Reducing or Suspending Retirement Plan Benefits in the Time of COVID-19 – Questions Employers Should Be Asking

Even as governors in more than half the states issue “stay-at-home” or “shelter-in-place” orders, the spread of COVID-19 shows little sign of slowing. Across the country, employers are weighing options for managing the pandemic’s financial impact on their businesses. 

Some employers have turned to layoffs or furloughs as a means of cost-cutting. Others are considering reducing or suspending employer retirement plan contributions to lessen their financial concerns, and this article provides answers to some of the questions those employers should be asking.

Defined Benefit (Pension) Plans

We sponsor a pension plan – what are our cost-cutting options?

Employers sponsoring single-employer pension plans may amend their plans’ benefit or allocation formulas (on a going-forward basis). By reducing that formula, an employer will reduce the rate of future benefit accruals, affecting the benefits payable to participants. If an amendment significantly reduces future benefit accruals, the plan’s administrator must generally provide plan participants and beneficiaries (and, if applicable, any union representing such individuals) with advance notice of the change (a “204(h) Notice”).¹

What information should the 204(h) Notice include and when should it be provided? 

The 204(h) Notice must be written to be understood by average plan participants and must include sufficient information about the planned amendment to allow participants and beneficiaries to understand how their benefits will be reduced. It must also describe how the benefit or allocation formula applies both before and after the amendment, and may include examples illustrating the change.

The 204(h) Notice should generally be provided to participants and beneficiaries at least 45 days before the amendment’s effective date.

Is other relief available to pension plan sponsors?

The newly enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) offers some limited relief to single-employer pension plans. These changes are described in our article discussing the CARES Act’s benefits provisions. 

Defined Contribution (Code §§401(k), 403(b)) Plans

We sponsor a “safe harbor” Code §401(k) plan² – can we reduce or suspend employer contributions?

Yes, provided certain requirements are satisfied. A safe harbor §401(k) plan is deemed to pass nondiscrimination testing requirements if its sponsor satisfies certain contribution and participant notice requirements. To satisfy the contribution requirements, employers sponsoring safe harbor plans can provide participants with either eligible matching or nonelective contributions.

Safe Harbor Matching Plans. If a plan offers employees “safe harbor” matching contributions, the employer may reduce/suspend those contributions midyear if:

• It is “operating at an economic loss” during the plan year (as described in Code §412(c)(2)(A)<span>); or

• For any reason, if the plan’s safe harbor notice includes a statement allowing the employer to reduce/suspend safe harbor matching contributions during the year.

If the employer satisfies one of those requirements, it can reduce/suspend the plan’s safe harbor matching contributions by:  

• Adopting a plan amendment reducing/suspending the plan’s safe harbor matching contributions. The amendment may be effective no earlier than 30 days after the employer provides eligible employees with a supplemental notice describing the reduction/suspension (described below).

If the plan uses a pre-approved plan format, the employer should contact its vendor to prepare the needed amendment. The employer should coordinate the amendment’s effective date with the vendor, mindful of the timing for providing the supplemental notice to plan participants. The vendor can likely assist the employer with preparing and distributing the supplemental notice;

• Providing a supplemental notice to all eligible employees (not just current plan participants) explaining the amendment’s terms and planned effective date. The supplemental notice should also describe how participants can change their deferral elections in response to the plan’s amendment;
• Giving participants reasonable time after receiving the supplemental notice, but before the amendment becomes effective, to change their deferral elections;
• Amending the plan to provide that required nondiscrimination testing (ADP, ACP, and top heavy) will be conducted using the current-year testing method. The employer should work with its vendors to ensure such testing is completed; and
• Ensuring the plan met safe harbor requirements with respect to amounts plan participants deferred before the amendment’s effective date, prorating the annual compensation limit imposed by Code §401(a)(17), as applicable. 

Safe Harbor Nonelective Plans. Before the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, employers sponsoring safe harbor nonelective plans followed the procedures described above to reduce/suspend nonelective contributions midyear. The SECURE Act, however, eliminated the requirement that such plans provide annual safe harbor notices to participants. 

Thus, it’s not clear whether employers must provide employees with a “supplemental” safe harbor notice to reduce/suspend safe harbor nonelective contributions. Until the IRS issues further guidance, employers should consider providing eligible employees with a notice describing the planned amendment and the employees’ ability to change their deferral elections.

We provide matching contributions, but our plan isn’t a safe harbor plan. How can we amend our plan?

That will depend on the terms of the plan. 

Discretionary Match. If the plan gives the employer discretion to determine whether matching contributions will be made each year, a plan amendment won’t be needed – the employer can simply suspend matching contributions going forward. 

Since no plan amendment is required, the employer need not notify plan participants of the reduction/discontinuation of the match. However, some experts suggest employers should openly communicate with their employees about the financial hardships they are facing at this time. Providing employees with advance notice of the upcoming reduction/suspension of matching contributions may help them understand the employer’s rationale for making the change, and will allow employees to adjust their elective deferrals as they deem necessary.

Fixed Rate of Match. If the plan document specifies the rate of matching contributions, a plan amendment will be needed to implement any change. Further, depending on how the match is calculated, the employer should consider whether some participants should receive a “true-up” matching contribution for elective deferrals they made before the amendment. 

Advance notice of the amendment isn’t required in this case either, but the employer must provide plan participants with a summary of material modifications (“SMM”) describing the changes to the plan. Participants must receive the SMM within 210 days after the end of the plan year in which the amendment is effective. Given the current circumstances, employers may, however, prefer to provide the SMM to participants sooner, rather than later.  

(Although pension plan and safe harbor plan sponsors must provide employees with 204(h) Notices and supplemental safe harbor notices, respectively, before reducing or suspending plan benefits, note that they must still provide SMMs to plan participants.)

Unionized Employees

Our employees are represented by a union – will that change the amendment process?

The collective bargaining agreement governing an employer’s relationship with its unionized employees will likely describe the benefits they must receive under the employer’s retirement plans. Thus, changing the benefits provided to participants under those plans will likely be subject to bargaining with the union.