Safe Harbor 401(k) Plan

The IRS, on May 18, 2009, published proposed regulations, Suspension or Reduction of Safe Harbor Nonelective Contributions, that would amend Regulations under Code §§401(k) and 401(m). 

These proposed regulations provide employers incurring a substantial business hardship an alternative to terminating their §401(k) safe harbor plans.  Employers meeting certain requirements can reduce or suspend required safe harbor nonelective contributions without losing their plan’s qualified status.

A plan that that intends to be a §401(k) safe harbor plan must:

  • adopt a safe harbor plan before the beginning of the plan year that specifies whether the employer will make matching or nonelective contributions;
  • maintain the safe harbor plan throughout a full 12-month plan year subject to certain exceptions (explained below);
  • notify each eligible employee within a reasonable period before the beginning of each plan year of his or her rights and obligations under the plan; and
  • make either matching or nonelective contributions at least as great as the rates required by its safe harbor.

There are two exceptions to the general requirement that an employer maintain a §401(k) safe harbor plan throughout a full 12-month plan year.   An employer may:

  • amend a plan to reduce or suspend safe harbor matching contributions on future employee elective contributions for a plan year, or
  • terminate its safe harbor plan during the plan year.

The proposed regulations allow an employer that suffers a substantial business hardship to amend its plan to reduce or suspend the plan’s safe harbor nonelective contributions if all the following requirements are satisfied:

  • the plan is amended prior to the end of the plan year to reduce or suspend the safe harbor nonelective contributions;
  • the plan as amended, provides that the ADP test (and ACP test if applicable to the plan) will be satisfied for the entire plan year in which the safe harbor nonelective contributions are reduced or suspended;
  • all eligible employees must be given a “supplemental notice” that explains the reduction or suspension of future safe harbor nonelective contributions and its consequences, the procedures for changing employee elections and the effective date of the amendment;
  • the reduction or suspension of the safe harbor nonelective contributions can occur no earlier than 30 days after giving eligible employees the supplemental notice and the amendment’s adoption date, if later;
  • all eligible employees must be given a reasonable period of time after they receive the supplemental notice (but prior to the reduction or suspension of the safe harbor nonelective contributions) to change their salary deferral elections; and
  • the §401(a)(17) compensation limits must be prorated.

A plan that amends to reduce or suspend safe harbor nonelective contributions will be subject to the rules for top-heavy plans.  These proposed regulations are effective for amendments adopted after May 18, 2009 but plans may rely on them pending issuance of final regulations. To the extent the final regulations are more restrictive than these proposed regulations, they will not be applied retroactively.

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