On May 18, 2009, the Internal Revenue Service (the "IRS") issued proposed regulations permitting the suspension or reduction of safe harbor nonelective contributions during a plan year if the employer incurs a substantial business hardship during the plan year (the "Proposed Regulations"). The Proposed Regulations may be relied upon for plan amendments adopted on or after May 18, 2009.


Plans maintained in accordance with Internal Revenue Code Sections 401(k) and (m) are required to satisfy certain annual nondiscrimination tests demonstrating that the benefits provided under the plan do not discriminate in favor of highly compensated employees. These tests are referred to as the actual deferral percentage ("ADP") and actual contribution percentage ("ACP") tests. However, plans that include a section 401(k) and/or (m) "safe harbor" design may be deemed to satisfy one or both of these tests. To fall within the safe harbor provisions, a plan must either provide for a certain level of safe harbor matching contributions or a safe harbor nonelective contribution.

Prior to the issuance of the Proposed Regulations, employers making safe harbor matching contributions were permitted under certain circumstances to suspend or reduce such matching contribution mid-year. Conversely, however, employers making safe harbor nonelective contributions were historically not permitted to suspend or reduce such contributions mid-year.

The Proposed Regulations

The Proposed Regulations provide that employers may now reduce or suspend safe harbor nonelective contributions mid-year where:

  • The plan amendment implementing this decision is adopted after May 18, 2009
  • The employer is suffering from a "substantial business hardship"
  • Eligible employees are given advance notice describing the suspension or reduction and are given a reasonable opportunity to change their cash or deferred election prior to the effective date of the suspension or reduction
  • The suspension or reduction becomes effective no earlier than the later of (i) 30 days after the notice is provided and (ii) the date the amendment is adopted.

Nonelective contributions will have to be made with respect to the compensation paid prior to the effective date of the suspension or reduction.

Safe harbor plans that are amended to take advantage of this relief must also be amended to provide that they will satisfy the ADP and/or ACP tests, as applicable, using the current year testing method for the entire plan year.

For purposes of the Proposed Regulations, an employer will be found to be suffering from a "substantial business hardship" only after taking into consideration a number of factors, including, for example, whether:

  • The employer is operating at an economic loss
  • There is substantial unemployment or underemployment in the trade or business and the industry
  • The sales and profits of the industry are depressed or declining
  • It is reasonable to expect that the plan will be continued only if relief is granted