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Employers Need a Break From Required Contributions, Pension Group Says

Officials ask that employers that are required to make a 3 percent contribution to their employees’ plans so they can get safe-harbor provisions be allowed to suspend the contribution because of economic hardship.

February 24, 2009
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The American Society of Pension Professionals & Actuaries is asking the government to give employers a break from rules that require many companies to contribute 3 percent to their employees’ 401(k) plans.

Officials at the Arlington, Virginia-based society wrote a letter to the Department of the Treasury and the Internal Revenue Service asking that employers that are required to make a 3 percent contribution to their employees’ plans so they can get safe-harbor provisions be allowed to suspend the contribution because of economic hardship.

Under the Pension Protection Act of 2006, employers that contributed 3 percent annually to employees’ 401(k) plans didn’t have to meet “non-discrimination” or “top-heavy” rules meant to prevent plans from favoring their higher earners.

In the past, the IRS had limited the maximum deferral by highly compensated employees to make sure that lower-paid employees received at least a minimum benefit in plans in which most of the assets were owned by higher-paid key employees. If companies failed to pass certain tests, they were required to return money to highly compensated workers.

Now, employers that contribute the 3 percent to workers don’t have to take these tests. But the problem, according to officials of the American Society of Pension Professionals & Actuaries, is that many companies are struggling to contribute 3 percent to their 401(k) plans.

Under existing regulations, employers that can’t afford to contribute to their plans have no other recourse than to terminate the retirement plans.

The organization is asking the government to allow employers to suspend their contributions, though they would still have to show that the firm isn’t favoring highly compensated workers.

“It’s pretty bad, and a lot of employers are really considering it. Times are tough,” said Brian Graff, the group’s executive director and chief executive.

“You’re talking about a lot of employers who are freezing payroll, and 3 percent is a lot of money,” he said.

Filed by Lisa Shidler of Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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