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COVID-19 (Coronavirus) Response: 401(k) Questions, Part II

March 23, 2020
Employee Benefits Advisory

401k graphicThe workplace and other employment consequences of responding to COVID-19 (coronavirus) will raise questions about 401(k) plan administration. We addressed some questions in a recent advisory. Here are additional questions that may come up soon.

Can the plan be amended to allow loans or hardship withdrawals?

Yes. Many plans allow loans, hardship withdrawals or both. If your plan does not, the plan can be amended to allow either or both. The availability of hardship withdrawals, however, would be a protected benefit, which could not be eliminated in the future except as to future contributions. Employers should carefully consider this before amending the plan to add hardship withdrawals.

Can matching or other employer contributions be reduced or suspended?

Yes, in many cases, but this depends on the type of contribution, and it may also require a plan amendment.

Safe harbor contributions. Safe harbor matching and nonelective contributions normally cannot be reduced or suspended during the year. There are two exceptions. One exception is if the annual safe harbor notice to employees included a statement that the safe harbor contributions might be reduced or suspended during the year. The other exception is if the employer is operating at an economic loss. Each of these exceptions requires a plan amendment, a notice to employees at least 30 days before the effective date and a reasonable opportunity for employees to change their elective contributions after they receive the notice.

Traditional contributions. Traditional (i.e., not safe harbor) matching and other employer contributions normally can be reduced or suspended for any reason. If the amount of the contribution is completely discretionary, the employer may simply exercise this discretion. If the amount of the contribution is determined under a formula, however, as is the case with most matching contributions, the situation becomes more complicated because the contribution normally cannot be reduced or suspended after employees have already satisfied the requirements for receiving it. For example, if making an employee contribution is the only requirement for receiving the matching contribution, the matching contribution can be reduced or suspended with respect to future employee contributions but not with respect to employee contributions that have already been made. Also, if the contribution formula is specified in the terms of the plan, a plan amendment is required to reduce or suspend the contribution. Finally, although no particular form of notice is required, appropriate communication to employees is important.

Can a layoff or furlough result in accelerated vesting of matching and other employer contribution accounts?

Yes. As with any other significant workforce reduction, a layoff or furlough involving a significant number of participants for more than a brief period of time may cause a partial termination of the plan. This would require full vesting of matching and other employer contribution accounts of the affected participants.

For more information, please contact your primary Varnum attorney or any member of the employee benefits practice team

For answers to additional 401(k) questions, see COVID-19 (Coronavirus) Response: 401(k) Questions, Part I.

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