Companies looking for ways to reduce their expenses and improve cash flow during the COVID-19 pandemic are asking whether it is permissible to suspend or reduce contributions to their defined contribution retirement plan. As usual, the answer is "it depends."
|Suspending profit sharing & money purchase plan contributions
Profit-sharing plans or money purchase plans that promise the company will make a stated contribution amount each year, such as 5% of compensation, can be amended mid-year to change the contribution formula. The amendment can always be applied prospectively with respect to compensation earned after the effective date. For example, if the amendment is effective August 1, 2020, participants would be entitled to an allocation of 5% of compensation earned through July 31, and 0% for compensation earned after July 31.
Many of these plans require that the employee must be employed on the last day of the plan year to be entitled to the contribution. A plan with this "last day" rule could be amended retroactively to the first day of the plan year because no one will accrue the right to the contribution until the last day.
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