Reducing or Suspending Safe Harbor 401(k) Matching and Nonelective Contributions Midyear
Final Treasury Regulations T.D. 9641 (generally effective November 15, 2013):
- allow you to reduce or suspend 401(k) plan safe harbor nonelective contributions midyear if you
- are “operating at an economic loss,” or
- have previously given a reduction/suspension notice to participants;
- beginning with plan years after 2014, permit you to suspend or reduce 401(k) safe harbor matching contributions midyear only under the same circumstances that apply to safe harbor nonelective contributions; and
- authorize the IRS to publish any other midyear changes that may be made to 401(k) safe harbor plans in future guidance published in the Internal Revenue Bulletin.
When you may reduce or suspend safe harbor contributions midyear
Nonelective safe harbor contributions
The final regulations allow you to reduce or suspend safe harbor nonelective contributions midyear if you:
- are operating at an economic loss for the plan year (IRC Section 412(c)(2)(A)) or have provided participants a potential reduction/suspension statement (see below), and
- meet the procedural requirements below.
Under the 2009 Proposed Treasury Regulations (REG-115699-09), you could only reduce or suspend nonelective safe harbor contributions midyear if you:
- incurred a substantial business hardship (comparable to a substantial business hardship under IRC Section 412(c)), and
- met the procedural requirements of the 2009 Proposed Treasury Regulations.
See Reducing or suspending safe harbor nonelective contributions in cases of substantial business hardship (Employee Plans News, May 2009).
Potential reduction/suspension statement
The statement informing participants of a potential reduction/suspension of safe harbor contributions must be included in the annual safe harbor notice you give to participants before the plan year. It must inform them that:
- you may amend the plan during the year to reduce or suspend your safe harbor plan contributions, and
- the amendment wouldn’t be effective until at least 30 days after you’ve given participants a supplemental notice.
Matching safe harbor contributions
For plan years beginning after 2014, the final regulations allow you to reduce or suspend safe harbor matching contributions midyear only if you’re operating at an economic loss or had included a potential reduction/suspension statement (see above) in your annual safe harbor notice to participants, and you meet the procedural requirements below.
For plan years beginning before 2015, to reduce or suspend safe harbor matching contributions midyear, you only have to meet the procedural requirements below.
Procedural requirements for reducing or suspending safe harbor contributions midyear
If you meet the circumstances for a midyear reduction/suspension of safe harbor contributions, to actually reduce or suspend safe harbor contributions during the year, you must follow these procedural requirements:
- Adopt a plan amendment before the end of the plan year to reduce or suspend safe harbor contributions. This amendment shouldn’t be effective earlier than:
- its adoption date, or
- 30 days after you give participants the supplemental notice.
- Give participants a supplemental notice explaining the consequences of the amendment that reduces or suspends your plan’s matching or nonelective contributions, the procedures for changing their salary deferral elections (and their employee contribution elections, if applicable) and the effective date of the amendment.
- Give participants a reasonable opportunity after they receive the supplemental notice and before the change is effective to change their salary deferral elections (and their employee contribution elections, if applicable).
- Make all safe harbor contributions through the effective date of the amendment.
- The amendment must provide that the plan will pass the actual deferral percentage test (and the actual contribution percentage test, if required) for the entire plan year in which you reduce or suspend the safe harbor contributions using the current year testing method.
- The plan must satisfy the top-heavy requirements.
Midyear safe harbor plan termination
The final regulations made no changes to the rules for terminating safe harbor 401(k) plans midyear. Generally, to terminate a safe harbor 401(k) plan midyear, you must satisfy the rules for safe harbor plans through the date of termination and take steps similar to the procedural requirements above, except you aren’t required to give participants a supplemental notice or an opportunity to change their contribution elections.
However, you only have to satisfy the rules for safe harbor plans through the date of termination, and adopt an amendment terminating the plan, if the termination is because of a:
- substantial business hardship under IRC Section 412(c); or
- merger, acquisition or other event that qualifies for the coverage transition rules of IRC Section 410(b)(6)(C).