The U.S. Department of Treasury and the Internal Revenue Service have issued final regulations providing guidance on permitted midyear reductions or suspensions of safe harbor nonelective and safe harbor matching contributions.The regulations are effective immediately with respect to safe harbor nonelective contributions. With regard to safe harbor matching contributions, they are effective for plan years beginning on or after January 1, 2015.
Under the regulations, an employer may suspend or reduce safe harbor nonelective contributions or safe harbor matching contributions if it is either operating at an economic loss for the plan year or it:
- Includes in its annual safe harbor notice a statement that the plan may be amended during the plan year to reduce or suspend safe harbor nonelective or matching contributions;
- Provides 30 days in advance of the reduction or suspension a supplemental notice of the reduction or suspension explaining (1) the consequences of the amendment that reduces or suspends future safe harbor contributions, (2) the procedures for employees to change their elective deferrals, and (3) the effective date of the amendment;
- Does not reduce or suspend safe harbor contributions earlier than the later of the effective date of the amendment or 30 days after eligible employees are provided the supplemental notice;
- Gives eligible employees a reasonable opportunity after receipt of the supplemental notice and before the reduction or suspension to change their elective deferrals;
- Amends the plan to provide that the actual deferral percentage (ADP) nondiscrimination test—and, if applicable, the actual contribution percentage (ACP) nondiscrimination test—will be satisfied for the entire plan year in which the reduction or suspension occurs, using the current-year testing method; and
- Provides the safe harbor contribution in relation to compensation paid for the period of the plan year during which the safe harbor was in effect.
Therefore, under the regulations, in order to reduce or suspend safe harbor 401(k) contributions, an employer must either (1) be operating at an economic loss or (2) prior to the start of the plan year, provide notice to participants of the possibility that contributions will be suspended or reduced and comply with the additional requirements outlined above.
Employers wishing to suspend or reduce safe harbor matching contributions for plan years beginning prior to January 1, 2015, must continue to comply with the more onerous “substantial business hardship” standard under the 2009 proposed regulations.