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IRS Offers Relief for Employer Retirement Plan Contributions

Posted on June 30, 2020

Employers now have more flexibility when it comes to suspending or reducing some retirement plan contributions because of pandemic-induced hardship, thanks to a new IRS notice.

Notice 2020-52, 2020-29 IRB 1, aims to “provide employers with more flexibility during the COVID-19 pandemic” when it comes to reductions or suspensions of safe harbor contributions to 401(k) and 401(m) retirement plans, while also retaining some protections for those plans’ participants, according to the IRS.

Ordinarily, employers with a safe harbor plan under section 401(k) or section 401(m) that submit a midyear amendment to the plan to reduce or suspend contributions must either be operating at a loss or have included in the plan’s safe harbor notice a statement that the plan may be amended at some point during the plan year and that any suspension or reduction in contributions wouldn’t take effect without at least 30 days’ prior notice.

Under the IRS notice, however, neither failure to meet the operating at a loss requirement nor failure to meet the supplemental notice requirements will be treated as a failure to meet the requirements if an amendment is adopted between March 13 and August 31 this year.

“An employer may be uncertain as to whether it is operating at an economic loss for the plan year and, due to the unexpected nature of the COVID-19 pandemic, the employer may not have foreseen the need to have included a statement in the plan’s safe harbor notice that safe harbor contributions may be reduced mid-year,” the IRS explained.

Aliya Robinson of the ERISA Industry Committee, whose organization had sought those changes in early April, said the notice should come as welcome relief to employers trying to navigate the economic challenges of the pandemic.

“Plan sponsors — companies in general — are looking to save where they can, but do as little harm as possible while doing that, especially if you’re not certain about how long the pandemic’s going to last,” Robinson told Tax Notes. Giving them the flexibility to reduce or hold off on retirement plan contributions for a period of time is preferable to cutting salaries, furloughing workers, or eliminating jobs altogether, she explained.

Another option employers may consider is reducing or suspending contributions on behalf of highly compensated employees only. “If you’re looking for ways to save money, you don’t want to harm those who would need it the most, which would be your non-highly-compensated employees,” Robinson explained.

In a clarification, the IRS affirmed in the notice that a midyear change in contributions on behalf of highly compensated employees doesn’t constitute a reduction or suspension of safe harbor contributions. However, that change would be deemed a midyear change subject to the safe harbor notice and election opportunity requirements set out in Notice 2016-16, 2016-7 IRB 318, according to the agency.

As such, the IRS indicated that an updated safe harbor notice and election opportunity must be provided to highly compensated employees.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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