Suspending 401(k) Matching Contributions During Tough Times

Employers sponsoring 401(k) plans may be suffering difficulties funding their matching contributions during these trying economic times.  To provide relief, the IRS allows an employer experiencing a “substantial business hardship” to discontinue their matching contributions.

For purposes of determining whether an employer is facing a significant business hardship under section 412(c), the factors taken into account include:

  • the employer is operating at an economic loss;
  • there is substantial unemployment or underemployment in the trade or business and in the industry concerned;
  • the sales and profits of the industry concerned are depressed or declining, and
  • it is reasonable to expect that the plan will be continued only if the waiver is granted.

A minimum notice of 30 days must be provided to all eligible employees explaining the reduction or suspension of the contributions.   Eligible employees must be given a reasonable opportunity prior to the reduction or suspension to change their salary deferral elections.  The notice must explain the consequences of the amendment reducing or suspending the safe harbor, the procedures for changing salary deferral elections, and the effective date of the amendment.

The plan must continue to satisfy the safe harbor matching contributions through the effective date of the amendment.  In addition, the plan must be amended to provide that the ADP test will be performed and satisfied for the entire plan year in which the reduction or suspension occurs.  As a consequence, it may be necessary to issue refunds to the Highly Compensated Employees in spring of 2021.

If your plan has discretionary employer matching contributions, it is easier to discontinue contributions.  You may cease the matching contributions to the plan by way of corporate resolution or board directive with notice to your employees.  There is no 30 day notice requirement, but employees must be allowed to make deferral changes before the change is effective.

As always, remember that employees can stop their deferral contributions at any time.

If you would like additional information or to discuss the topics mentioned, please contact Stacey L. Spencer, QKA at 317-260-4421 or sspencer@greenwaltcpas.com.