COVID-19 Impact on Cash Balance Funding
If plan sponsors are concerned about 2020 contribution requirements for a Cash Balance plan, there are actions that can be taken. Because many of ABP’s plans are designed to require 1000 hours to accrue a benefit for the year, it is possible to make changes currently for calendar year end plans:
Lower Cash Balance Contributions
A Cash Balance plan can be amended to provide for lower contributions. However, be aware that if you maintain a 401(k) or Profit Sharing plan, required nondiscrimination testing takes into account both plans. For that reason, Profit Sharing contributions may still be required to meet certain IRS testing and minimum contribution requirements.
ABP can help evaluate specific plan circumstances and determine anticipated overall contribution levels that help meet plan sponsors' goals.
Eliminate Cash Balance Contributions
A Cash Balance plan can be amended to freeze benefits. The plan can subsequently be amended and unfrozen to resume contributions at any time.
It is important to note that freezing a Cash Balance plan does not necessarily eliminate a contribution altogether. Depending on the funded status of the plan, plans are still required to meet their plan document prescribed interest credit. To the extent that the plan investments do not meet that earnings rate, plan sponsors will have some minimum contribution that is allocated towards making up a portion of that missed earnings.
Despite this potential contribution, freezing the plan provides the most flexibility to plan sponsors. Although Safe Harbor or Top Heavy minimum contributions may be required in any associated 401(k) plan, Profit Sharing contributions would then be completely discretionary. As such anticipated cashflow for contribution purposes would be significantly lower for the 2020 plan year.
Although plans are normally frozen until a later plan year, contributions could be unfrozen for the 2020 plan year. For those plan sponsors that may be unsure of 2020 financial status, this can be a conservative safeguard until the business has a better handle on annual profits. An amendment could be adopted prior to year end to restore the contributions or implement a modified level of contributions.