Employer Sponsored Retirement Plans During Difficult Economic Times
By: Joanna Fenske, QPA, QKA
Many employer sponsored retirement plans have been impacted by the downturn of our economy. As a result, many companies have made the decision to either reduce contributions that they have been providing to their employees, or stop them all together. Some plan sponsors have even felt the need to terminate their existing plan. While this may provide relief to the plan sponsor’s finances, these reduced or suspended contributions can potentially cause headaches for the plan sponsor that they may not have anticipated.
To illustrate, we’ll look at some of the testing that is required for retirement plans. Discrimination testing is required each plan year for plans that allow employee 401(k) contributions, or pre-tax deferrals. The purpose of the test is to determine if the highly compensated employees (HCEs) in the plan as a group made contributions at a greater than acceptable rate when compared to the non-highly compensated employees (NHCEs) as a group. If the test fails, a common method for correcting the failure is to issue refunds of a portion of the deferrals to the HCE class of employees. As a result, the HCEs are no longer getting the full benefit of the retirement plan.
As a way around this discrimination testing, many plans adopted safe harbor contribution provisions. By either making a 3% profit sharing contribution OR a 4% matching contribution to eligible participants, highly compensated employees could make the maximum 401(k) contributions allowed by law ($16,500 for 2009, $22,000 for 2009 if at least age 50) without having to worry about receiving a portion of this money back as a refund. Safe harbor contributions must be declared at least 30 days prior to the beginning of each plan year, and these contributions are not subject to a vesting schedule. Once the contribution is declared for the year, the plan sponsor is obligated to make the contribution.
With the decline in the economy, many plan sponsors who made the safe harbor election for the 2009 plan year were suddenly faced with the very real possibility that they would not be able to meet this safe harbor contribution obligation. Due to the overwhelming number of plan sponsors that were facing this problem and the resultant financial strain, the IRS issued proposed regulations in May of 2009 to allow for some relief which was not previously available to all safe harbor plans.
Although with the proposed regulations the contribution requirements would remain in effect through the plan change date, it could allow the plan sponsor some financial relief towards the end of the plan year. As a consequence, the nondiscrimination testing discussed previously would be in effect for the entire year once again, with the HCEs running the risk of receiving refunds.
In conclusion, it is apparent that employer sponsored retirement plans are not immune to the troubled economy. However, with proper planning and the help of a retirement plan professional, it may be possible to salvage your plan until your business begins its recovery.
Joanna Fenske, QPA, QKA, is a senior manager with Qualified Plans, LLC. Joanna can be reached at jfenske@qplans.com, or at 912-356-1120.
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