Cash flow considerations related to defined contribution retirement plans under COVID-19
In the last three months, many employers have had significant decreases in their top line revenue and have attempted to cut costs to offset that revenue decrease. The IRS has provided relief to retirement plans through the CARES’s act to assist plan participants manage through these difficult times. Today, we wanted to share some strategies for managing cash flows as it relates defined contribution retirement plans from an employer perspective.
Utilization of forfeitures
Forfeitures result when employees are terminated prior to achieving full vesting as provided in the retirement plan document. The pandemic has caused employers to potentially eliminate certain workers which may result in an increase in forfeitures if they are not fully vested. The plan document will provide for the use of forfeitures, typically either to pay plan expenses, offset company contributions or reallocate to participants. From an employer perspective, the payment of allowed expenses from the plan may be a source of cash that can come out of the Plan rather than the plan sponsors bank account. Alternatively, the company contribution could be partially funded by forfeitures. Many companies will utilize forfeitures once a year simply because it is less of an administrative burden, however, it may be beneficial to the plan sponsor to use those forfeitures more frequently to help with the company’s cash flow.
Force out of participant balances
Many Plan sponsors will force out small balances related to terminated participants per the plan document once a year. The small balances in the plan may represent participant accounts that are not fully vested. Once those balances are paid out, it may result in an increase of forfeitures available to the company.
Company contributions for defined contribution plans
To the extent the Plan allows for the suspension of the company contributions, the Plan sponsor may wish to suspend it to assist with future cash flows. It is very important to review the plan document to ensure that the contributions can be suspended and if an amendment is required. Keep in mind if the 401k plan is a safe harbor plan, additional requirements need to be met to suspend employer contributions.
Timing of employer contributions
The IRS issued notice 2020-18 which provided for federal income tax returns due April 15, 2020 to have an extension to July 15, 2020. The notice extended the due date for payment of company contributions that would have been due on April 15, 2020 to July 15, 2020. If the company extends the return until October 15, 2020, the payment will be due October 15, 2020.
If you would like to discuss further, please contact us.