On August 5, 2020, Exxon Mobil announced that it would be suspending the company’s matching of employee contributions for its 401k plan. BrightScope, a data-driven platform that analyzes and ranks employee retirement plans, puts Exxon Mobile’s 401k in the top 15% of its peers’ plans based on how quickly the plan helps employees get to retirement. Clearly Exxon Mobile’s plan is well-constructed and productive, the type typically supported by large companies with established revenue streams. Thus, if Exxon Mobil is cutting back its employer contribution will other companies follow suit? It seems they have: “Recent industry research says about 10%-12% of plan sponsors have suspended 401k matching contributions so far due to the pandemic, and nearly a quarter of companies are either planning to or considering suspending their match this year.”
With approximately a quarter of US companies considering some kind of modification of the 401k plans provided for their employees, we wanted to explore how to go about changing material terms within Employee Retirement Income Security Act of 1974 (“ERISA”)-regulated retirement plans.
Modifying an Employer’s Contribution to a 401k Plan
Essentially, the process comes down to whether or not your company is operating a Safe Harbor 401k plan. What is a Safe Harbor 401k? A Safe Harbor 401k is an ERISA and IRS regulated plan that meets certain notice and employer contribution requirements, and by doing so is exempted from the annual testing done by the IRS. The tests include the Actual Deferral Percentage Test, the Actual Contribution Percentage Test, and the Top-Heavy Test, all of which attempt to ensure everyone in the plan has fair opportunities to invest in the 401k and that highly compensated/key employees aren’t contributing significantly more to the plan than the average participant. By meeting the annual notice requirements, and the contribution requirements (employer contributions must vest immediately upon adding to the 401k), the plan does not have to engage in the onerous tests listed above. The reason for maintaining a Safe Harbor plan is to ensure the Plan does not need to go through the onerous testing every year, which allows the plan sponsor to save resources that would have been allocated to the accounting and back-office services needed to monitor and prepare the documentation required by regulatory authorities.
If the plan is a Safe Harbor 401k, you may suspend or reduce the employer contribution mid-year if: 1) the employer included, in the mandatory safe harbor notice sent to employees, language stating the plan reserves the right to suspend or reduce contributions; or 2) under Section 412(c)(2)(A) of the Internal Revenue Code the employer meets the definition of “economic loss”, meaning generally the employer is able to show its overhead and expenses exceed its income. If one of those two scenarios is met, the employer must send out a notification to employees at least 30 days, and no longer than 90 days, before the change is to happen and give the employees a chance to change their elections. Finally, the plan should pass a resolution amending the 401k plan to reflect the reduction in contributions.
If the plan is not a Safe Harbor plan, it may not be necessary to provide notice or amend the plan, especially if its documented as a discretionary employer contribution. For example, if the contribution is discretionary, the employer can decide to not make contributions for 2020. However, if the contribution is a non-discretionary fixed percentage, the plan sponsor should pass a resolution to suspend or reduce contributions, and notify plan participants according to the plan’s governing documentation. However, if the contribution is suspended indefinitely or permanently terminated, plan participants can argue that any contribution made by the employer should immediately vest. To be on the safe side, the plan should resume contributions at a later point as this helps guard against any arguments that the plan was terminated and thus all employer contributions should be immediately vested.While there are other more minor requirements and procedures needed to modify an employer 401k, the major requirements and suggestions discussed above should show that employers can easily modify their contribution, especially in times of need. COVID is putting significant stress on large businesses and -formerly- robust industries that normally do not usually experience this level of hardship. Modifying the employer contribution for a 401k is a valid and increasingly common way to momentarily relieve the economic pressure the company is facing. The keyword here is momentarily. Exxon may have temporarily suspended its employee contribution and addressed some of the COVID-related financial issues it is facing. In order to avoid some of the more severe penalties for indefinitely suspending their contribution, however, my money is on Exxon eventually bringing back its contribution during sunnier times. Hopefully, most employers who go down this path will too.