I have recently had two separate employers tell me that they wanted to stop making safe harbor matching contributions to participants in their 401(k) retirement plans in the middle of a plan year. The employers had very different reasons for wanting to eliminate their safe harbor match mid-year, but they had identical stories about what their plans’ institutional record keepers told them when they asked the record keepers what procedures to follow to terminate the match. Both employers were told that terminating a safe harbor match mid-year was not permissible and that they could only terminate the match effective for the next plan year.
Under the tax code, a 401(k) plan that meets certain “safe harbor” conditions for a plan year is deemed to satisfy the actual deferral percentage (ADP) and the actual contribution percentage (ACP) discrimination tests and will not be considered top heavy for that plan year. One method for satisfying the safe harbor rules requires the employer to make minimum matching contributions to the accounts of all participants who make elective deferrals (and employee contributions) for the plan year and to provide a notice to eligible employees before the start of the plan year informing the employees, among other things, of the plan’s safe harbor match formula and intent to be a safe harbor plan for the plan year. One additional condition for safe harbor status is that in general, a plan’s safe harbor provisions must remain in effect for the entire plan year.
Despite the entire plan year requirement, and despite what the employers I talked to were told, it is permissible to terminate a 401(k) safe harbor formula mid-year, provided certain conditions are satisfied. These conditions are that:
- The employer must be operating at an economic loss, or the plan’s notice of safe harbor status included a statement that the plan may be amended during the plan year to reduce or suspend the safe harbor matching contribution and that the reduction or suspension will not apply until at least 30 days after all eligible employees are provided notice of the reduction or suspension;
- All eligible employees are provided a supplemental notice that explains the consequences of the amendment that reduces or suspends future safe harbor contributions, the procedures for the employees to change their deferrals or contributions to the plan, and the effective date of the amendment;
- The reduction or suspension is not effective earlier than the later of the date the amendment is adopted or 30 days after the supplemental notice is provided to eligible employees;
- Eligible employees are given a reasonable opportunity after receipt of the supplemental notice and prior to the reduction or suspension to change their deferrals or contributions to the plan;
- The plan is amended to provide that the ADP and ACP tests will be satisfied for the entire plan year using the current year testing method; and
- The plan satisfied the safe harbor requirements through the effective date of the amendment.
For employers sponsoring 401(k) plans with safe harbor matching contributions, there are two immediate takeaways from my recent experience. The first is to check their plan’s annual safe harbor notices to ensure that they include language stating that their plans may be amended mid-year to reduce or suspend the safe harbor match with at least 30 days’ notice. The second is think carefully about the guidance their record keepers provide. If their answer does not sound logical or fair, or does not help them achieve their business objectives, they should consult with a qualified employee benefits attorney. General statements about what the law allows are a start, but in the employee benefits world, details matter.