Review Plan Documents and More if Changing Employer Contributions to a 401(k) Plan (Coronavirus and the Law)


The COVID-19 outbreak has caused economic disruptions, furloughs, and job losses. Business downturns as a result of the pandemic may cause employers to look at reducing or eliminating employer contributions to the company’s 401(k) plan. Employer contributions to a 401(k) plan are either non-elective contributions or matching contributions. Those two types of contributions can be made as discretionary or “safe harbor” contributions. This article briefly outlines some of the planning and operational issues involved in employer contributions to 401(k) plans that employers likely will face in the coming months.

Eliminating or reducing discretionary contributions to a 401(k) generally is simple to accomplish, because no amendment to the plan document or summary plan description is necessary. The principal issue is providing adequate notice to the participants in the plan of the reduction or elimination of the contributions.

Eliminating or reducing safe harbor contributions is a more complex matter. Safe harbor contributions are made to allow the employer to avoid discrimination testing otherwise required of qualified plans, such as 401(k) plans. Safe harbor contributions are subject to rules that generally prevent the suspension or reduction of those contributions during a plan year.

Safe harbor contributions, however, may be suspended or reduced midyear (1) if the employer is operating at an “economic loss,” or (2) if the employer included in its required annual safe harbor notice to employees a statement that the 401(k) plan may be amended in the upcoming year to suspend or reduce safe harbor contributions.

For plan years beginning after December 31, 2019, how to implement the “preemptive” notice option is unclear. Under the recently enacted SECURE Act, for plan years beginning after December 31, 2019, an employer who makes non-elective safe harbor contributions is no longer required to provide an annual safe harbor contribution notice to eligible employees. The IRS has not yet provided any guidance as to how an employer suspends or reduces safe harbor contributions after the SECURE Act.

In any event, any suspension or reduction of safe harbor contributions cannot apply until all eligible employees receive a supplemental notice of the suspension or reduction of contributions. Further, the suspension or reduction of contributions cannot begin until the earlier of the later of the date the plan is amended or 30 days after the supplemental notice is provided to all eligible employees.

If an employer fails to make a safe harbor contribution, the plan’s qualification under the Internal Revenue Code may be jeopardized, leading to adverse income tax consequences for the employer and the plan participants. Further, a failure to make a safe harbor contribution may be a prohibited transaction or a breach of the employer’s fiduciary duty to the plan and the participants, resulting in economic sanctions against the employer.

Any decision to reduce or eliminate employer contributions to a 401(k) plan must be based on a careful review of the plan document and the relevant provisions of the Internal Revenue Code and ERISA. Third party administrators, plan trustees, and, if relevant, the sponsors of the prototype or volume submitter 401(k) must be included in the decision-making process as well. For additional considerations regarding potential changes to corporate 401(k) plans, contact Neil Birkhoff at

Read more legal updates on COVID-19 from Woods Rogers attorneys.


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