More corporations are looking to temporarily halt 401(k) contributions, trying to cut costs as the coronavirus crisis hits their revenue and profits, labor attorneys said.
It’s another way companies are trying to contain mounting losses, along with millions of layoffs and employee furloughs. For workers, those moves put a big dent in family budgets and retirement plans, which are already battered by the stock market’s plunge.
Joy Napier-Joyce, head of the employee benefits practice at the law firm Jackson Lewis, said calls about canceling 401(k) matching ramped up over the past two weeks.
“In anticipation of an economic downturn, employers are looking at the ability to suspend those contributions for this year, or the near future, to help with expenses,” Joyce said.
A 401(k) plan is a retirement option offered by employers, which gives employees a tax break on money they set aside for their nest egg.
Depending on the employer’s 401(k) plan, contributions made to retirement savings could be matched by employer contributions. Typically, employers match a percentage of an employee’s contributions, up to a certain portion of their salary.
Many U.S. employers cut back on contributions to workers’ accounts during the recession in 2008 but raised them in recent years to attract and retain staff during a tight labor market.
Companies rattled by the spreading coronavirus pandemic are considering all options to stay afloat, including amending their promises to employees.
Scaling back on 401(k) contributions “has come up numerous times recently as a result of what’s happening to the economy,” said Jay Dorsch, employee benefits lawyer at Cozen O’Connor.
Businesses across all sectors are suspending or reducing contributions, employee benefits lawyers said. That includes retail, manufacturing, travel and hospitality, which are taking big hits as people stay home, cut spending and face layoffs.
“We’ve seen it from large manufacturing and retail to community health care hospitals,” Joyce said.
As intercity travel took a hit, Amtrak announced it cut routes, froze hiring and suspended 401(k) matching contributions in March. Marriott International and La-Z-Boy announced similar plans.
About 42% of U.S. employees have participated in a retirement plan that includes a 401(k), 403(b), 457 or other individual account plan, according to the Pension Rights Center, citing data from the Bureau of Labor Statistics’ National Compensation Survey in 2018. That compared with 22% of workers who participated in a pension plan.
Is it illegal for my boss to suddenly halt 401(k) contributions?
No, experts said, especially during a tremendous economic hardship.
Employers do not have to match any part of an employee’s 401(k) plan. Companies can argue that they can’t afford to put money into the accounts if they want to keep the lights on or keep staffers employed.
“If there is no cash in a business, that’s a strong argument,” said Dana Kravetz, firm managing partner at Michelman & Robinson.
Cutbacks are not going to happen overnight.
If you have a Safe Harbor plan that allows businesses to skirt certain IRS tests, your employer has to give you 30 days’ notice before backing away from its 401(k) contributions, experts said.
If you aren’t under a Safe Harbor plan, it still takes time for employers to cancel because of logistical planning with payroll administrators, Dorsch said.