Considering Employer Match Suspension

As businesses reopen and employees return to work, employers are wrestling with how to handle cash flow in unprecedented circumstances.  If you are considering suspending the employer match in your company’s retirement plan, you are not alone.  Can you suspend a match? Yes.  But that decision should not be made lightly.

The Plan Sponsor Council of America[i] conducted a snapshot survey of plan sponsors in early April, and found that 1 in 5 large employers (>5000 participants) are suspending their match and about 10.5% of small employers (< 200 participants) are doing the same.  As companies face a cash crunch in this global pandemic, suspending the match in the retirement plan may be the most feasible option compared to some of the other tough choices being faced.

Even if you are a safe harbor plan, you do have options for suspending the match if you are operating at an “economic loss”, or you have disclosed such a possible amendment in the annual safe harbor notice provided to participants.   Thirty-day employee notice is required regardless of reasons for the suspension of the safe harbor contribution.

Something significant to consider is the importance of the match for participants.  A properly designed match has proven to drive positive participant behavior and encourage more savings.  For instance, a 25-year-old earning $60,000 a year, getting a 5% match in their 401k would get $3,000 that year.  The real impact can be seen long-term.  After 40 years when the participant is 65 years old, theoretically earning an average of 7% a year, that $3,000 could be closer to $45,000.  As you can see, the long-term impact on the participant’s retirement account is meaningful.

In the wake of the 2008/2009 financial crisis, a number of companies, affecting about 5% of all 401k participants, suspended their 401k match between January 2008 and November 2009[ii].  As the economy recovered, three quarters of employers reinstated the match.  So, match suspension has been a viable option for companies facing liquidity issues in the past.  But we certainly encourage everybody to understand the short-term behavioral effects, and the long-term savings effects for participants.  We would also encourage you to set up a process to reinstate the match when able.

[i]https://www.psca.org/sites/psca.org/files/uploads/Research/snapshot_surveys/CARES%20Act%20Snapshot%20FINAL.pdf

[ii] https://www.marketwatch.com/story/employers-start-to-suspend-their-401k-match-2020-04-21