In Final Regulations issued under Internal Revenue Code Section 401(k) in 2004, the IRS outlined procedures for revoking a safe harbor matching contribution formula after the beginning of a safe harbor plan year. Under those Final Regulations a safe harbor matching formula can be suspended during a plan year if advance notice is given and the plan satisfies the average deferral percentage (ADP) test and the average contribution percentage test (ACP) for the entire plan year of the revocation. In 2009, the IRS issued proposed regulations which would likewise permit mid-year reductions or suspensions on safe harbor non-elective contributions. A recent release finalizes the proposed regulations into a Final Regulation with several modifications, including modifications relating to suspension of safe harbor matching contributions..
First, the requirement in the proposed regulations that an employer must be suffering a substantial business hardship in order to be eligible to suspend the safe harbor contribution has been replaced with a requirement that at the time of the suspension the employer must be operating at an economic loss. This requirement will also be imposed beginning in 2015 on employers wishing to reduce or suspend safe harbor matching contributions. The Final Regulations provide an alternative qualifier that would allow employers to reduce or suspend a safe harbor contribution without meeting the economic loss requirement. The safe harbor notice provided to participants before the beginning of the plan year can include a statement that there is a “possibility that the safe harbor contributions might be reduced or suspended during the year.” If the contributions are so reduced or suspended, participants must receive a supplemental notice at least 30 days in advance of any such suspension or reduction. Safe harbor contributions must continue through the end of that 30 day period.
These provisions apply to both matching and non-elective safe harbor contributions. This is the flip side of the “contingent notice provisions” of Reg. Section 1.401(k)-3(f)(2) that already applies to safe harbor non-elective contributions. Under these provisions the employer can provide a notice indicating that the plan may be amended during the year to include safe harbor non-elective contributions and, if so, a follow up notice will be provided. This provision allows the employer to decide by year end whether to make the safe harbor non-elective contribution for that year.
As under the Regulations, if safe harbor contributions are not made for the entire plan year the plan must satisfy the ADP test for the entire plan year. The Regulations described are generally applicable to amendments adopted after May 18, 2009. However, the amendments to the rules for reductions and suspensions of safe harbor matching contributions applies for plan years on or after January 1, 2015. We are likely to see safe harbor notices include contingent language allowing the employer to make mid-year changes. This will give employers flexibility in changing from safe harbor status mid-year even if the company is not operating at a loss. Since a supplemental notice will be required only if the mid-year change is made, employers should incur no increased costs by including that language in the notice.