Why 2025 Might Require Mid-Year Changes to Your Retirement Plan

Retirement plan design is typically reviewed in advance of and updated at the start of a new plan year, but 2025 is proving to be anything but typical. With the uncertainty stemming from the new presidential administration and the resulting federal funding freezes, reductions in federal contracts, executive orders impacting workforce policies, and widespread restructuring in Washington, many organizations — especially those tied to government contracts, grants, and regulatory agencies — are facing financial and operational shifts they didn’t fully anticipate.

 For plan sponsors, this means waiting until year-end to make modifications might not be the best course of action, and in certain instances may be problematic. Whether it’s changes in contribution strategies, plan expenses, compliance obligations, or participant behavior, there are strong reasons to revisit your plan design mid-year rather than risk falling behind.

 What have we seen since January 20th, 2025:

Uncertainty: Safe Harbor Matching Removal

 When a business is experiencing financial strain due to budget constraints, workforce reductions, or shifting revenue streams, it may be necessary to reconsider your retirement plan levers. When that strain is sudden, immediate, and potentially unrelenting, it's vital to look to costs within your benefits. For the retirement plan, your Safe Harbor contribution may be a quick way to step-back from committed expenses. A client received a majority, but not bulk, of their revenue from a federal contract. They needed time to evaluate the impact to their organization while minimizing budget outflows. We worked with the plan, and their administrative team to remove the safe harbor contribution provision.

 A Safe Harbor retirement plan is designed to automatically satisfy certain annual nondiscrimination testing requirements by ensuring employer contributions are immediate and usually fully vested (some Safe Harbor matching provisions allow for a short vesting schedule) — but in exchange for that flexibility, employers typically commit to (and write into the plan document) a set contribution structure for the entire plan year, which across its various iterations is at least 3.5% of employees deferrals.

 In certain situations, the IRS allows for mid-year suspension or reduction of Safe Harbor contributions under two conditions: if the company is operating at an economic loss or if employees were notified in advance that changes could occur. If financial realities are making it difficult to maintain the committed match, plan sponsors may need to assess whether a mid-year removal or reduction is the best course of action and ensure compliance with required participant notices and plan amendments. While removing a Safe Harbor match can help manage costs, it also means the plan will be subject to the annual nondiscrimination testing — so careful consideration and fiduciary oversight are essential before making a change. Fortunately, despite being a safe harbor plan for many years, the recordkeeping partner had completed the historic compliance testing, so we had the moot historical results to give us a confidence that historically the plan would pass their testing without the Safe Harbor matching contribution being a requirement. While they removed the stated matching, their intention is to continue to fund the same matching formula into 2025, should funding allow. We'll meet again later this year to begin discussing plans for 2026.

 Certainty: Plan Termination

Like the client above, another client was experiencing financial strain, except this client received over 95% of their organizational funding from a U.S government agency that was suddenly closed. Due to the suddenness and the nature of their business funding, they had no other choices but to close the business and begin to terminate the retirement plan.

 When a company shuts down, its 401(k) or 403(b) plan cannot remain open indefinitely, and plan sponsors must take swift action to ensure that participants can access their funds in a compliant and orderly manner. Plan termination involves notifying participants, distributing all plan assets, and filing a final Form 5500 to formally close out the plan. Depending on the circumstances, loans may need to be repaid immediately, employer contributions may be halted, and investments may need to be liquidated.

 While business closure is never an easy decision, handling a retirement plan termination with care is essential to protect both employees' retirement savings and the plan sponsor’s fiduciary responsibilities.

 Competing Legislative Priorities:

At the same time, shifts in Washington are driving potential regulatory and compliance challenges with existing regulation like the Fiduciary Rule or the Biden-era ESG Rule. This is made further cumbersome by the barrage of executive orders, DOGE staffing impacts - especially at IRS and DOL - which could create unexpected changes in compliance obligations, tax treatment, or fiduciary expectations. And, not to be forgotten, and generally off the administration's radar, but also past bipartisan legislation such as SECURE 2.0 implementation continues to roll out in 2025 and beyond.

 Monitoring Participant Behavior

Beyond compliance, participant behavior in uncertain times can signal the need for plan adjustments. Are employees making more hardship withdrawals? Are contribution rates declining due to financial stress or household income changes? If so, it may be time to rethink plan design elements like default deferral rates, hardship withdrawal policies, or participant education resources to better support employees during economic uncertainty. Monitoring participant behavior and website usage trends

 For businesses experiencing workforce reductions or hiring freezes, now is the time to reconsider how plan eligibility, employer contributions, and forfeiture utilization align with a changing employee base. If hiring is slowing, are auto-enrollment or eligibility rules set up in a way that still makes sense? If budgets are tighter, are employer contributions structured in a sustainable way?

Mid-year plan changes aren’t the norm, but 2025 isn’t shaping up to be a normal year. Economic, political, and policy shifts are creating real challenges for businesses, and plan sponsors need a knowledgeable partner to understand their options and ensure their retirement plans keep up.

Let’s make sure your plan is ready — not just for the long haul, but for the realities of today. We help plan sponsors assess whether plan design adjustments make sense and guide them through the process of aligning their retirement plans with today’s business realities. If you’d like to review your plan and ensure it’s set up for success in 2025, let’s start the conversation.

 By partnering with an experienced advisor, plan sponsors can navigate these changes effectively, ensuring the plan remains compliant and competitive. Whether it’s adjusting investment menus, optimizing plan design, or staying ahead of new legislative requirements, a retirement plan advisor helps to protect the long-term health of your company’s retirement plan. If you're interested in working with a retirement plan advisor, reach out today at Christina.Tunison@lpl.com to learn how we can support your plan’s long-term success.

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

 #706088 Mar2025