According to a poll conducted by Plan Sponsor magazine in March of 2009, 16.7% of the polled employers had reduced or suspended their 401(k) match as a result of the falling economy. Another 5.8% indicated that they were considering a change to the company matching contribution and another 6% had actually increased matching contributions for 2009, a third of those as a substitution for other reduced benefits. However, an overwhelming majority of those polled expected no changes to the existing company match.
As many of our clients have experienced declining revenues, they have reacted by imposing various cost-cutting measures. Several have reported one to two rounds of staff layoffs. In order to avoid further layoffs and the loss of key personnel who will be needed when the economy rebounds, company management has turned to other cost-saving measures. Employee benefits, particulary health care and pensions, are substantial cost items for most companies. Many have been limiting health plan benefits (by adding higher deductibles and co-pays) to reduce premium costs over the past ten years. A number of the companies have either suspended 401(k) matching contributions for the remainder of 2009 or are considering doing so. Hewitt Associates announced in a recent press release that companies can save an average of $1,500 per employee per year on a typical 50% match on deferrals up to the 6% formula.
Should you consider a change to your employer 401(k) match?
There are a number of considerations that a company should evaluate before modifying its 401(k) match. For example, rather than suspending the match entirely, employers might consider temporarily reducing the match, say by 50%, to maintain employee morale and to encourage continued saving.
If you decide to make a change, how do you do it? Are there legal restrictions?
- If you have plan participants who are covered by a collective bargaining agreement, you may need to bargain with the union before making any change in benefits.
- You will also need to consider any current plan restrictions on making changes to elective deferrals. Will employees be able to make a change or revoke a deferral election if the company stops matching, or is there a limited window in the plan to do so?
- If your plan has elected the safe harbor plan design under Code Section 401(k) (12) with a matching contribution, the IRS requires at least 30 days advance written notice to employees before a change can take effect. A board resolution and written amendment is required to suspend the safe harbor match. If the safe harbor match is reduced or suspended, the employer must perform non-discrimination testing for the entire plan year. Corrective distributions may be required if any of these tests are failed. If you have been relying on the safe harbor election to avoid top-heavy requirements, you may also need to make top-heavy minimum contributions for the year the safe harbor election is revoked.
- If the plan does not have a safe harbor matching formula, but has a matching formula written into the plan document, the employer will need to formally amend the plan documents (via board action and a written plan amendment) and provide notice to employees consistent with the ERISA Summary of Material Modification requirements (within 210 days following the end of the plan year). However, we recommend employers provide advance notice so as to give employees an opportunity to revoke or modify deferral elections in response to the employer action.
- If the plan has a discretionary matching formula, a change typically requires board action (in some cases a committee action) and communication should be given to participants to allow them to revoke, reduce or increase their elective deferrals in response to this change.
We have had a number of clients who sponsor a safe harbor 401(k) plan with a fixed 3% of pay non-elective employer contribution. Under current Internal Revenue Service (IRS) regulations, there is no means of suspending this contribution during a plan year in which a safe harbor election is in effect. The only means of prospectively eliminating this non-elective contribution is to terminate the plan. An employer terminating a 401(k) plan may not adopt another defined contribution plan within 12 months from the date of termination. According to ASPPA, a trade association of plan advisors, the IRS is expected to issue relief, by a notice or other release in the next month or so, allowing suspension of these contributions without terminating the plan. Failure to follow the plan document and IRS regulations could lead to plan disqualification. Employers should proceed carefully before taking any action that may affect existing retirement obligations.