Retirement plans are not immune to the pandemic and its effects, and that includes nonqualified plans. A recent Plan Sponsor Council of America webinar discussed issues affecting nonqualified plans during the time of COVID-19.
Bruce J. McNeil, Partner, Stoel Rives LLP; E. Matthew Maier, Vice President, Lockton Companies, LLC; and Jason Stephens, Senior Director, Executive Benefits Practice Lead, CAPTRUST offered their insights in a panel discussion.
Terminations and Freezes
A plan sponsor which seeks to terminate a program must terminate all similar programs, panelists emphasized. Participant distributions cannot take place earlier than 12 months from the date of termination but must be made before 24 months have passed.
The driving forces behind terminating or freezing a plan are HR and financial considerations, said Maier, adding that freezes are more common.
So how can plan sponsors freeze a deferred compensation plan? In general, panelists said, plans can be frozen at any time, but deferral elections are irrevocable for the tax year in which they are made. Exceptions to this rule include:
- cancellation of deferrals due to disability;
- unforeseeable emergency; and
- 401(k) hardship if the nonqualified document requires deferrals to cease.
Employer Match
If the employer match is discretionary and the employer seeks to suspend the match, it simply can stop making the contribution to participant accounts. However, if the employer match is defined, it may be necessary to amend the plan or for there to be a board resolution in order to suspend contributions; in such a circumstance, it is considered best practice to consult with legal counsel.
Stephens added a cautionary note, remarking that, “suspending matches can have a short-term benefit, but there could be longer-term consequences.”
Plan Funding and Liquidity Issues
“There are a number of moving parts to these issues,” McNeil remarked. For instance, if the plan sponsor is actively setting aside assets to informally finance the plan, the company has the discretion to stop. But not all third-party administrators’ platforms can handle this change. And changes could adversely affect the plan sponsor’s financial statements.
If making distributions now would adversely affect financial stability, what options do plan sponsors have? The easiest solution, the panelists said, is to delay distributions to later in the current tax year. And a going concern exception may allow further delay; however, panelists suggest consulting with legal counsel in this regard.
Furloughs vs. Layoffs vs. Separation from Service
Changes in the size of a workforce through furloughs, layoffs and separation from service have been one of the economic effects of the pandemic. “The numbers have been staggering. It’s a huge, huge number,” McNeil remarked,
But there are nuances. McNeil noted that layoffs are different from furloughs, which may not be a separation from service for which a distribution can be made. “Employers are going to have to look at what ‘separation from service’ means,” he said.
Unplanned Distributions
Panelists addressed how participants can take an unplanned distribution. Participants can take a withdrawal in the event of an unforeseeable emergency. If the plan does not currently contain a provision allowing such withdrawals, such a provision can be added at any time—even for current balances.
McNeil noted that the process of determining an unforeseeable emergency is fact-specific and may be different for each person, so it is important that a plan sponsor review each individual’s situation and not apply the determination to all plan participants. “This is why an employer cannot act preemptively” in this matter, McNeil said.
Tips
Panelists offered some tips and suggestions:
- If adverse business issues arise or continue, review the plan document for options that would allow stopping an employer match or contributions, or freezing or terminating the plan.
- As the Coronavirus pandemic continues, participants may be looking for options that would allow stopping deferrals or taking withdrawals in response to unforeseeable emergencies. Review the plan document for available options or be aware if amendments would be needed.
- Review the financing strategy for the impact of market volatility and/or overall business performance; objectives may have changed.
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