But such measures will mean little if the economy takes a turn for the worse. Should that happen, employees may be even more disgruntled if employers once again tinker with their retirement benefits. “One thing employers will find out is that they can play that card only so often,” says Bill McClain, a principal at Mercer.
Still, the next time company survival is in question, CFOs will likely subject 401(k) costs to fresh scrutiny. Says Aquion’s Stuart, “As painful as it was, I think we made the right moves. I just hope to never have to make them again.”
David McCann is senior editor for human capital and careers at CFO.
Amid the turmoil of the recession, the environmental engineering firm WRScompass suspended its 401(k) match two weeks before a scheduled conversion to a safe-harbor 401(k) plan, having already incurred all the legal and consulting costs associated with that move.
Under safe-harbor rules, if a plan sponsor gives all participants a contribution equal to 3% of their pay, it is exempt from having to pass the Internal Revenue Service discrimination test that determines whether highly compensated employees are making disproportionate contributions. A plan sponsor that fails the test must make taxable “corrective distributions” to the high-earning employees.
Getting the exemption was important to WRScompass because so many of its employees are engineers in the “highly compensated” category — earning more than $110,000 a year. The IRS says that such individuals can contribute, on average, no more than two percentage points of their pay above what the average lower-compensated employee contributes.
If the latter’s figure is 3%, the highly compensated staffers are limited to 5%. For someone making $110,000 a year, that’s $5,500 — almost $11,000 less than the government otherwise allows.
Yet WRScompass, observing the plunging economy’s effect on its business, canceled its move to a safe-harbor plan anyway, to avoid having to pay all employees the 3% match. Many of the highly skilled engineers who subsequently left were likely frustrated by their limited ability to save for retirement, CFO Richard Kelecy surmises.
The IRS test is an issue for a lot of companies. Of approximately 3,000 plans with potential compliance risks that The Hartford has reviewed, more than half have made corrective distributions, says Thomas Foster, national spokesperson for the company’s retirement plans group.
Meanwhile, companies face new compliance challenges regarding plan fees and how they must be disclosed to participants. For more on the requirements, looming deadlines, and harsh penalties that may result for companies that fail to comply, see A Sense of Disclosure.” — D.M.
As companies make a strong push to restore matching 401(k) contributions, it’s worth remembering that there are technical requirements that must be heeded. According to attorney Carol Buckmann of law firm Osler, Hoskin & Harcourt LLP, following these guidelines can help companies avoid future audit problems or the need to file under a voluntary correction program.
• If a company resumes a matching contribution midyear, it will have to do discrimination testing of both employee and matching contributions for the current plan year.
If a company suspended contributions under a safe-harbor 401(k) plan, it can’t resume a safe-harbor matching contribution midyear. Employers can resume safe-harbor status by sending out a new safe-harbor notice before the next plan year starts.
• If a company is not sure about the level of match it can ultimately pay, it could adopt a discretionary matching provision, with or without a guaranteed minimum match, and determine the total match (if any) before the end of the plan year. It could also require that contributions be made only from profits. However, a plan won’t meet the safe-harbor requirements if it has a purely discretionary match. There are other restrictions if safe-harbor matching contributions exceed the required match.
• Contributions must be allocated to the correct limitation year to avoid violating Section 415 maximum-contributions limits.
• Deductions can’t be prefunded by basing contributions on compensation not yet earned by participants.
• Employees must be notified promptly of any change to the employer-contribution rules.