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Davis Brown Employment and Labor Law Blog

Matching Employee Retirement Contributions during a Pandemic - March 23, 2020

Many employers are looking at their financial sustainability for the near future as COVID-19 impacts our economy and are looking at ways to cut costs. A common question we are receiving - can we stop matching our employees’ 401(k) or 403(b) contributions?

There has been no law change relating to these types of pension benefits. If your plan has discretionary matching contributions, you can likely suspend those with adequate communication to plan participants.

If your current retirement plan has non-safe harbor mandatory matching contributions stating the company will match an employee’s contribution at a certain percentage, you are likely still bound to that unless: 

  1. the plan document allows suspending contributions for certain limited circumstances, or 
  2. you can amend the plan documents. 
Even in those situations, typically the company must provide notice to the affected employees prior to any change taking place.

Some retirement plans have safe harbor contributions, meaning that the company complies with a safe harbor to eliminate the need for certain nondiscrimination testing. If a retirement plan has safe harbor testing, eliminating matching gets more complicated. Even if you could amend the plan to eliminate the matching contributions, you would then have to do the nondiscrimination testing that the safe harbor contributions had previously allowed the employer to avoid.

If the company misses certain matching contributions due to financial difficulties, that could cause the plan to become disqualified. If this happens, the employer should consult their attorney to discuss the appropriate mechanism to fix such plan failure. The IRS has a system in place dictating how various plan failures can be corrected.

Similar provisions apply for profit sharing contributions as well. Employers should review their current plan to determine whether profit sharing contributions are discretionary or mandatory, and determine if any changes to the plan are appropriate at this time.

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