We are getting reports from a number of our members that employers—struggling with the impact of business closings, a lack of customers, or other economic impacts due to the pandemic—are looking for some help. Based on results to a member survey, the impact could be catastrophic!
We received just over 230 responses—and three-quarters (76%) said that their small business clients had (already) approached them with concerns about plan termination/contribution funding (17% said “not yet”). That was consistent with a recent poll of ASPPA TPA/recordkeeper members, where a week ago 79% had heard from clients on the subject.
“Some are considering partial plan terminations. Some are halting matches. One is considering delaying match to year end,” commented one reader. “We’ve had clients considering changing ER contributions, but have not seen terminations yet. We do expect that we will begin to see plan terminations for many small businesses,” explained another.
“Many clients are eliminating the safe harbor contribution mid year in their 401(k) Plans,” noted one reader. “Also amending Cash Balance Plans to reduce funding obligation for 2020. “We have had no inquiries regarding termination but multiple inquiries regarding suspension of employer contributions,” said another reader.
“We may be fielding 20 plus calls a day right now with clients seeking alternatives to their funding and companies possibly shutting their plans down,” another explained. “Multiple now have inquired about halting at a minimum. Some even are amending their plan to no longer be a safe harbor plan to stop contributions,” commented another. “This is to error on the side of caution. All would experience more relief if they had the option to maintain their safe harbor status but be allowed to stop for the remainder of the year. “
“Most I have talked to are wanting to cancel their safe harbor match,” commented another.“Most have called and want to terminate the safe harbor match but not the plan,” said another. “Most are considering eliminating contributions, but are concerned with potential testing issues as a result,” explained another. “Yes, we have received several inquiries from clients both small and large looking at different contingency plans to keep their doors open. Often suspending the 401(k) is among those contingencies,” said another.
“We have had a handful of clients reach out to us with questions about suspending their match. Many plans are safe harbor plans,” commented another. “With business activity being stifled, they simply do not have the resources to fund their contributions.”
“Most questions are about deferring plan sponsor fees and/or a grace period to pay their recordkeeping invoice,” noted another. “They would like to avoid terminating the plan,” explained one reader. “A few started delaying funding as the safe harbor match was per pay calculation in the document but they would like to shift to fund at year end.” On the other hand, one reader noted that it had been “Just questions about suspending contributions and match at this point. It has only been a couple clients.” Another reader commented that “Only one client has inquired about suspending their matching contributions but have not taken action. It is my sense that they are evaluating their options. No one has mentioned terminating their plan.” Another echoed, “Most just want to be able to suspend matching contributions. None have talked about terminating their plan yet.“
What Percentage at Risk?
Those calls/inquiries notwithstanding, we asked NAPA-Net readers to opine as to approximately what percentage of their small business clients they felt were candidates for plan termination as a consequence of the corona pandemic (e.g. reduction in sales, reduced employee counts, reduced hours, forced closures)?
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While one-in-ten didn’t believe they had any candidates in that category, a plurality (38%) put that figure at 1%-10%, and nearly a quarter (24%) thought 11%-20% could be at risk—numbers, it should be noted, that were in line, if a tad above, estimates provided by the ASPPA polling (28% and 17%, respectively). Other responses:
10% - 21%-30%
7% - 31%-40%
5% - 41%-50%
4% - 51%-60%
1% - 71%-80%
1% - 61%-70%
How Many Clients at Risk?
Asked to put a count to those percentages, NAPA-Net readers responded:
38% - 1-5
12% - 6-10
9% - 11-15
4% - 16-20
3% - 21-25
Alarmingly, nearly one-in-ten said that “more than 100” of their clients could be at risk.
While the current environment presents challenges for employers of all sizes, small employers would seem to be at most short-term risk. Focusing on the plans with less than $10 million in assets, a weighted average of those results indicated that 32.4% of their small business clients could be impacted—nearly a third.
Applying that weighted average, according to year-end 2017 Form 5500 data, there are 662,000 DC plans, 571,000 401(k) plans. According to the most recent EBRI/ICI data, approximately 90% of those have less than $10 million in assets—and, extrapolating the findings above, nearly a third of those plans—more than 193,000 plans might be candidates for plan termination as a consequence of the Coronavirus pandemic. That, by the way, is not far off the projections based on the survey of ASPPA members.
We got SO many interesting and inciteful comments from SO many readers this week. Here’s a sampling:
No terminations, but lots of inquiries about employer contribution cessation—including for safe-harbor plans. Also concerns with partial plan termination issues for indefinite lay-offs/furloughs that might extend to employment terminations.
This may put a negative stigma on safe harbor as the couple conversations I’ve had with plan sponsor clients have been safe harbor plans, leaving less discretion for immediate changes to the employer match.
While none have suggested terminating their plans, we have several who have inquired about suspending their matching contributions due to the economic hits they’re taking.
Companies are asking for cost impact analysis of match discontinuation to deploy those dollars elsewhere, i.e. payroll, Med benefits, paid leave, etc.
Safe Harbor clients are opting to delay the funding of the contribution till year end, with a true-up as a 1st strategy. Non-Safe Harbor clients are contemplating halting contribution funding.
Reality is just starting to settle in that this is going to last more than a few weeks. I’m sure we will hear more about this as time goes by.
One has already alerted employees they will stop contributions within 30 days. Notices were sent.
Many small employers will face cash flow concerns during and after Coronavirus pandemic. This will impact any pending required contributions for 2019 plan year and the future of the plan starting with 2020 plan year. For small business, it will be imperative the qualified plans are preserved with a very little hassle on the current administrative burden so that it is not thrown out as a whole. Plan termination should be the last resort unless the business is closing down.
Top Heavy is going to be one of the bigger issues for clients who need to terminate their safe harbor provisions. This provision will be a fatal dagger to a lot of our groups and this is in my opinion where we need the biggest relief.
They are handling operations OK. The lack of business is hurting though. The lack of business translates to contributions/ funding.
Many are asking about what steps need to be taken if they decide to suspend the match.
None thus far. They realize we're all in the same boat.
Considering suspending match in lieu of terminating employees
We are just seeing the beginning of this reality settling in. Anything that can be done to help employers remain flexible will be desirable.
Clients not interested to terminate their plans, but are interested to know steps to stop their employer contribution. Clients with safe harbor plans assuming they will get relief with a mid-year stop if business requires.
Most of our clients that we've spoken with are hunkering down and feel this is going to be a short-term issue. We have a few that are feeling the effects, but all seem to think they will get through it
Thanks to everyone who participated in this week’s NAPA-Net Reader Poll. We got a TON of comments this week—you can check out some more here.