As businesses across the country adjust to the financial reality of Coronavirus related shutdowns and restrictions, some employers that sponsor safe harbor formula 401(k) plans are revisiting a money saving strategy last implemented on a wide scale basis over a decade ago during the great recession—the suspension or reduction of safe harbor contributions.
Under a safe harbor 401(k) plan, the plan can automatically satisfy the ADP, ACP, and top heavy nondiscrimination requirements if the employer makes either a minimum matching contribution to employees who make elective deferrals or a non-elective contribution to all eligible employees not tied to elective deferrals. Generally, a safe harbor plan must remain a safe harbor for the entire plan year. However, if certain conditions provided in IRS regulations are met, a safe harbor plan may be amended mid-plan year to suspend or reduce safe harbor contributions mid-year.
Suspension or Reduction Requirements
An employer may suspend or reduce safe harbor contributions mid-year if each of the following conditions are satisfied:
- The employer must either:
- be operating at an “economic loss” (as described in the pension plan waiver of minimum funding standard rules under Code Section 412(c)(2)(A)) for the plan year, or
- the annual safe harbor notice provided to eligible employees for the plan year included a statement that the plan could be amended to suspend or reduce safe harbor contributions with 30 days’ notice.
- All eligible employees (not just those actively participating) are provided a supplemental notice of the change which explains the consequences of the amendment that suspends/reduces safe harbor contributions, the procedures for eligible employees to change their elective deferral elections, and the effective date of the amendment.
- The suspension or reduction is effective no earlier than the date the suspension or reduction amendment is adopted or 30 days after eligible employees are provided the supplemental notice.
- Eligible employees are given a reasonable opportunity after receipt of the notice to change their elective deferral elections.
- The Plan is amended to provide that the ADP test and ACP test (if applicable) will be satisfied for the entire plan year.
- The Plan satisfies all other safe harbor requirements with respect to amounts deferred through the effective date of the amendment
For employers with an urgent need, the fastest a plan can suspend or reduce safe harbor contributions is 30 days after the date the supplemental notice is provided, as long as the plan amendment is adopted before the 30 days expires. The employer must make safe harbor contributions for periods prior to the suspension/reduction effective date. Once the safe harbor contribution is suspended or reduced, a plan will not be a safe harbor plan for the rest of the plan year, even if safe harbor contributions are resumed later in the year.
This post is a part of the All Things HR Blog’s multi-part series on frequent issues and questions faced by employers during the COVID-19 crisis.
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About the Author:
Jordan Schreier is a Member in Dickinson Wright’s Ann Arbor office and Chair of the Firm’s Employee Benefits and Executive Compensation Practice Group. His practice primarily involves advising both for-profit and non-profit employers on planning and compliance issues involving all aspects of employee benefits, including welfare benefits, qualified retirement, and other deferred compensation plans. He can be reached at 734-623-1945 or JSchreier@dickinson-wright.com and you can visit his bio here.