Unexpected Retirement Plan Problems Due to COVID-19

Piggybank in mask with stack coin on wood.saving money concept.Published November 17, 2020 – One aspect of the current pandemic and subsequent business layoffs and furloughs that is not being talked about very much is the impact to corporate retirement plans in regards to the impact that those layoffs could have on a plan’s non-discrimination testing for the plan year 2020.  Although almost a year away, business owners should start thinking about how any business interruptions could negatively impact their 401(k) testing for plan year 2020 that occurs in 2021.

Every year, with certain exceptions, 401(k) plans need to conduct and pass a variety of compliance tests to demonstrate to the government that the plan is equitable. It needs to be equitable between all plan participants, including both the highly compensated and non-highly compensated employee groups. These tests can potentially limit how much a highly compensated employee can contribute to the plan or how much an employer has to contribute. Factors such as an employee’s annual compensation, the number of hours they worked in the year, the amount they contributed to the plan and any employer contributions they received all factor into the testing requirements and impact the results.

All of these factors could have been impacted by COVID-19 and the business interruptions that resulted. Business owners need to ask themselves the following:

  • Are you a business that had to layoff employees?
  • Did employee hours have to be cut back?
  • Did employees have to take pay cuts?
  • Was your business forced to lower or suspend employer 401(k) matching contributions?
  • Did the business owner front load plan contributions for themselves early in the year?

These are just a few of the business situations that could have resulted from COVID-19 that can impact 401(k) testing. All of these factors can lead to testing problems and potential failures for the plan year 2020. This could further lead to reduced contributions to business owners and/or key employees, or even result in the refund of employee deferrals or require additional employer contributions and costs to staff. The time to review and act is now. Adjustments can still be made in 2020 to minimize the negative impact to retirement plans and business owner’s retirement savings.

This article is an excerpt from Dopkins Employee Benefits Newsletter.  To read the complete content, please click here.

For more information, contact Chad O’Connell at coconnell@dopkins.com.

* Dopkins Wealth Management, LLC is a registered investment advisor owned by the partners of Dopkins & Company, LLP.

About the Author

Chad R. O’Connell AIF

Chad manages Dopkins’ retirement plan services group, which focuses on investment management, consulting and fiduciary governance services to corporations and not-for-profit entities. In addition, Chad also provides financial services to high net worth individuals and business owners.

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