December 11, 2013

Contributions to Safe Harbor 401(k) Plans

A number of years ago, a law was passed allowing a defined contribution plan to be designed as a safe harbor plan.  The benefit of a safe harbor plan is that the plan is deemed to meet certain discrimination tests, specifically the Actual Deferral Percentage (ADP) test and the Actual Contribution Percentage test (ACP) test.  In order to qualify as a safe harbor plan, the plan must comply with certain design requirements, most significant of which is making either a safe harbor matching contribution or a safe harbor non-elective contribution, which is binding for the 12-month plan year.  In 2009, regulations were proposed allowing certain circumstances that the safe harbor contribution could be suspended due to business hardship (see 401(k) Safe Harbor Plans: Limited Relief, Benefit Beat, 7/8/09).

A few weeks ago, final IRS regulations were issued clarifying the circumstances under which the safe harbor non-elective contribution could be suspended (also see related IRS fact sheet, Reducing or Suspending Safe Harbor 401(k) Matching and Nonelective Contributions Midyear).  Specifically, the final regulations change “business hardship” to “economic loss”.  For both the non-elective contributions and matching contributions, the suspension can occur if the employer can prove economic loss.  Alternatively, the safe harbor notice which is required to be provided between 30 and 90 days prior to the first day of the plan year to which the safe harbor applies, must state that the plan may be amended to reduce or suspend the non-elective or matching contribution, as applicable.  For the matching contributions, the safe harbor notice rule applies to plan years beginning on or after January 1, 2015.

Employers sponsoring a safe-harbor plan may want to reserve their right to make modifications in the advanced notice rather than having to depend on the “economic hardship” provision.  For calendar year plans, it is too late to make this change for the 2014 plan year, as the safe-harbor notice must have been issued by the end of November.  But, this could be something to consider for the 2015 plan year.