination should get in touch with their third-party administrators, or TPAs, to alert them to this possibility so that the plan can address the now-100% vesting of a terminated participant’s account and to ensure that the plan’s annual reporting will be accurate.

To date, there has been no additional guidance about whether the rules for a partial plan termination will be modified.

Post-CARES Act guidance:

  • The deadline for adoption of a restated 403(b) plan is now delayed – from March 31 to June 30, 2020.
  • The deadline for adoption of pre-approved defined benefit plan restatements is delayed from April 30 to July 1, 2020.

The unifying message across these topics is:  stay in touch with your plan advisors.  Ask questions first, before you take steps that may trip you up after you take them.

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