401(k) Safe Harbor Plans: Limited Relief
Generally, 401(k) safe harbor plans that include a nonelective contribution provision cannot reduce or suspend the nonelective contributions mid-plan year. In May, 2009, the IRS issued proposed regulations to allow nonelective contributions to be reduced or suspended mid-year, if certain conditions are met. These regulations are in response the economic times in which we find ourselves.
The regulations, though proposed, can be relied upon now and any action taken in accordance with the regulations would not be considered a violation, if the action differs from the requirements of any final regulations.
The reduction or suspension of nonelective contributions must be as a result of a substantial business hardship, as defined by IRC Section 412(c). Factors taken into account in determining a “temporary substantial business hardship” are whether or not:
- The employer is operating at an economic loss;
- There is substantial unemployment or underemployment in the trade or business and in the industry concerned;
- The sales and profits of the industry concerned are depressed or declining; and
- It is reasonable to expect that the plan will be continued only if the hardship waiver is granted.
Assuming the substantial business hardship standard can be met, the following steps must be taken:
- A plan amendment must be adopted on or after May 18, 2009.
- All eligible employees must be provided a notice explaining:
- The consequences of reducing or suspending future safe harbor nonelective contributions;
- The procedure for changing cash or deferred elections, and, if applicable, employee contributions; and
- The effective date of the change.
The reduction or suspension of nonelective contributions cannot begin until the later of 30 days after the notice is provided to plan participants, and the adoption date of the amendment. Eligible employees must be given a reasonable opportunity, following receipt of the notice and prior to the reduction or suspension of nonelective contributions commences, to change elections and employee contributions, if applicable.
If the plan is top heavy, it will no longer satisfy the safe harbor requirements for the full plan year, and it will become subject to the top heavy rules of IRC Section 416 for the balance of the plan year.
The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.
As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.