Freezing or Suspending Matching Contributions: Requirements and Timing
DC plan sponsors hit hard by the recent economic environment are evaluating if reducing or suspending matching contributions is prudent. The presence of an employer match both supplements and encourages employee retirement savings.
Plan sponsors have been more likely to decrease or suspend matching contributions during periods of economic hardship. This was seen in the 2001 recession and during the Global Financial Crisis (GFC). The Center for Retirement Research at Boston College estimated that almost 5% of plan participants were impacted by reduced or suspended matching contributions between January 2008 and November 2009. Another industry survey focused on large plans found that 11% of surveyed employers, with average assets of $580 million, suspended their matching contributions during the GFC.
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The decision to freeze or suspend a contribution may be complicated by whether it is a safe harbor or a non-safe harbor match. Safe harbor plans can reduce or suspend employer contributions if the safe harbor notice previously distributed indicated that such contributions could be reduced or suspended, or the employer is operating at an economic loss for the plan year. Safe harbor plans must provide notice 30 to 60 days in advance. Also, the plan cannot make the change if it is three months prior to a plan year end.
Non-safe harbor plans can suspend the match generally, but they should refer to how the plan document is written and how much discretion is given. The plan document may describe a set formula or timing, which means the plan sponsor would be required to amend the plan document and update the summary plan description and/or summary of material modifications. However, if the plan document grants discretion, the employer may have greater ability to make changes without a formal plan amendment.
There is some evidence that suspending or decreasing the matching contribution may reduce plan participation and savings rates. However, the prevalence of automatic enrollment has increased dramatically over time and may mute the impact on participation.
Plan sponsors exploring contribution reductions should consider the flexibility of the plan design and plan document. Other important considerations are employee perception and retirement readiness.