IRS Issues Final Regulations on Reducing or Suspending 401(k) Safe Harbor Contributions
By: Cynthia Boyle Lande
On November 15, 2013, the IRS issued final Regulations covering the reduction or suspension of 401(k) safe harbor contributions. These Regulations build on other final Regulations issued in 2004 and proposed Regulations issued in 2009.
The new Regulations describe the steps that employers must follow to amend a 401(k) to eliminate employer safe harbor contributions mid-year. Employer safe harbor contributions may take the form of non-elective contributions paid entirely by the employer (“non-elective contributions”) or employer contributions which match employee contributions (“matching contributions”). Treasury Regulations typically require that a safe harbor 401(k) plan (whether employer contributions are matching or non-elective contributions) have a 12-month plan year. As a result, employers cannot typically eliminate the safe harbor element from a plan mid-year.
• Provides employees a supplemental notice explaining the suspension at least 30 days prior to the effective date of the suspension and allows employees a reasonable opportunity after receiving the notice to change their deferral elections;
• Continues to make safe harbor matching contributions until the effective date of the amendment; and
• Amends the plan to satisfy ADP and ACP testing (as applicable) and actually satisfies those tests for the entire plan year.
The 2004 Regulations did not, however, allow a similar suspension of safe harbor non-elective contributions.
The new Regulations allow employers to amend 401(k) plans to suspend safe harbor non-elective contributions as well so long as the requirements listed above are satisfied and either of the following is true:
• The employer is operating at an economic loss for the plan year, or
• The employer includes with its safe harbor notice distributed to employees prior to the beginning of the plan year a statement that the employer may amend the plan during the plan year to reduce or suspend safe harbor non-elective contributions so long as the reduction or suspension does not apply until at least 30 days after all eligible employees receive a subsequent notice of the reduction or suspension.
These new Regulations are retroactively effective as of May 18, 2009.
To ensure consistency among various safe harbor 401(k) plans, these new requirements also will apply to safe harbor plans with matching contributions beginning January 1, 2015.
The 2004 Regulations allow employers to amend 401(k) plans to suspend safe harbor matching contributions if the employer does all of the following:
What Employers Should Do:
This Year: Employers with safe harbor 401(k) plans providing for employer non-elective contributions should consider modifying the notice that they will provide to employees prior to the beginning of the next plan year. If an employer making non-elective contributions to a safe harbor 401(k) plan does not include the statement described above in its safe harbor notice for the upcoming plan year, the employer will not be able to reduce or suspend non-elective contributions during the year unless the employer is operating at an economic loss.
Next Year: Employers with safe harbor 401(k) plans providing for matching contributions should consider modifying the notice that they will provide to employees prior to the beginning of their first plan year beginning after December 31, 2014. Beginning January 1, 2015, failure to include the statement described above in safe harbor notices for the upcoming year will prevent employers from reducing or suspending matching contributions during the year unless they are operating at an economic loss.
If you have any questions regarding the new IRS rules on reducing or suspending safe harbor contributions or on 401(k) compliance generally, you should contact your BrownWinick employee benefits attorney.