The IRS has issued proposed regulations which now permit plan sponsors that experience a substantial business hardship to reduce or eliminate safe harbor non-elective contributions mid-year. Existing regulations currently permit the reduction or elimination of safe harbor matching contributions, but a similar rule did not exist as to safe harbor non-elective contributions. To reduce or eliminate safe harbor contributions due to a substantial business hardship, plan sponsors must meet five requirements. Plan sponsors must:  

  • provide employees with a notice of the reduction or suspension;  
  • make the effective date of the reduction or suspension no earlier than the later of 30 days after employee notice is given and the amendment is adopted;  
  • provide employees with a reasonable opportunity prior to the reduction or suspension to change their elections;  
  • amend the plan to provide that the ADP and ACP tests will be satisfied for the entire plan year in which the suspension or reduction occurs; and  
  • ensure that the matching contribution requirements under the safe harbor arrangement are satisfied through the effective date of the amendment.  

An employer plan sponsor must be able to demonstrate that it has incurred a substantial business hardship comparable to that described in IRC § 412(c). To qualify as a “substantial business hardship” the following factors are taken into consideration: (1) whether the plan sponsor is operating at a loss, (2) whether there is substantial unemployment or under employment in the plan sponsor’s industry, and (3) whether sales and profits in the plan sponsor’s industry are depressed or declining.

The proposed regulations are effective for amendments adopted after May 18, 2009. Employers may rely on these proposed regulations for guidance pending the issuance of final regulations.