Contribution holdups becoming a stark reality

Updated with clarification

While scores of retirement plan sponsors — among them Amtrak, Marriott International Inc. and Macy's Inc. — have suspended or delayed employer contributions to minimize the financial wreckage from the coronavirus, it isn't an easy decision or even an easy process, particularly for sponsors of safe harbor plans.

"I don't think any employer is relishing the need to cut back on their employer contributions," said Joy M. Napier-Joyce, an attorney with Jackson Lewis PC in Baltimore. "Given the financial pressures that a lot of them are under right now, they're finding it fiscally prudent to stop any outlay of cash that can be prevented in order to cover other costs like payroll."

For sponsors of safe harbor plans, especially, the decision is doubly complex. Sponsors of such plans are required to give participants 30 days' notice — unlike most other plans, which can suspend contributions immediately.

Giving the required notice not only stymies how quickly safe harbor sponsors can act to cut costs but may be difficult in an environment where human resources departments and businesses aren't functioning normally.

In addition, they must consider the challenge of non-discrimination testing, which they would now need to do if they were to stop contributions and lose their status as a safe harbor plan. One of the big attractions of using a safe harbor plan design is that it avoids non-discrimination testing.

"There are more questions I think from the safe harbor sponsors to understand what the ramifications are," Ms. Napier-Joyce said, referring to suspensions of employer contributions.

Industry trade groups are stepping in on their behalf, saying safe harbor plan design is very common among small- and medium-size businesses, those least able to weather the coronavirus crisis. The American Retirement Association, for example, is lobbying the Department of Treasury to allow sponsors to suspend or reduce contributions immediately, without the 30-day notice.

"Small businesses are encountering a cash-flow issue and the alternative to reducing employer contributions is outright plan termination," said Will Hansen, chief government affairs officer with the American Retirement Association and executive director of the Plan Sponsor Council of America in Arlington, Va.

Based on a survey of 111 record keepers and an analysis of Form 5500 data, ARA estimates that roughly 216,000 small retirement plans could be at risk of termination as a result of the coronavirus pandemic. The majority of the record keepers surveyed (84%) worked primarily with plans with less than $10 million in assets.

"We want to be able to get through this pandemic and ensure that companies are still operational and still operating their 401(k) plans," Mr. Hansen said.

The SPARK Institute Inc. is also lobbying the Treasury Department as well as the IRS and the Department of Labor, asking that they loosen the 30-day notice period to "within a reasonable time" or "as soon as practicable."

"It's not easy to get a notice to an employee who is quarantined or the business is closed," said Michael Hadley, an attorney with law firm David & Harman LLP in Washington. "Nobody had 30 days advance notice of how bad this was going to be, and how quickly businesses were going to have to shut down."

Trade groups are also looking to help small businesses avoid a partial termination of their plans, which occurs when employers reduce their workforce by more than 20% in a single year. The issue with partial terminations is that participants not yet fully vested in their company contributions would become fully vested when laid off, eliminating a potential source of money that employers often use to fund plan expenses or future contributions, according to industry experts.

"If somebody leaves before they're fully vested, those (non-vested) monies can then be used to offset future employer matching contributions or it can be used to pay for plan fees," said Greg Mykytyn, senior vice president at RIA firm Commerce Street Peak Advisors in Dallas. "If they do a partial plan termination, those non-vested monies that they were using are no longer there to use."

Partial terminations also raise legal questions about whether employers have to vest employees who have been furloughed, a concept that is "somewhat foreign" to most businesses, Mr. Hadley said.

Because it's unclear whether furloughed employees have been laid off, the question for regulators and legal experts is whether furloughed workers must be fully vested in the retirement plan, Mr. Hadley said.

To overcome the issue of partial terminations, the ARA is looking for regulatory relief that would give an employer the opportunity to regain the number of participants it laid off or furloughed at a certain date in the future.

The trade group is recommending that "a temporary period for the 2020 plan year be established whereby partial terminations are deemed not to occur if the plan sponsor's business has been affected by the coronavirus emergency and if those employees are rehired by Dec. 31, 2020."

The goal is to rehire the same number of people and not necessarily the same people, Mr. Hansen said.

As plan sponsors wait for regulatory relief, they can in the interim employ "tactical tools" to free up their cash flow while continuing to fund their retirement plan and their company contributions, said Dan Basile, head of retirement product at Ascensus LLC in Dresher, Pa.

Plan sponsors can, for example, use forfeiture accounts — the unvested money that employees forfeit to the plan when they leave — to fund plan expenses and employer contributions, he said. They can also tap ERISA budget accounts, which are plan-level accounts that capture excess income that's collected by a record keeper from investment managers, such as 12b-1 mutual fund fees and other fees that are embedded in the expense ratio of investment funds in the plan.

"They're collected and are in excess of anything that is funding a record-keeping bill or some other plan-level expense bill, and so it's there for the plan sponsor to use for eligible expenses," Mr. Basile said.

Business owners can also immediately stop their contributions to their own retirement accounts, Mr. Mykytyn said. "If they are over 50 years old and they have, say, 26 pay periods, they're probably putting in about $2,000 a month in order to get to that $26,000 (IRS) limit. So right there, that frees up $2,000," he said.

In addition, sponsors can shift any record-keeping, administration and investment adviser fees that they pay out-of-pocket to participants. "If they are in trouble financially, and they are currently paying those fees, they can change the fee structure to where they're now deducted from participant accounts rather than having to pay that themselves," Mr. Mykytyn said.

Mr. Basile, who also discusses with clients the possibility of shifting fees onto the plan, sees the option as a difficult one, much like the decision to suspend employer contributions. "Nevertheless," he said, "they do preserve the ability for plan participants to continue to avail themselves of the numerous other benefits that a retirement plan offers."