A Special Report on Retirement Plans: Reducing or Eliminating Employer Contributions

Reducing or Eliminating Employer Contributions

Due to the economic downturn, many employers are seeking ways to control expenses. To that end, employers are looking more closely at reducing or eliminating contributions to their retirement plans. Reducing or eliminating an employer contribution can be done; but needs to be done correctly and with an understanding of the consequences of such reduction or elimination. Furthermore, special rules apply if the employer is a party to a collective bargaining agreement.

The Correct Approach

401(k) Plans Matching Contributions

Many employers have already implemented or are planning to reduce or eliminate the matching contribution they have been making on employee salary deferral contributions to their 401(k) plans. If the 401(k) plan is drafted such that the matching contribution is discretionary, both in terms of the amount the employer will contribute and whether the employer will make a contribution, then no amendment is needed to the 401(k) plan document. If the employer has previously announced that it will be making a contribution, or historically the employer has been making such contributions, the employer should announce in advance that it will be reducing or eliminating the match. Employees should also be given the opportunity to change their salary deferral contributions.

If the matching contribution is not discretionary, then the 401(k) plan document needs to be amended to permit a reduction or elimination of the match. Such amendment will only have prospective impact. Rather than eliminating the ability to make a matching contribution, it is preferable to amend the plan document to make the match discretionary in order to provide the employer with the greatest flexibility with respect to matching
contributions going forward.

Key point: employees should be given advance notice and the opportunity to change their salary deferral contributions. Please note that the document should be reviewed to be sure employees can change the salary election contributions.

Safe Harbor 401(k) Plans

Many employers utilize a 401(k) plan design, which includes what is commonly referred to as a “Safe Harbor” contribution. A Safe Harbor contribution permits the plan to automatically pass the specialized non-discrimination testing required of 401(k) plans. There are two types of Safe Harbor contributions. The elimination or reduction of either of these contributions must be done in strict accord with the Internal Revenue Service (IRS) rules. Because Safe Harbor contributions are mandatory, any changes to a Safe Harbor contribution require a plan amendment.

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Special thanks to Malaika C. and Mary C., who provided this article and the Plansponsor.com article as supplements to EB 361.