The IRS recently issued final regulations (T.D. 9641) to provide guidance on permitted midyear reductions or suspensions of safe harbor contributions to Sections 401(k) and 403(b) plans.
These regulations were issued in the wake of the economic downturn, when cash-strapped employers sought ways to reduce costs. Instead of terminating their Sections 401(k) and 403(b) plans, employers were interested in reducing or suspending their contributions to the plans.
In 2009, the IRS issued proposed regulations on which employers were permitted to rely. The proposed regulations provided that the employer must have a substantial business hardship to suspend or reduce nonelective contributions in the middle of a year. Under the final regulations, employers are required to be operating at an economic loss in order to implement the midyear reduction or suspension.
Alternatively, the final regulations allow an employer to reduce or suspend safe harbor nonelective contributions regardless of the employer's financial condition if participants are notified before the beginning of the plan year that the contributions might be reduced or suspended mid-year. The notice must also provide that a supplemental notice will be provided to the participants if a reduction or suspension does occur and that the reduction or suspension will not apply until at least 30 days after the supplemental notice is provided.
Employers who use calendar year plans and may choose to reduce or suspend safe harbor nonelective contributions in 2014 should consider providing this notice to participants before the end of 2013.
The guidance related to nonelective safe harbor contributions applies to plan amendments adopted after May 18, 2009, and to the reduction or suspension of safe harbor matching contributions for plan years beginning on or after Jan. 1, 2015.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.