IRS Final Rule Simplifies Requirements to Suspend or Reduce Safe Harbor Contributions Mid-year | Practical Law

IRS Final Rule Simplifies Requirements to Suspend or Reduce Safe Harbor Contributions Mid-year | Practical Law

The Internal Revenue Service (IRS) issued final rules permitting the mid-year reduction or suspension of safe harbor nonelective contributions under Section 401(k) of the Internal Revenue Code (IRC) by employers that are operating at an economic loss or satisfy certain notice requirements. The final rules also make conforming changes to regulations that address the reduction or suspension of safe harbor matching contributions under Section 401(m) of the IRC.

IRS Final Rule Simplifies Requirements to Suspend or Reduce Safe Harbor Contributions Mid-year

by Practical Law Employee Benefits & Executive Compensation
Published on 15 Nov 2013 • USA (National/Federal)
The Internal Revenue Service (IRS) issued final rules permitting the mid-year reduction or suspension of safe harbor nonelective contributions under Section 401(k) of the Internal Revenue Code (IRC) by employers that are operating at an economic loss or satisfy certain notice requirements. The final rules also make conforming changes to regulations that address the reduction or suspension of safe harbor matching contributions under Section 401(m) of the IRC.
On November 14, 2013, the IRS issued final regulations permitting the mid-year reduction or suspension of safe harbor nonelective contributions under Section 401(k) of the Internal Revenue Code (IRC) by employers that are either operating at an economic loss or satisfy specific notice requirements. The final rules also revise requirements for the reduction or suspension of safe harbor matching contributions under Section 401(m) of the IRC.
The final regulations, which are effective November 15, 2013, generally apply to plan amendments adopted after May 18, 2009, the effective date previously provided in the proposed regulations. However, the changes simplify the requirements applicable to future mid-year reductions or suspensions of safe harbor matching contributions apply for plan years beginning on or after January 1, 2015.
In addition, the IRS indicated that guidance published in the Internal Revenue Bulletin may establish additional situations beyond those discussed in the regulations in which employers may make mid-year reductions or suspensions of contributions to safe harbor plans under either Section 401(k) or 401(m) of the IRC.

Nondiscrimination Rules and Safe Harbor Plans

Employers are generally required to comply with specific nondiscrimination rules in their administration of 401(k) plans in addition to complying with rules that apply to all qualified plans (see Practice Note, Requirements for Qualified Retirement Plans and Practice Note, Safe Harbor 401(k) Plans: Overview and Planning Opportunities: Nondiscrimination Rules).
However, employers can avoid complying with the nondiscrimination tests required under these rules by:

Changes to Substantial Business Hardship Standard under Proposed Regulations

On May 18, 2009, the IRS issued proposed regulations that permitted employers who had suffered a substantial business hardship to reduce or suspend safe harbor nonelective contributions mid-year (see Practice Note, Safe Harbor 401(k) Plans: Overview and Planning Opportunities: Eliminating or Reducing a Safe Harbor Contributions). The final regulations simplify the standards described in the proposed regulations by:
  • Replacing the "substantial business hardship" standard with a standard that requires the employer to operate at an economic loss as described in Section 412(c)(2)(A) of the IRC.
  • Permitting an employer to reduce or suspend safe harbor nonelective contributions without regard to the financial condition of the employer if notice is provided to participants before the beginning of the plan year that:
    • discloses the possibility that the contributions might be reduced or suspended mid-year;
    • provides that a supplemental notice will be provided to plan participants if a reduction or suspension does occur; and
    • provides that the reduction or suspension will not apply until at least 30 days after the supplemental notice is sent.

Uniformity in Rules Governing Safe Harbor Nonelective Contributions and Matching Contributions

The final regulations also harmonizes the final and proposed rules so that the requirements that apply to a mid-year reduction or suspension of safe harbor nonelective contributions are not stricter than the rules applicable to a mid-year reduction or suspension of safe harbor matching contributions. Therefore, safe harbor matching contributions may be reduced or suspended under a mid-year amendment only if either of the same economic loss and notice provisions required for safe harbor nonelective contributions are satisfied (see Practice Note, IRS Final Rule Simplifies Requirements to Suspend or Reduce Safe Harbor Contributions Mid-year: Changes to Substantial Business Hardship Standard under Proposed Regulations).
The IRS clarified that the final regulations do not:
  • Alter the existing ability of a safe harbor plan to, before the beginning of the plan year, use a contingent notice (as permitted by Section 1.401(k)-3(f)(2) of the IRC) to notify participants that the plan may be amended to include safe-harbor contributions during the upcoming plan year so long as the employer provides, at the time of the change, a follow-up notice that satisfies the requirements of the IRC.
  • Apply to plan amendments adopted before the publication of the proposed rules in May 2009. Any employer that adopted a plan amendment to reduce safe harbor contributions mid-year before that date violated the rules applicable under Section 401(k) of the IRC and, if applicable, section 401(m).

Practical Impact

Employers who wish to reduce or suspend safe harbor contributions to their 401(k) plans mid-year, but were unable to do so under the requirements of the 2009 proposed regulations (because, for example, they did not incur a substantial business hardship as described in the regulations), will be permitted the flexibility to make these mid-year changes, provided they satisfy the dual notice requirements described in these final regulation:
  • For safe harbor nonelective contributions, at any time, so long as the timing requirements of the required initial notice is satisfied.
  • For safe harbor matching contributions, for plan years beginning on or after January 1, 2015,