Employee Benefit Plan Issues During COVID-19 (Part 1)
May 15, 2020
In the first of this four-part series on employee benefit plan issues in the age of the coronavirus, Denise Finney, a partner in EisnerAmper’s Pension Services Group, discusses the impact on employers’ 401(k) plans, unintended consequences of reducing or eliminating contributions, and some employer best practices.
DP: So these are, without a doubt, some challenging times in which we currently live, and I'm sure the pension area isn't immune. I know that liquidity is on everybody's mind. So what are you seeing from your clients in the way of cost containment?
DF: It certainly is challenging. I recently read a post with a picture of a boat in a storm with the caption, "We are not all in the same boat, but we are all weathering the same storm."
DP: I like that.
DF: Employers are not all in the same boat, so they're taking different approaches. The most common, what we're seeing, is eliminating nonessential spending. The easiest is travel related expenses, they're being reduced due to physical distancing. And some employers are returning or renegotiating payments for their unused leased equipment, fleet vehicles, or delaying or canceling capital improvement project. Employers are also talking with their banks, their lenders, their vendors about payment deferment. They're also cutting back on payroll costs, or having temporary pay cuts, cutting back hours, while we're also seeing furloughs and layoffs. In my area of specialization, employers are looking to reduce costs associated with other employee benefits such as the 401k audit plans.
DP: Okay. So are you seeing employers reducing or eliminating altogether contributions on 401ks?
DF:Yes. There are some employers that are eliminating it if they're operating at a loss, while others are considering eliminating or reducing. It all depends upon the employer contribution, how it's set up. Some are discretionary. Some are non-discretionary. Some match on a contribution payroll-by-payroll basis. And other plans are safe harbor, depending on what type of plan they have and how it's set up in their plan document. They might have to do some additional planning to get to the point where they can reduce or eliminate their employer contribution.
DP:So for our listeners who aren't familiar, tell us what you mean by non-discretionary and safe harbor.
DF:Sure. A non-discretionary contribution, it's a required contribution and it'd be documented in the plan. Generally, they're fixed. It's an annual contribution. Whereas a safe harbor, although it is still a required contribution, it's generally based on the employee, what they contributed, or a percentage of an employee's annual compensation. One of the differences is that safe harbor contributions, those are vested immediately, whereas the non-discretionary contributions could be subject to a vesting schedule.
DP: Okay. How about any other trends or concerns that you're hearing from clients?
DF:Yeah. Employers are concerned if they've got a safe harbor plan, they're concerned about losing their safe harbor status and rightfully so. If a plan is no longer a safe harbor, they would be subject to plan testing, that could make them give refunds to certain individuals in the plan. They would also have to give notice to participants, at least 30 days advance notice, before suspending that safe harbor contribution.
DP:Okay. So I realized that when it comes to clients, one size doesn't fit all, but are there some best practices that you're advising them?
DF:Absolutely. Number one, communication. It's key. We're encouraging our clients to communicate, have discussions with their service providers. That means their record keeper, their ERISA counsel, us as auditors, before moving on to make a decision about changing their 401k audit plan. Generally, what's required when they do change the plan is a board resolution, a plan amendment, and a notice to participants. However, we have to be careful because these decisions aren't necessarily risk-free. And unfortunately, there could be some unintended consequences. For example, they could fail their non-discrimination testing, or the IRS could decide that it's an operational failure based on the facts and circumstances, participant communication's plan language, that the employer unconditionally promised a contribution to the participants.
DP:Well, that's interesting. So I thank you for your insights, Denise. You have an interesting perspective on all of this. So thank you and stay well.
DF:Thanks, Dave. You, too.
DP:Thank you for listening to the EisnerAmper podcast series. Join us next time when we continue our discussion with Denise, focusing on pension plan terminations.