This article considers several questions employers may be asking about ways to reduce corresponding costs with respect to employer-sponsored qualified retirement plans, like 401(k), 403(b), and pension plans. (Other options may also be considered, like terminations of employment as described here.) For purposes of this article, the employer is assumed to be the plan sponsor of the applicable retirement plan.
Can and how do we reduce costs if we have a defined contribution (401(k) or 403(b)) plan?
The most common way employers reduce costs for their defined contribution plans is by reducing or suspending employer contributions, such as matching or non-elective (profit-sharing) contributions. The discussion below focuses on matching contributions but generally applies in a similar manner to non-elective contributions (though differences may apply). No matter the kind of contribution or the amount of reduction, the first thing to do is to check your plan document to determine what kind of contributions your plan provides for and what the parameters of those contributions are.
Your plan provides for safe harbor matching contributions.
For plans in this category, employers can reduce or suspend these contributions if:
- The employer is operating at an “economic loss” during the plan year, or
- The safe harbor notice distributed previously included a statement allowing the employer to reduce or suspend the safe harbor contribution (sometimes referred to as a “reservation” or “maybe not” statement).
A plan amendment is generally needed to follow through on this reduction or suspension. In addition, the sponsor needs to provide a supplemental notice to affected participants at least 30 days in advance of the effective date of the reduction or suspension, and the plan is then required to pass normal nondiscrimination testing on a current year basis for that plan year. (Also, and notwithstanding the supplemental advance notice requirements, a safe harbor plan must also provide participants with an updated summary plan description (SPD) or a summary of material modifications (SMM), which serves as an amendment to the SPD, as described further below under “Your plan provides for matching contributions but isn’t safe harbor.”)
If the plan uses a pre-approved plan format (previously referred to as master, prototype, or volume submitter plans), then the employer should contact its vendor to prepare the needed amendment, working with its legal counsel to ensure valid timeliness and substance. Notably, the employer should work closely with the vendor when implementing the amendment’s effective date, being mindful of the timing requirement for providing the supplemental notice to plan participants, as we explained previously for reducing costs during the pandemic.
Your plan provides for matching contributions but isn’t safe harbor.
Discretionary match. If the plan document gives the employer discretion to determine whether annual matching contributions will be made, a plan amendment shouldn’t be needed. Instead, the employer can simply reduce or suspend matching contributions for that year and any future years as it deems necessary or appropriate. The employer should review the corporate documentation approving the prior year’s discretionary matching contribution to see if a superseding corporate action is needed. For example, if the company’s prior board resolution stated that the discretionary match will be 100% of the first 5% of compensation contributed, and that this formula will remain in effect until changed by the board, then board action will be needed to reduce or suspend that contribution.
In this case, no plan amendment is required but employers should review the terms of the plan’s SPD to see if updates or changes are needed or recommended, for instance, if the SPD discusses past practices or employer intentions, as well as consider proactively sending participants an informal notice or similar communication about what may occur, especially in light of difficult financial uncertainties as a result of nationwide and international tariffs. (If such updates or changes are made, then the employer must generally provide participants with an updated SPD or an SMM describing such changes.) Such communication, which can be provided after the fact (i.e., no advance notice is required) can help set employee expectations far in advance and may allow them a better opportunity to adjust their elective deferrals as they deem appropriate.
Fixed rate of match. If the plan document specifies the rate of matching contributions, a plan amendment will be needed to implement any reduction or suspension. In addition, depending on how the matching amount is calculated, the employer might consider whether participants should receive a “true-up” matching contribution for elective deferrals made before the amendment.
In this case, employers are not required to provide advance notice of the amendment, but it must provide participants with an updated SPD or SMM describing the changes, generally within 210 days after the end of the plan year in which the amendment is effective, though best practice and good employee relations suggest providing notice as soon as reasonably practicable after implementing the change.
Can and how do we reduce costs if we have a defined benefit (pension) plan?
As we explained previously, employers sponsoring single-employer pension plans may amend their plans’ benefit or allocation formulas on a prospective basis. By reducing the formula, employers reduce the rate of future benefit accruals, affecting the benefits payable to participants. If the amendment significantly reduces future benefit accruals, the administrator generally needs to provide participants and beneficiaries (and any union representing such persons, if applicable) with advance notice of the change, as noted before. (And like a defined contribution safe harbor plan, a defined benefit plan must also provide participants with an updated SPD or SMM, as described above under “Your plan provides for matching contributions but isn’t safe harbor.”)
Can and how do we reduce costs if our employees are represented by a union?
You should check the terms of the applicable bargaining agreement because that governs the employer’s relationship with its unionized employees and likely describes the benefits they must receive under the employer’s retirement plans. If necessary, you would need to bargain the reduction or suspension of employer retirement plan contributions or pension accruals with the union. Provided consent from the union is needed and achieved, the applicable descriptions and procedures above would then otherwise apply.
