Safe harbor 401(k) and 403(b) plans require that an employer make either matching or non-elective contributions for an entire plan year. Previous Internal Revenue Service (IRS) regulations permitted employers to suspend matching contributions upon giving 30 days advance notice to participants. The previous guidance did not address mid-year changes to non-elective contributions. In 2009, the IRS issued proposed regulations that would permit suspension of non-elective contributions if the employer satisfied certain financial hardship conditions. Under the proposed regulations, in order to show financial hardship, an employer would have to have met the stringent rules for requesting a waiver of the minimum funding standard. The IRS final regulations provide uniformity in the rules for both suspension and reduction of safe harbor matching or non-elective contributions. Under the final regulations, there are two methods by which a mid-year change could be made. Under the first method, the employer must be operating at an economic loss. This requirement is only one of several standards that would have to have been satisfied for requesting a minimum funding waiver. This change will allow employers more certainty in determining whether they satisfy the requirement. The second way in which a safe harbor contribution can be suspended is if the annual safe harbor notice provides that the plan may be amended during the plan year to eliminate or reduce the safe harbor contribution with 30-days advance notice to participants. The 30-day advance notice must explain the consequences of the amendment, procedures for making changes in cash or deferred elections, and the effective date of the amendment, and participants must be provided a reasonable opportunity to change their salary deferral elections. Note that, because the safe harbor requirements are no longer being met, the final regulations require that the ADP and ACP tests must be satisfied using the current year testing methodology. The final regulations also provide for a mid-year plan termination without advance notice if the termination is in connection with a corporate merger or reorganization or the plan sponsor incurs a substantial business hardship.

It is recommended that plan sponsors modify the next safe harbor notice to provide for the 30-day notice of suspension language in order to provide the greatest degree of flexibility in operation of their plans. (T.D. 9641)