COVID-19 Client Alerts:
August 31 Important Date for Additional COVID-19 Relief for Retirement Plans, Part 2
This is Part 2 of our two-part alert focused on recent IRS relief for retirement plans due to the COVID-19 Pandemic.
In June, the IRS issued two important notices providing additional relief with August 31 noted as an important deadline in both notices.
The first IRS notice, Notice 2020-51, discussed in Part 1 of this alert, enables participants to repay 2020 required minimum distributions (RMDs) that were received prior to enactment of the CARES Act, so long as repayments are made by August 31, 2020.
In today's alert, Part 2, we discuss the second IRS notice, Notice 2020-52, which was issued on June 29, 2020 and provides temporary relief by permitting certain safe harbor plans that are amended by August 31, 2020 to reduce or suspend safe harbor contributions after the start of the plan year.
Contributions to 401(k) plans must not discriminate in favor of highly compensated employees (HCEs). A plan must meet certain nondiscrimination tests that compare the average percentage of deferrals of nonhighly compensated employees to that of HCEs known as the Actual Deferral Percentage (ADP) test. Additionally, if the plan provides for employer matching contributions those contributions must also be tested in a similar manner under the Actual Contribution Percentage (ACP) test. A 403(b) plan that provides employer matching contributions is also subject to the ACP test.
A safe harbor plan is a plan that is designed to provide all nonhighly compensated employees with a minimum required employer contribution sufficient to avoid having to be tested under the ADP or ACP tests. The two general safe harbor formulas are an employer nonelective contribution for all nonhighly compensated employees of 3% of compensation or an employer matching contribution that matches the first 3% at 100% and the next 2% at 50% (for a total match of 4% on a 5% deferral).
In order to be a safe harbor plan, there are limits on changing the employer contribution formula during the plan year. Under regulations, amendments to the formula may be made only under two circumstances: 1) if the employer is operating at an economic loss for the plan year; or 2) if the safe harbor notice provided employees for the plan year states that the safe harbor contributions may be reduced or suspended during the plan year. If either requirement is met and the employer wishes to reduce or suspend the contributions, it must provide a supplemental notice of the reduction/suspension to employees at least 30 days in advance of the change becoming effective. This supplemental notice gives employees enough time to decide whether to change their elective deferral.
Employers could not foresee the COVID-19 Pandemic or its economic impact on the nation. Many employers are facing unexpected financial issues trying to stay in business. Saving money by reducing or suspending contributions to 401(k) plans could help in this regard. However, employers may not have had the forethought to include the statement about reducing or suspending safe harbor contributions in their notice to participants. Likewise, they may not yet know whether they will operate at a loss for the plan year.
In Notice 2020-52, the IRS provided temporary relief from some of the amendment and notice restrictions for safe harbor plans. First, the Notice clarifies that any contributions for HCEs are not considered safe harbor contributions. Therefore, mid-year changes to reduce or suspend safe harbor contributions to HCEs does not impact safe harbor status. Second, the Notice allows an amendment to reduce or suspend all safe harbor contributions mid-year even if the economic loss or notice requirements in the regulations are not met, provided the amendment is adopted by August 31, 2020. If the amendment is adopted, the plan becomes subject to ADP/ACP testing for the plan year.
If the safe harbor contributions being suspended or reduced are nonelective employer contributions (as opposed to matching contributions), the 30-day requirement for supplemental notice will be considered met if the notice is provided no later than August 31, 2020 and the amendment is adopted no later than the effective date of the suspension or reduction. However, if matching contributions are being reduced or suspended there is no relief from the 30-day requirement because the employee’s need time to decide whether to change their elective contributions. Therefore, the supplemental notice must be provided at least 30 days before the effective date of the amendment.
Action Needed. Employers with safe harbor plans that wish to reduce or suspend safe harbor contributions (or already have) need to meet the notice requirements and amend the plan in accordance with Notice 2020-52. This means action must be taken by August 31, 2020, which is right around the corner from now.
Copyright © 2020, Murphy Austin Adams Schoenfeld LLP. All rights reserved. Please be assured that we make every effort to make certain that the information contained in this alert is current at the time this email was delivered. Because laws and legislation are constantly changing, please contact us if you are unsure whether this material is still current. Nothing contained herein should be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended to be for general information purposes only. We assume no liability in connection with the use of the information contained in this article. Given the rapidly evolving nature of legal and governmental responses to the COVID-19 pandemic, unfolding events likely will supersede many of the issues discussed in these updates. We encourage you to contact our lawyers directly for the most current information and counsel regarding legal and governmental responses to the COVID-19 pandemic. Please contact us to answer any questions you may have.