On November 14, 2013, the Internal Revenue Service (IRS) issued final regulations, which provide guidance on permitted mid-year reductions or suspensions of safe harbor nonelective contributions. The final regulations also revise previous requirements for permitted mid-year reductions or suspensions of safe harbor matching contributions.
In general, a plan sponsor must establish 401(k) plan safe harbor provisions prior to the beginning of the plan year, and those provisions must remain in effect for the entire plan year. Prior to the publication of the final regulations, a plan sponsor could amend a 401(k) plan providing safe harbor matching contributions during the plan year for any reason to reduce or suspend those contributions. On the other hand, a plan sponsor could amend a 401(k) plan providing safe harbor nonelective contributions during the plan year to reduce or suspend the contributions only if the plan sponsor incurred a substantial business hardship under the standard applicable for purposes of the defined benefit plan funding rules. In either circumstance, the prior rules required the plan sponsor to amend the plan to reflect the change, provide employees at least 30 days advance notice, continue making safe harbor contributions for the 30-day notice period, and otherwise satisfy applicable nondiscrimination testing for the plan year.
The new final regulations attempt to achieve uniformity between the rules applicable to safe harbor nonelective contributions and safe harbor matching contributions. The rules applicable to safe harbor nonelective contributions are effective for amendments adopted after May 18, 2009, and the rules applicable to safe harbor matching contributions are effective for plan years beginning on or after January 1, 2015.
The final regulations permit both types of safe harbor contributions to be reduced or suspended mid-year either:
- if the plan sponsor is operating at an economic loss under Internal Revenue Code section 412(c); or
- for any reason, provided that the plan sponsor issues a notice to employees prior to the beginning of the plan year disclosing the possibility that safe harbor contributions may be reduced or suspended.
The final regulations retain, for both safe harbor contribution types, the general rules that require the plan sponsor to:
- amend the plan to reflect the change;
- provide employees at least 30 days advance notice;
- continue making safe harbor contributions for the 30-day notice period; and
- otherwise satisfy applicable nondiscrimination testing for the plan year.
The effect of the final regulations is to relax the requirements for plan sponsors to reduce or suspend safe harbor nonelective contributions mid-year, while including additional requirements for plan sponsors to reduce or suspend safe harbor matching contributions mid-year.
Under the final regulations, safe harbor nonelective contributions may now be reduced or suspended if the plan sponsor is operating at an economic loss—rather than the prior, more stringent standard, which required a substantial business hardship. Furthermore, safe harbor nonelective contributions may now be reduced or suspended for any reason and regardless of the financial health of the plan sponsor, provided that the prior-year notice and other requirements are satisfied. However, the final regulations will subject the reduction or suspension of safe harbor matching contributions to stricter standards by:
- requiring notice prior to the beginning of the plan year for reductions or suspensions that are adopted for any reason; and
- requiring that the plan sponsor be operating at an economic loss in order to reduce or suspend contributions mid-year in the absence of prior year notice.
Finally, the final regulations provide that future guidance may be published in the Internal Revenue Bulletin to set forth additional situations in which a safe harbor plan may be amended mid-year.