Dealing With Safe Harbor Contributions During Business Hardships

  • Employer strategies
  • 4/1/2020

When your organization is faced with unexpected hardship — whether it’s due to the coronavirus pandemic or another unforeseen circumstance — you may able to make changes to your qualified retirement plan.

Key insights

  • If you sponsor a qualified retirement plan, you may be able to cease safe harbor contributions.
  • There are certain steps to which you need to adhere when eliminating safe harbor contributions.
  • Your third party administrator or investment advisor can help guide you through the process.

Businesses dealing with uncertainty during these difficult times may have some flexibility related to mandatory safe harbor contributions in qualified retirement plans.

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If you sponsor a qualified retirement plan with a safe harbor feature, you may be able to cease safe harbor contributions for the remainder of 2020. If you’re considering this option, your third party administrator (TPA) or investment advisor can provide options. Follow these guidelines to retain your plan’s qualified status.

Thirty days’ advance notice is required when eliminating safe harbor contributions

Thirty days prior to ceasing a safe harbor provision, you must:

  • Formally amend the plan to remove the safe harbor provisions
  • Take company action to adopt the amendment
  • Execute the amendment and take employer action (30 days prior to the end of the safe harbor contributions)
  • Distribute a notice announcing the contribution cancellation to participants at least 30 days prior to the date safe harbor contributions cease
  • Continue safe harbor contributions until 30 days have passed

The IRS requires a 30-day notice period in order to allow plan participants to adjust their level of salary deferral contributions. Remember to notify record keepers of this change as well.

Consider these steps when discontinuing safe harbor contributions

Be ready for nondiscrimination testing

During the year in which you eliminate safe harbor contributions, the retirement plan is subject to nondiscrimination testing (also referred to as ADP/ACP testing) for the entire year. If you fail the nondiscrimination test, you may need to provide refunds to certain highly compensated employees who participate during 2020. In 2020, a highly compensated employee is defined as:

  • Any employee who owns more than 5% of the sponsoring employer in 2020 or 2019
  • Certain relatives of any employee who owns more than 5% of the company
  • Employees who earned more than $125,000 in 2019

Your TPA can review your particular situation to forecast any potential testing failures.

Determine next steps if it appears you may fail a nondiscrimination test

Amend your plans, if appropriate, to incorporate other features that may help to minimize the effects of a test failure. These features are limited, but your TPA is available to provide guidance.

Review the need for a minimum employer contribution

If the retirement plan is top heavy, you may need to make a minimum employer contribution for non-key employees. In general, a plan may be considered top heavy if more than 60% of the account balances are held by key employees (certain owners and officers). In most cases, using a safe harbor feature provides the employer an exemption from this minimum required contribution, so removing the safe harbor contribution from a top heavy plan could mean the employer will need to fund this contribution. However, if key employees do not contribute to the plan during the year, this minimum contribution will not be required. Your TPA can provide information on your plan’s top heavy status.

Reinstating the safe harbor provision

When it comes time to consider bringing back the safe harbor contribution, keep these points in mind:

  • You may re-adopt a safe harbor contribution for 2021.
  • If you re-adopt a safe harbor contribution, you will need to amend your retirement plan no later than 30 days prior to the start of the next plan year (December 1, 2020, if your plan is a calendar-year plan), and distribute a Safe Harbor Notice no later than the December 1 deadline.
  • The SECURE Act allows employers to take a wait-and-see approach to reinstating safe harbor contributions later in the year, while requiring a 4% of compensation contribution retroactive to January 1, 2020.

How we can help

Consult the industry professionals at CLA for more information on your qualified retirement plan options during these times. We’re here to help.

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