IRS Issues Proposed Relief for Safe Harbor
401(k) Plans
By: DEBRA J. LINDER, JOHN H. MERKLE & JAMES B. PLATT
June 8, 2009
On May 18, 2009, the IRS issued proposed regulations that would permit employers incurring a substantial business hardship to reduce or suspend required Safe Harbor Nonelective Contributions without losing their plan’s qualified status.
As background, traditional 401(k) plans must comply with annual nondiscrimination testing that may restrict contributions for highly compensated employees. A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, must provide for either matching or nonelective employer contributions that are fully vested when made. The employer must also provide eligible employees with a notice prior to the beginning of each plan year concerning how the safe harbor contribution will be made for such plan year. A safe harbor 401(k) plan is not subject to the annual nondiscrimination testing that is required under a traditional 401(k) plan and may not be subject to the top-heavy rules.
Safe Harbor Matching Contributions. Under current rules, an employer may reduce or suspend a safe harbor matching contribution by amending its plan to do so and giving eligible employees a 30-day advance written notice. Eligible employees must be allowed a reasonable opportunity to change their 401(k) salary deferral elections following receipt of the notice. The plan must then prorate the IRS dollar limitation on compensation (in 2009, the dollar limitation is $245,000), and satisfy the nondiscrimination tests for the entire plan year. In addition, the employer must make any top-heavy minimum contribution that may be required for the plan year.
Safe Harbor Nonelective Contributions. Under the proposed rules, an employer suffering a substantial business hardship may reduce or suspend safe harbor nonelective contributions by amending its plan to do so and giving eligible employees a 30-day advance written notice. Employees must be allowed a reasonable opportunity to change their 401(k) salary deferral elections following receipt of the notice. The plan must then prorate the IRS dollar limitation on compensation (in 2009, the dollar limitation is $245,000), and satisfy the nondiscrimination tests for the entire plan year. In addition, the employer must make any top-heavy minimum contribution that may be required for the plan year.
Some factors taken into account in determining if an employer has suffered a substantial business hardship include whether:
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The employer is operating at an economic loss;
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There is substantial unemployment or underemployment in the trade or business and in the industry concerned;
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The sales and profits of the industry concerned are depressed or declining.
If you have any questions concerning the proposed regulations or their impact on your plan, please contact a member of our Compensation Planning & Employee Benefits Group.