Effects of Economic Downturn on Your 401(k) Plan

This economy is forcing many companies to cut costs where ever possible, including staff reductions and reducing or discontinuing matching contributions. There are very complex rules that govern your plan. Taking a few minutes to review your plan will ensure that you are following those rules. Here are few things to think about:

Partial Termination-

As a general rule, partial termination occurs when an employer-initiated action results in a significant decrease in plan participation. As an example, a partial termination may be deemed to occur when an employer reduces its workforce by 20%. The law requires that all affected participants be fully vested in their account balance, which includes employer matching and profit sharing contributions.

Employer contributions-

Employers should review their plan documents to determine whether amendments need to be made to discontinue matching contributions. If your matching contribution is specifically noted in your plan document, you may need to amend and inform plan participants. If your contribution is entirely discretionary, you will not need to amend the plan. Look at how you are making your matching contribution, whether on a per-pay-period basis, quarterly or annually. From this you can determine at which point your can halt contributions.

Hardship withdrawals-

A participant must have exhausted all other available resources to be eligible for a hardship withdrawals. Hardship withdrawals are typically available to pay for medical expenses, purchase of principal residence, cost of tuition for post-secondary education, to prevent eviction or foreclosure and funeral expenses. If your plan allows for hardship withdrawals review your plan document carefully. Review documentation prior to approving a withdrawal. Also, it is common for plans to require suspension of salary deferrals into the plan for some period taking a hardship withdrawal. Be sure you have procedures in place to ensure this happens. A better option than a hardship is a participant loan, especially since it avoids the 10% premature distribution penalty.

Employee contributions-

Do not hold onto employee contributions. Small plans (under 100 participants) must now submit contributions with seven business days of the payroll date. Large plans (over 100 participants) must pay contributions into the plan as soon as administratively possible. Holding 401(k) funds too long could affect the performance of employees’ investments and may constitute fraud in the eyes of the Department of Labor. To ensure fiduciary responsibility, we suggest that you submit employee 401(k) contributions simultaneously with payroll taxes.

Audit Requirement-

The general rule is that plans with 100 or more participants at the beginning of the plan year are considered “large plans’ and are required to have an audit. Participants are not only those that are participating, but also employees who are eligible to participate but chose not to. If your plan currently requires an audit, but you have had a significant reduction plan participants, you must be under 100 participants at the beginning of the plan year to forgo an audit. Remember, terminated employees who still have account balances, count as a participant.