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April 13, 2020

COVID-19: Cost-Cutting, Cost-Deferral Options for Employer Retirement Plans

The economic crises caused by COVID-19 have prompted employers to look for ways to defer or reduce their costs of doing business. For many employers, sponsoring a retirement plan presents significant ongoing costs. This alert examines ways that employers can reduce or defer those costs.


Many profit-sharing, 401(k), 403(b), and similar plans obligate employers to make matching or non-elective (i.e., profit-sharing) contributions. Both single-employer and multi-employer pension plans require employer contributions. Different funding rules apply to different types of plans. An employer’s cost-cutting and cost-deferral options depend, in large part, on the type of plan the employer sponsors or participates in.

In all cases, an employer’s ability to defer or reduce retirement plan costs depend on the Internal Revenue Code, including amendments to the code made by the recent CARES Act and on the terms of the plan. An employer cannot take advantage of a cost-cutting or cost-deferral tool permitted by the code if the plan states otherwise. In all cases, the employer should consult the plan document and, if necessary, amend the document to permit the use a specific cost-cutting or cost-deferral tool.

The options described in this alert applies only to employer contributions. If the plan permits employees to defer their own compensation to the plan, the employees may decrease or suspend their contributions as provided in the plan document. The employer must deposit employee deferral contributions as soon as they can be reasonably segregated from the employer’s assets.

Suspending Contributions

Certain defined contribution plans—such as 401(k) plans, 403(b) plans, and profit-sharing plans—allow the employer to determine whether, and in what amount, it will contribute to the plan in any given year. If the plan contains such discretionary language, the employer may generally cease making employer contributions to the plan until the employer chooses to resume those contributions.

If the employer’s defined contribution plan provides for fixed employer matching or nonelective contributions, the employer must make those contributions unless it amends the plan to suspend or discontinue them. A plan amendment may not eliminate an employer contribution that an employee has already accrued (i.e., earned). Therefore, such an amendment might apply prospectively only. Whether an employee has accrued the right to an employer contribution as of the effective date of an amendment depends on the terms of the plan.

For example, if the plan states that an employee will share in the employer’s contribution only if employed on the last day of the plan year, the employee’s right to the contribution will not accrue until that date. Similarly, if the plan states that the employee must work a specific number of hours during the year to share in the employer contribution, the employee’s right to the contribution will not accrue until the employee works the required number of hours. An employer may suspend contributions retroactively to the first day of the plan year with respect to any employee who has not accrued the right to that year’s contribution.

Additional Requirements for “Safe Harbor” 401(k) Plans

“Safe harbor” 401(k) plans require employers to make safe harbor contributions to the accounts of participants and are exempt from certain otherwise applicable nondiscrimination requirements. An employer may suspend safe harbor contributions if the employer experiences a substantial business hardship (under rules that allow for waiver of funding standards for pension plans) and the employer provides special notice to the affected employees; or the safe harbor notice that was provided in 2019 (for the 2020 plan year) included a statement of the employer’s authority to reduce or suspend safe harbor contributions mid-year.

Freezing Defined Benefit Pension Plans

An employer may not suspend contributions to a defined benefit pension plan. However, if the plan is a single-employer pension plan, an employer may generally amend the plan to suspend or freeze the future accrual of benefits if the amendment is adopted before participants earn (i.e., accrue) the right to a benefit for the year. Adopting a freeze amendment may not have an immediate impact on funding, particularly if the plan is not fully funded.

Employers must provide notice of a freeze amendment to affected participants at least 45 days before the effective date of the amendment. The advance notice period is 15 days for “small” pension plans (i.e., a plan with fewer than 100 participants). Many pension plans require a participant to complete 1,000 hours of service during a plan year as a condition of earning a benefit for that year. For calendar year plans, a full-time employee is likely to reach this threshold by the middle of May, so immediate action may be required. If the 45-day notice requirement applies, a 2020 calendar year plan would need to provide the necessary notice by April 15. An amendment that is effective as of the middle or end of May should be sufficient to cease accruals for the year for most if not all participants.

An employer that sponsors a single-employer pension plan may also temporarily defer contributions to the plan as described below

An employer that participates in a multi-employer pension fund or any other collectively bargained plan may not unilaterally freeze future benefit accruals under the plan.

Deferring Contributions

The code states that an employer may make its contribution to a defined contribution plan at any time prior to the due date for filing its tax return for that year, including extensions.  Assume, for example, that a for-profit “C” corporation uses a calendar year as its tax year and sponsors a 401(k) plan that provides for fixed matching contributions. Unless the plan states otherwise, the corporation may defer making its 2020 matching contributions until April 15, 2021—the due date for filing its corporate tax return). If the corporation files an application for automatic extension to file its return, the deadline to make its 2020 contribution to the plan is extended to October 15, 2021.

Different contribution timing rules apply to single-employer defined benefit pension plans. If the plan had a funding shortfall for the preceding plan year, the employer is required to make quarterly contributions. The CARES Act provides temporary relief from this requirement. Under the act, an employer may postpone any minimum funding contribution that would otherwise be due in 2020 until January 1, 2021, provided that the employer pays interest on the deferred contributions. The CARES Act provides no funding deferral for employers that participate in multi-employer pension plans.

An employer may not defer its contribution if the plan states the employer will make its contribution earlier. For example, if a 401(k) plan states the employer will make matching contribution on a payroll-by-payroll basis, the employer must do so unless it amends the plan to eliminate the requirement.

Terminating the Plan

Terminating a plan is the most drastic step an employer may take to reduce retirement plan costs. Employers should approach this option with caution. Termination is a complex process that involves its own administrative costs and burdens. Employers may not terminate a single-employer pension plan without fully funding all accrued benefits under the plan. Employers that participate in multi-employer pension plans must also pay their share of all accrued benefits upon withdrawal from such plans.

If you have any questions regarding the content of this alert, please contact Ray McCabe, partner, at or another member of the firm’s Employee Benefits Practice Area.

We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. You can reach our COVID-19 Response Team at


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