Suspending 401(k) Safe Harbor Nonelective Contributions Now Permitted
The IRS has issued much-anticipated proposed regulations that allow employers experiencing business hardships to reduce or suspend 401(k) safe harbor plan nonelective contributions (including nonelective contributions made to satisfy qualified automatic contribution arrangement requirements). Employers have had the option to amend plans to reduce or suspend safe harbor matching contributions, based on provisions in the final 401(k) regulations. But until now, employers providing a safe harbor nonelective contribution have had no alternative but to terminate their plans if unable to make promised contributions. These proposed regulations, in fact, generally parallel the final 401(k) regulations’ provisions for reducing or eliminating safe harbor matching contributions. They may be relied on for amendments adopted after May 18, 2009. If final regulations are more restrictive when issued, they will be applied prospectively only.
Conditions
Safe harbor nonelective contributions may be reduced or suspended if these conditions are met.
1. The reduced or suspended contribution must be due to a “substantial business hardship.” Factors taken into account in determining such hardship include, but are not limited to, the following.
- The employer is operating at an economic loss.
- There is substantial unemployment or underemployment in the employer’s trade or industry.
- The employer is experiencing declining sales or profits.
- It is reasonable to expect that the plan will terminate if relief is not available.
2. The employer must provide a notice to all eligible employees, stating the employer’s intent to amend the plan to reduce or suspend nonelective contributions.
3. The reduction or suspension cannot be effective until the later of 30 days after the notice is provided, or the date the amendment is adopted. (Practically, the effective date of the amendment should be on or after the 30th day after the notice is provided.)
4. Eligible employees must have reasonable opportunity after receiving the notice, and before the amendment effective date, to change deferral and after-tax (if applicable) contribution elections.
5. Employers must make the nonelective contribution based on employee compensation through the amendment effective date.
7. The
top-heavy rules that require a minimum contribution to be made to nonkey employees in certain circumstances will apply for the year.
Notice Requirements
The notice must inform employees of the following.
- The effect of the reduction or suspension of nonelective contributions
- The effective date of the amendment to reduce or suspend nonelective contributions
- The procedures for changing employee deferral or after-tax contribution elections
Other Considerations
No Year-End Contribution Change
The proposed regulations stress that an employer cannot reduce or suspend a 401(k) safe harbor nonelective contribution retroactively at the end of a plan year, even though the contribution is normally paid to employee accounts at that time. Again, a reduction or suspension cannot take effect until the later of 30 days after employees receive notice, or the amendment adoption date.
Compensation Cap
The compensation cap must be prorated to align with the effective date of the reduction or suspension of nonelective contributions. For example, if an employer amends to suspend the nonelective contribution effective on a date six months into the plan year, the annual 2009 compensation cap of $245,000 would be reduced by 50 percent (6/12), to $122,500.
Public Comments, Hearing
Written or electronically submitted comments must be received by the IRS by August 17, 2009. A public hearing is scheduled for September 23, 2009, after which these regulations will be finalized.
Modified Pre-Plan Year Notice?
The IRS also indicates in this guidance that it is considering revising the annual pre-plan year notice required for 401(k) safe harbor plans to include text alerting employees to the possibility that a promised match or nonelective contribution could be reduced or suspended during the plan year. The IRS specifically invites public comment on the advisability of this change. If adopted, this change would not be effective before 2010 plan years.
© 2009 Ascensus, Inc. Brainerd, MN
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