Suspending Safe Harbor Match Mid-Year

Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Texas is representative of a common question on mid-year suspension of safe harbor contributions.

“My client is concerned that the current economic environment and recent market swings will negatively impact his business and profits. Can he suspend the company’s 401(k) safe harbor match now to reduce company expenses?”

Highlights of the Discussion

Under limited circumstances, and according to final Treasury Regulations, the sponsor of a 401(k) or 403(b) safe harbor plan may amend the plan during the current year to reduce or suspend the company’s safe harbor contribution—either the matching or nonelective contribution.

A removal or reduction of a safe harbor contribution mid-year is permitted if the employer either

1. Is operating under an economic loss for the year (See Internal Revenue Code Section (IRC 412(c)(2)(A); or

2. Included a statement in the safe harbor notice given to participants before the start of the plan year that the employer

• May reduce or suspend contributions mid-year;

• Will give participants a supplemental notice regarding the reduction or suspension; and

• Will not reduce or suspend employer contributions until at least 30 days after receipt of the supplemental notice.

Note: While the IRS has not expanded on the definition of economic loss for this purpose, under generally accepted accounting principles, documentation by the employer that the business’s expenses exceeded income for the year would, presumably, suffice. There must be actual, documented, and sustained business losses (e.g., audited financial statements showing a net operating loss).

Supplemental Notice

If a reduction or suspension will occur, the supplemental notice must explain 1) the consequences of the suspension or reduction of contributions; 2) how participants may change their deferral elections as a result; and 3) when the amendment takes effect.

Other Procedural Requirements

The employer must also

1. Give participants a reasonable opportunity after they receive the supplemental notice and before the reduction or suspension of employer contributions to change their contribution elections;

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2. Amend the plan to apply the actual deferral percentage (ADP) and/or actual contribution percentage (ACP) tests for the entire plan year; and

3. Allocate to the plan any contributions that had accrued before the amendment took effect.

Conclusion

With the proper set up, or as a result of economic loss, sponsors of 401(k) safe harbor plans may reduce or suspend employer matching or nonelective safe harbor contributions mid-year.