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IRS Finalizes Amendments to 401(k) Safe Harbor Regulations
11/22/2013

In new final amendments to the 401(k) safe harbor regulations (here), the IRS has provided some additional flexibility on mid-year reductions or suspensions of safe harbor contributions but also has added some new requirements. The regulations apply to amendments adopted after May 18, 2009, except that the additional requirements for mid-year reductions or suspensions of safe harbor matching contributions apply for plan years beginning on or after January 1, 2015.

Background. Safe harbor 401(k) plans are exempt from certain nondiscrimination testing requirements but must meet specific requirements related to employer contributions and vesting and must provide an annual notice. The employer contribution requirement is satisfied through either a matching contribution or a "nonelective" contribution. Safe harbor plan provisions generally must be adopted at or before the beginning of a plan year and must remain in effect for the entire plan year.

Because safe harbor plan provisions must remain in effect for the entire plan year, employers generally have been prohibited from reducing or suspending safe harbor contributions in the middle of a plan year. A limited exception has been available for safe harbor matching contributions, which could be reduced or suspended with at least 30 days advance notice, so long as participants were given an opportunity to change their deferral elections. Before 2009, however, safe harbor nonelective contributions could not be reduced or suspended during the plan year. Proposed regulations issued in 2009 permitted a narrow exception allowing for reduction or suspension of safe harbor nonelective contributions in cases of substantial business hardship.

The new regulations finalize the 2009 proposed regulations and add new requirements for a mid-year reduction or elimination of safe harbor matching contributions. 

Reduction or Suspension of Safe Harbor Matching Contributions. Under the final regulations, the following requirements must be satisfied to reduce or suspend safe harbor matching contributions during the plan year:

  • The employer must either (1) be operating at an economic loss, or (2) include a statement in the annual safe harbor notice saying that the plan may be amended mid-year to reduce or suspend the safe harbor matching contributions.
  • Eligible employees must be provided a supplemental notice describing the amendment that reduces or suspends the safe harbor contribution (and addresses some other technical requirements).
  • The amendment reducing or suspending the safe harbor contribution is effective no earlier than 30 days after the supplemental notice is provided.
  • Eligible employees must be given an opportunity to change their deferral elections.
  • The Plan must be amended to provide that nondiscrimination testing will be satisfied for the entire plan year.

The first of these requirements (that the employer must either be operating at an economic loss or describe in its annual safe harbor notice that it is reserving the right to reduce or suspend contributions) is new, as applied to safe harbor matching contributions. As noted above, it applies for plan years beginning on or after January 1, 2015. Until that time, the prior standards remain in place, meaning a reduction or suspension may occur without regard to the employer's financial condition or advance notice.

Reduction or Suspension of Safe Harbor Nonelective Contributions. Under the final regulations, the requirements to reduce or suspend safe harbor nonelective contributions during the plan year are the same as the requirements outlined above for reducing or suspending safe harbor matching contributions. However, the requirement related to economic hardship is not new as it relates to nonelective contributions, so it is effectively immediately. The ability to state in the annual safe harbor notice that the employer reserves the right to reduce or suspend the safe harbor nonelective contribution is a favorable change that will allow employers to reduce or suspend a safe harbor nonelective contribution without regard to economic hardship. 

 


Editors
Don Berner Image
Don Berner, the Labor Law, OSHA, & Immigration Law Guy
Boyd Byers Image
Boyd Byers, the General Employment Law Guy
Jason Lacey Image
Jason Lacey, the Employee Benefits Guy
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